sec document
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2003
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission file number 0-13803
GATEWAY INDUSTRIES, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 33-0637631
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
590 Madison Avenue, 32nd Floor
New York, NY 10022
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(Address of Principal Executive Offices, Including Zip Code)
212-758-3232
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(Issuer's Telephone Number, Including Area Code)
Shares of Issuer's Common Stock Outstanding at October 15, 2003: 4,192,105
Transitional Small Business Disclosure Format: Yes / / No /X/
INDEX
Part I - Financial Information Page Number
------------------------------ -----------
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002................ 2
Condensed Consolidated Statements
of Operations - Three Months Ended
September 30, 2003 and 2002............................. 3
Condensed Consolidated Statements
of Operations - Nine Months Ended
September 30, 2003 and 2002............................. 4
Condensed Consolidated Statements
of Cash Flows - Nine Months Ended
September 30, 2003 and 2002............................. 5
Notes to Condensed Consolidated Financial Statements..... 6
Item 2. Management's Discussion and Analysis or Plan of
Operation............................................... 11
Item 3. Controls and Procedures................................. 16
Part II - Other Information
---------------------------
Item 2. Changes in Securities and Use of Proceeds............... 17
Item 6. Exhibits and Reports on Form 8-K........................ 18
Signatures.............................................. 19
1
Part I. Financial Information
---------------------
Item 1. Condensed Consolidated Financial Statements
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CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2003 December 31, 2002
(Unaudited)
Cash and cash equivalents $ 1,129,454 $ 1,844,512
Marketable securities 207,419 --
Accounts receivable, net 1,124,987 800,766
Prepaid expenses 137,527 94,652
Other current assets 36,776 45,584
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Total current assets 2,636,163 2,785,514
Fixed assets, net 375,382 379,050
Software, net 160,860 165,066
Goodwill, net 2,751,288 2,751,288
Security deposits 25,154 18,857
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Total assets $ 5,948,847 $ 6,099,775
============ ============
Liabilities and Shareholders' Equity
Liabilities
Accounts payable and accrued expenses $ 501,922 $ 278,308
Deferred income 224,682 227,537
Customer deposits 81,882 40,958
Current portion, capital lease 46,670 10,010
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Total current liabilities 855,156 556,813
Capital lease obligation 73,913 16,165
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Total liabilities 929,069 572,978
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Shareholders' equity
Preferred stock, $.10 par value; 1,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.001 par value; 10,000,000 shares
authorized; 4,192,105 shares issued and outstanding at
September 30, 2003 and 4,192,000 shares
issued and outstanding at December 31, 2002 4,192 4,192
Capital in excess of par value 10,999,746 10,999,746
Accumulated deficit (5,984,160) (5,477,141)
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Total shareholders' equity 5,019,778 5,526,797
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Total liabilities and shareholders' equity $ 5,948,847 $ 6,099,775
============ ============
The accompanying notes are an integral part of these statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended September 30,
2003 2002
---- ----
Revenues $ 1,612,493 $ 1,418,896
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Costs and expenses
Fulfillment and materials 258,608 127,649
Personnel costs 1,044,010 870,910
Selling, general and administrative 426,953 330,648
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Total costs and expenses 1,729,571 1,329,207
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Operating(loss) income (117,078) 89,689
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Other income (expense)
Interest 1,307 7,274
Other income (expense), net 257 (3,691)
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Total other income 1,564 3,583
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Net (loss) income $ (115,514) $ 93,272
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Net (loss) income per share - basic $ (.03) $ .02
=========== ===========
Net (loss) income per share - diluted $ (.03) $ .02
=========== ===========
Weighted average shares outstanding - basic 4,192,105 4,192,024
=========== ===========
Weighted average shares outstanding - diluted 4,192,105 4,192,024
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The accompanying notes are an integral part of these statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months
Ended September 30,
2003 2002
---- ----
Revenues $ 4,679,012 $ 4,242,514
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Costs and expenses
Fulfillment and materials 672,541 436,561
Personnel costs 3,164,578 2,615,547
Selling, general and administrative 1,348,151 1,086,363
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Total costs and expenses 5,185,270 4,138,471
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Operating (loss) income (506,258) 104,043
