10-Q

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, 2000. [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______. Commission file number 0-13803 GATEWAY INDUSTRIES, INC. (Exact name of Small Business Issuer as Specified in Its Charter) DELAWARE 33-0637631 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 150 East 52nd Street, 21st Floor New York, NY 10022 (Address of Principal Executive Offices) 877-431-2942 (Issuer's Telephone Number, Including Area Code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] Shares of Issuer's Common Stock Outstanding at September 30, 2000: 4,192,024 Transitional small business disclosure format: Yes [ ] No [X] GATEWAY INDUSTRIES, INC. AND SUBSIDIARY INDEX PART I - FINANCIAL INFORMATION PAGE

Item 1.       Condensed Consolidated Financial Statements (Unaudited):

              Condensed Consolidated Balance Sheet
              September 30, 2000............................................  2

              Condensed Consolidated Statements
              of  Operations - Three Months Ended
              September 30, 2000 and 1999 ..................................  3

              Condensed Consolidated Statements
              of  Operations - Nine Months Ended
              September 30, 2000 and 1999 ..................................  4

              Condensed Consolidated Statements
              of  Cash Flows - Nine Months Ended
              September 30, 2000 and 1999...................................  5

              Notes to Condensed Consolidated Financial Statements..........  6

Item 2.       Management's Discussion and Analysis
              or Plan of Operations.........................................  8


                          PART II - OTHER INFORMATION

Item 6.       Exhibits and Reports on Form 8-K.............................. 10

Signatures.................................................................. 11

GATEWAY INDUSTRIES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET September 30, 2000 (Unaudited)

ASSETS Current assets: Cash and cash equivalents............................................. $ 3,064,000 Accounts receivable................................................... 767,000 Prepaid expenses and other............................................ 32,000 ------------ Total current assets.............................................. 3,863,000 ------------ Other assets: Security deposits..................................................... 48,000 Property, plant and equipment, net.................................... 334,000 Goodwill and other intangibles, net................................... 3,337,000 ------------ Total other assets................................................ 3,719,000 ------------ Total assets ............................................................. $ 7,582,000 ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses................................. $ 265,000 Deferred income....................................................... 268,000 Customer deposits..................................................... 560,000 Capital lease obligation.............................................. 3,000 ------------- Total current liabilities......................................... 1,096,000 ------------- Shareholders' equity Preferred stock, $.10 par value, 1,000,000 shares authorized, no shares issued or outstanding................................... -- Common stock, $.001 par value, 10,000,000 shares authorized, 4,192,024 shares