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Other income (expense)
Interest 6,463 22,446
Other (expense), net (7,224) (10,919)
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Total other (expense) income (761) 11,527
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Net (loss) income $ (507,019) $ 115,570
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Net (loss) income per share - basic $ (.12) $ .03
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Net (loss) income per share -diluted $ (.12) $ .03
=========== ===========
Weighted average shares outstanding - basic 4,192,105 4,192,024
=========== ===========
Weighted average shares outstanding - diluted 4,192,105 4,192,024
=========== ===========
The accompanying notes are an integral part of these statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended September 30,
2003 2002
---- ----
Cash flows from operating activities:
Net (loss) income $ (507,019) $ 115,570
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation 112,632 87,060
Amortization of software costs 66,261 53,190
Changes in assets and liabilities net of assets and liabilities
acquired:
Accounts receivable (324,221) 6,654
Prepaid expenses and other (21,122) (14,354)
Security deposit (6,297) --
Marketable securities (207,419) --
Accounts payable 223,614 (346,746)
Deferred income (2,855) (43,448)
Customer deposits 40,924 (27,055)
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Net cash used in operating activities (625,502) (169,129)
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Cash flows from investing activities:
Purchase of property, plant, and equipment (68,232) (72,201)
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Net cash used in investing activities (68,232) (72,201)
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Cash flows from financing activities:
Payments of obligation on capital lease (21,324) (8,261)
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Net cash used in financing activities (21,324) (8,261)
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Net decrease in cash and cash equivalents (715,058) (249,591)
Cash and cash equivalents at beginning of period 1,844,512 2,041,315
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Cash and cash equivalents at end of period $ 1,129,454 $ 1,791,724
=========== ===========
Supplemental cash flow information:
Cash paid during the year for
Income taxes $ 21,959 $ 12,450
Interest expense $ 8,895 $ 10,919
Supplemental information:
Oaktree acquired $101,749 of assets under capital leases in 2003 and $4,770 in
2002.
The accompanying notes are an integral part of these statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 1. GENERAL
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instruction to Form
10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying unaudited interim financial statements include all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation. Results for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected either for any other
quarter in the year ending December 31, 2003 or for the entire year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2002.
NOTE 2. OPERATIONS
Gateway Industries, Inc. (the "Company") was incorporated in
Delaware in July 1994 and acquired all of the outstanding common stock of
Oaktree Systems, Inc. ("Oaktree") in March 2000. Oaktree provides real-time
database development consolidation and management services, such as database
marketing, product fulfillment, subscription fulfillment, web site design and
maintenance to customers. Such customers are principally not-for-profit
entities, health care providers and publishers throughout the United States.
The Company had no full time employees from December 1996 until the
acquisition of Oaktree. The Company's officers and Steel Partners, Ltd. (an
entity controlled by the Company's Chairman) devote significant time to the
Company's administration and exploring potential acquisitions and other business
opportunities.
NOTE 3. NET (LOSS) INCOME PER SHARE
Net (loss) income per share was calculated using the weighted
average number of common shares outstanding. For the nine months ended September
30, 2003 and 2002, stock options excluded from the calculation of diluted loss
per share were 1,069,000 and 592,500, respectively, as their effect would have
been antidilutive. For the three months ended September 30, 2003 and 2002, stock
options excluded from the calculation of diluted loss per share were 1,069,000
and 592,500, respectively, as their effect would have been antidilutive.
Accordingly, basic and diluted income per share is the same for each of the
three month and nine month periods ended September 30, 2003 and 2002.
NOTE 4. MARKETABLE SECURITIES
Marketable securities held by the Company are classified as trading
securities and are recorded at fair market value. Unrealized gains and losses on
trading securities are included in other income (expense).
6
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No.145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS SFAS 145. This Statement rescinds FASB Statement No. 4, REPORTING
GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT, and an amendment of that
Statement, FASB Statement No. 64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY
SINKING-FUND REQUIREMENTS. This Statement also rescinds FASB Statement No. 44,
ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions.
Effective January 1, 2003, the Company adopted the provisions of SFAS 145 which
did not have a material impact on the results of operations or financial
position of the Company for the nine months ended September 30, 2003.
In July 2002, the FASB issued Statement No. 146, ACCOUNTING FOR
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES SFAS 146. This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between this Statement and Issue 94-3
relates to its requirements for recognition of a liability for a cost associated
with an exit or disposal activity. This Statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost as defined
in Issue 94-3 was recognized at the date of an entity's commitment to an exit
plan. The provisions of this Statement are effective for exit or disposal
activities initiated after December 31, 2002. Effective January 1, 2003, the
Company adopted the provisions of SFAS 146 which did not have a material impact
on the results of operations or financial position of the Company for the nine
months ended September 30, 2003.
In November 2002, the FASB issued Interpretation No. 45, "GUARANTORS
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS" ("FIN 45"). FIN 45 requires that certain
guarantees be initially recorded at fair value, which is different from the
general current practice of recording a liability only when a loss is probable
and reasonably estimable. FIN 45 also requires a guarantor to make significant
new disclosures for virtually all guarantees. The Company adopted the disclosure
requirements under FIN 45 for the quarter ended March 31, 2003 and has adopted
the initial recognition and initial measurement provisions for any guarantees
issued or modified after March 31, 2003. The adoption of FIN 45 did not have a
material impact on the results of operations or financial position of the
Company for the nine months ended September 30, 2003.
On December 31, 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR
STOCK BASED COMPENSATION TRANSITION AND DISCLOSURE, SFAS 148 AMENDS FASB
STATEMENT NO. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION", to provide
alternative methods of transition to SFAS 123's fair value method of accounting
for stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 and APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
7
financial statements. While SFAS 148 does not amend SFAS 123 to require
companies to account for employee stock options using the fair value method, the
disclosure provisions of SFAS 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for the
compensation using the fair value method of SFAS 123 or the intrinsic value
method of APB Opinion 25. The Company adopted the required disclosure provisions
of SFAS 148. See Note 6.
In January 2003, the FASB issued interpretation No. 46,
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES - AN INTERPRETATION OF ARB NO. 51"
("FIN 46"), which addresses consolidation of variable interest entities. FIN 46
expands the criteria for consideration in determining whether a variable
interest entity should be consolidated by a business entity, and requires
existing unconsolidated variable interest entities (which include, but are not
limited to, Special Purpose Entities, or SPE's) to be consolidated by their
primary beneficiaries if the entities do not effectively disburse risks among
parties involved. This interpretation applies immediately to variable interest
entities created after January 31, 2003, and variable interest entities in which
an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of FIN 46 did not have a material
impact on the results of operations or financial position of the Company for the
nine months ended September 30, 2003.
In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS 149 was issued to
amend and clarify financial accounting and reporting for derivative instruments
and hedging activities under SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. Specifically, this Standard clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative and when a derivative contains a financing component.
Additionally, SFAS 149 amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND
DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS, and amends certain other existing pronouncements. SFAS
149 is effective for contracts entered into or modified subsequent to June 30,
2003 and hedging relationships designated subsequent to June 30, 2003. The
provisions of this Standard are to be applied prospectively. The adoption of
SFAS 149 did not have a material impact on the results of operations or
financial position of the Company for the nine months ended September 30, 2003.
In May 2003, the FASB issued SFAS 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." SFAS
150 requires that certain financial instruments, which under previous guidance
were accounted for as equity, must now be accounted for as liabilities. The
Standard requires that certain freestanding financial instruments be classified
as liabilities, including mandatorily redeemable financial instruments,
obligations to repurchase the issuer's equity shares by transferring assets and
certain obligations to issue a variable number of shares. SFAS 150 is effective
for financial instruments entered into or modified subsequent to May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. Effective July 1, 2003, the
Company adopted the provisions of SFAS 150 which did not have a material impact
on the results of operations or financial position of the Company for the nine
months ended September 30, 2003.
8
NOTE 6. STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK
BASED COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF SFAS 123, which
provided alternative methods for a voluntary change to the fair value method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The Company has elected to continue to account for its
stock-based employee compensation plans under APB Opinion 25 ("APB No. 25"),
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. The
following disclosures are provided in accordance with SFAS 148.
As permitted by FASB Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "ACCOUNTING FOR STOCK-BASED COMPENSATION," the Company has
elected to follow APB No. 25 and related interpretations in accounting for its
employee stock option plans. Under APB No. 25, no compensation expense is
recognized at the time of option grant because the exercise price of the
Company's employee stock option equals the fair market value of the underlying
common stock on the date of grant.
The exercise price of all other options equals the market price of
the Company's common stock on the date of grant. Accordingly, no compensation
cost has been recognized for the Company's employee stock option plans. Had
compensation cost for such plans been determined based on the fair value of the
options at the grant dates consistent with the method of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below.
Nine months ended September 30, 2003 2002
------------------------------------------------------------------------
Actual net (loss) income $(507,019) $115,570
Pro forma net (loss) income $(522,880) $100,801
Actual net (loss) income per share
Basic $ (0.12) $0.03
Diluted $ (0.12) $0.03
Pro forma net (loss) income per share
Basic - Pro forma $ (0.12) $0.02
Diluted - Pro forma $ (0.12) $0.02
Three months ended September 30, 2003 2002
------------------------------------------------------------------------
Actual net (loss) income $(115,514) $ 93,272
Pro forma net (loss) income $(120,801) $ 88,349
Actual net (loss) income per share
Basic $ (0.03) $0.02
Diluted $ (0.03) $0.02
Pro forma net (loss) income per share
Basic - Pro forma $ (0.03) $0.02
Diluted - Pro forma $ (0.03) $0.02
9
The fair value of the above stock-based compensation costs were
determined using the Black-Scholes option valuation model. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions, are fully transferable and
do not include a discount for large block trades. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility, expected life of the option and other estimates. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes of the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 7. WARRANTS ISSUED
Effective March 5, 2003, the Company granted Mayo Foundation for
Medical Education and Research ("Mayo") warrants dated July 1, 2003 to purchase
up to 100,000 shares and 50,000 shares, respectively, of common stock of the
Company at an exercise price of $1.75 per share, subject to the following
conditions. The warrants to purchase up to 100,000 shares become exercisable in
four equal annual installments on July 1 of each year beginning July 1, 2004 as
long as the Oaktree subsidiary and Mayo continue to be parties to a certain
Master Services Agreement effective November 15, 2002 (the "Master Services
Agreement") and expire June 30, 2008. Each annual installment becomes
exercisable only if subscriptions to any consumer health information publication
intended for sale to the general public produced by Mayo ("Consumer Health
Subscription Business") that are managed and fulfilled by Oaktree under the
Master Services Agreement account for at least ninety percent of Mayo's total
gross revenues derived from the Consumer Health Subscription Business during the
twelve-month period preceding the applicable installment date. The warrants to
purchase up to 50,000 shares become exercisable subject to the achievement of
certain revenue goals by Oaktree from New Business (as defined in the warrant)
and expire December 31, 2007. The warrants become exercisable as to fifty
percent of the shares if cumulative gross revenues from New Business for the
first time exceed $1,000,000 for any calendar year commencing January 1, 2003
and ending December 31, 2006. The warrants become exercisable as to one hundred
percent of the shares if cumulative gross revenues from New Business exceed
$2,000,000 for any calendar year commencing January 1, 2003 and ending December
31, 2006, regardless of whether any portion of the warrants was exercisable
prior thereto. The issuance of the warrants described in this paragraph was
deemed to be exempt from registration under the Securities Act of 1933, as
amended, in reliance on Section 4(2) of the Securities Act as a transaction by
an issuer not involving a public offering.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
INTRODUCTION
The Company acquired Oaktree on March 21, 2000 pursuant to a Stock
Purchase Agreement. The purchase price of Oaktree was approximately $4.1
million, consisting of $2 million in cash, the issuance of 600,000 restricted
shares of Common Stock of the Company and the assumption of approximately
$650,000 of debt, which was repaid at the closing date, plus certain fees and
expenses.
Oaktree is a twenty one year-old company specializing in providing
cost effective marketing solutions to organizations needing sophisticated
information management tools. In the past, these systems were found principally
only on mainframe and minicomputer systems. Oaktree has developed a
sophisticated PC based relational database that provides unlimited capacity and
flexibility to meet today's demanding informational needs. Oaktree has also
implemented a state-of-the-art Data Center that incorporates the latest
Client/Server based PC architecture. Oaktree currently manages direct marketing
databases for clients which contain over 25 million customers that include a
related 100 million transactions.
Oaktree provides a full set of database marketing solutions that
cover the full range of customer interaction. These entirely Web based solutions
allow our customers to manage their marketing promotions and the supporting
operational systems from their desktops in a real-time mode. The Internet is the
preferred medium for providing information and reports to our clients. All
reports, data access and the status of production jobs are available to
customers 24 hours a day, seven days a week simply by accessing their desktop
browsers. With Oaktree providing a single source solution, all data will reflect
a real-time status, meaning that reports will reflect information that is
accurate and up-to-date. Multiple levels of security provide a high degree of
data integrity and protection.
Oaktree's proprietary, integrated database allows clients with
e-commerce, subscription, product fulfillment and fundraising businesses to
utilize a single, customer focused database to do all of their marketing
promotions and response analysis. Clients can track their businesses on a real
time basis and make immediate decisions to adjust marketing promotions and/or
production schedules. The Company believes Oaktree's new Internet initiatives
and the release of its database product DB-Cultivator will allow us to offer
better expansion of services to existing customers and should generate
quarter-to-quarter growth.
Management believes that the competitive landscape continues to
favor Oaktree's PC Database and Internet business model. Management also
believes that customers will pursue solutions that improve operating
efficiencies and improve income potential. Oaktree's products offer both
opportunities at lower costs than traditional, mainframe competitors.
REVENUES AND EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
The Company had revenues of $1,612,493 for the three months ended
September 30, 2003 compared to $1,418,896 for the comparable period in 2002.
This increase is primarily due to increased revenue from the Company's new
Subscription Fulfillment Product, partially offset by decreases in higher margin
database revenues.
11
Fulfillment and materials costs were $258,608 for the three months
ended September 30, 2003 compared to $127,649 for the comparable period in 2002.
This increase was due primarily to the costs associated with outsourcing some
ancillary operations related to the Company's new Subscription Fulfillment
Product to third party vendors.
Personnel costs were $1,044,010 for the three months ended September
30, 2003 compared to $870,910 for the comparable period in 2002. This increase
was due primarily to costs associated with the hiring of new industry specific
management to position the Company for future growth.
Selling, general & administrative expenses were $426,953 for the
three months ended September 30, 2003 compared to $330,648 for the comparable
period in 2002. This increase was due primarily to the costs associated with the
addition of a sales and marketing department in the second quarter of 2003.
Interest income & Other income (expense) were $1,307 and $257,
respectively, for the three months ended September 30, 2003 compared to $7,274
and ($3,691), respectively, for the comparable period in 2002. The decrease in
interest income was primarily due to decreased interest earned on cash held by
the Company.
The Company had a net loss of $115,514 for the three months ended
September 30, 2003 compared to a net profit of $93,272 for the comparable period
in 2002. This decrease was due primarily to costs associated with the hiring of
new industry specific management, the addition of a sales and marketing
department to reposition the Company for future growth and decreased revenues
from higher margin database services.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
The Company had revenues of $4,679,012 for the nine months ended
September 30, 2003 compared to $4,242,514 for the comparable period in 2002. The
increase was primarily due to increased revenue from the Company's new
Subscription Fulfillment Product, partially offset by decreases in higher margin
database revenues.
Fulfillment and materials costs were $672,541 for the nine months
ended September 30, 2003 compared to $436,561 for the comparable period in 2002.
This increase was due primarily to the cost associated with outsourcing some
ancillary operations related to the Company's new Subscription Fulfillment
Product to third party vendors.
Personnel costs were $3,164,578 for the nine months ended September
30, 2003 compared to $2,615,547 for the comparable period in 2002. This increase
was due primarily to costs associated with the hiring of new industry specific
management and expenses incurred as a result of a reduction in existing
workforce.
Selling, general & administrative expenses were $1,348,151 for the
nine months ended September 30, 2003 compared to $1,086,363 for the comparable
period in 2002. This increase was due primarily to the costs associated with the
addition of a sales and marketing department in the second quarter of 2003.
Interest income & Other (expense) were $6,463 and ($7,224),
respectively, for the nine months ended September 30, 2003 compared to $22,446
and ($10,919), respectively, for the comparable period in 2002. The decrease in
12
interest income was primarily due to decreased interest earned on cash held by
the Company.
The Company had a net loss of $507,019 for the nine months ended
September 30, 2003 compared to a net profit of $115,570 for the comparable
period in 2002. This decrease was primarily due to costs associated with the
hiring of new industry specific management, the addition of a sales and
marketing department to reposition the Company for future growth and decreased
revenues from higher margin database services.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $1,129,454 at
September 30, 2003 and $1,844,512 at December 31, 2002. The Company's cash and
cash equivalents decreased in the first nine months of 2003 due primarily to the
costs associated with the hiring of new industry specific management, the
addition of the new sales and marketing department, expenses incurred as a
result of a reduction in existing workforce and an increase in accounts
receivable of $324,221. The Company continues to seek an acquisition or other
business combination; although no definitive agreements, arrangements or
understandings have been reached. Management believes its cash position is
sufficient to cover administrative expenses and current obligations for the
foreseeable future.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
======================================================================================================================
Payments Due by Period
Contractual Cash Obligations Total Less than 1 year 1-3 years 4 - 5 years After 5 years
Long Term Debt 0
Capital Lease Obligations $ 141,174 $ 56,648 $ 84,526
Operating Leases $ 459,991 $225,100 $234,891
Unconditional Purchase Obligations 0
Other Long Term Obligations 0
Total Contractual Cash Obligations $ 601,165 $281,748 $319,417
======================================================================================================================
CRITICAL ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF
FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS ("SFAS 145"). This Statement
rescinds FASB Statement No. 4, REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF
DEBT, and an amendment of that Statement, FASB Statement No. 64, EXTINGUISHMENTS
OF DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS. This Statement also rescinds
FASB Statement No. 44, ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS. This
Statement amends FASB Statement No. 13, ACCOUNTING FOR LEASES, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Effective January 1, 2003, the Company adopted the provisions of
13
SFAS 145 which did not have a material impact on the results of operations or
financial position of the Company for the nine months ended September 30, 2003.
In July 2002, the FASB issued Statement No.146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES SFAS 146. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between this Statement and Issue 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. Effective January 1, 2003, the Company
adopted the provisions of SFAS 146 which did not have a material impact on the
results of operations or financial position of the Company for the nine months
ended September 30, 2003.
In November 2002, the FASB issued Interpretation No. 45, "GUARANTORS
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS" ("FIN 45"). FIN 45 requires that certain
guarantees be initially recorded at fair value, which is different from the
general current practice of recording a liability only when a loss is probable
and reasonably estimable. FIN 45 also requires a guarantor to make significant
new disclosures for virtually all guarantees. The Company adopted the disclosure
requirements under FIN 45 for the quarter ended March 31, 2003 and has adopted
the initial recognition and initial measurement provisions for any guarantees
issued or modified after March 31, 2003. The adoption of FIN 45 did not have a
material impact on the results of operations or financial position of the
Company for the nine months ended September 30, 2003.
On December 31, 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK BASED COMPENSATION TRANSITION AND DISCLOSURE, SFAS 148 AMENDS FASB
STATEMENT NO. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide
alternative methods of transition to SFAS 123's fair value method of accounting
for stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 and APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. While SFAS 148 does not amend SFAS 123 to require
companies to account for employee stock options using the fair value method, the
disclosure provisions of SFAS 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for the
compensation using the fair value method of SFAS 123 or the intrinsic value
method of APB Opinion 25. The Company adopted the required disclosure provisions
of SFAS No. 148. See Note 6.
14
In January 2003, the FASB issued interpretation No. 46,
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES - AN INTERPRETATION OF ARB NO. 51"
("FIN 46"), which addresses consolidation of variable interest entities. FIN 46
expands the criteria for consideration in determining whether a variable
interest entity should be consolidated by a business entity, and requires
existing unconsolidated variable interest entities (which include, but are not
limited to, Special Purpose Entities, or SPE's) to be consolidated by their
primary beneficiaries if the entities do not effectively disburse risks among
parties involved. This interpretation applies immediately to variable interest
entities created after January 31, 2003, and variable interest entities in which
an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of FIN 46 did not have a material
impact on the results of operations or financial position of the Company for the
nine months ended September 30, 2003.
In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS 149 was issued to
amend and clarify financial accounting and reporting for derivative instruments
and hedging activities under SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES. Specifically, this Standard clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative and when a derivative contains a financing component.
Additionally, SFAS 149 amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND
DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS, and amends certain other existing pronouncements. SFAS
149 is effective for contracts entered into or modified subsequent to June 30,
2003 and hedging relationships designated subsequent to June 30, 2003. The
provisions of this Standard are to be applied prospectively. The adoption of
SFAS 149 did not have a material impact on the results of operations or
financial position of the Company for the nine months ended September 30, 2003.
In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." SFAS
150 requires that certain financial instruments, which under previous guidance
were accounted for as equity, must now be accounted for as liabilities. The
Standard requires that certain freestanding financial instruments be classified
as liabilities, including mandatorily redeemable financial instruments,
obligations to repurchase the issuer's equity shares by transferring assets and
certain obligations to issue a variable number of shares. SFAS 150 is effective
for financial instruments entered into or modified subsequent to May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. Effective July 1, 2003, the
Company adopted the provisions of SFAS 150 which did not have a material impact
on the results of operations or financial position of the Company for the nine
months ended September 30, 2003.
15
ITEM 3. CONTROLS AND PROCEDURES
-----------------------
(a) Evaluation of disclosure controls and procedures
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiary) required to be included in the Company's periodic SEC filings.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
(c) Asset-Backed issuers
Not applicable.
16
PART II. OTHER INFORMATION
-----------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
Effective March 5, 2003, the Company granted Mayo Foundation for
Medical Education and Research ("Mayo") warrants dated July 1, 2003 to purchase
up to 100,000 shares and 50,000 shares, respectively, of common stock of the
Company at an exercise price of $1.75 per share, subject to the following
conditions. The warrants to purchase up to 100,000 shares become exercisable in
four equal annual installments on July 1 of each year beginning July 1, 2004 as
long as the Oaktree subsidiary and Mayo continue to be parties to a certain
Master Services Agreement effective November 15, 2002 (the "Master Services
Agreement") and expire June 30, 2008. Each annual installment becomes
exercisable only if subscriptions to any consumer health information publication
intended for sale to the general public produced by Mayo ("Consumer Health
Subscription Business") that are managed and fulfilled by Oaktree under the
Master Services Agreement account for at least ninety percent of Mayo's total
gross revenues derived from the Consumer Health Subscription Business during the
twelve-month period preceding the applicable installment date. The warrants to
purchase up to 50,000 shares become exercisable subject to the achievement of
certain revenue goals by Oaktree from New Business (as defined in the warrant)
and expire December 31, 2007. The warrants become exercisable as to fifty
percent of the shares if cumulative gross revenues from New Business for the
first time exceed $1,000,000 for any calendar year commencing January 1, 2003
and ending December 31, 2006. The warrants become exercisable as to one hundred
percent of the shares if cumulative gross revenues from New Business exceed
$2,000,000 for any calendar year commencing January 1, 2003 and ending December
31, 2006, regardless of whether any portion of the warrants was exercisable
prior thereto. The issuance of the warrants described in this paragraph was
deemed to be exempt from registration under the Securities Act of 1933, as
amended, in reliance on Section 4(2) of the Securities Act as a transaction by
an issuer not involving a public offering. The warrants were filed as exhibits
to the Company's Form 10-QSB for the quarter ended June 30, 2003.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS
Exhibit No. Description
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
None
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SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GATEWAY INDUSTRIES, INC.
/s/ Maritza Ramirez
--------------------------------
Maritza Ramirez, Chief Financial Officer
and duly authorized signatory
Date: October 31, 2003
19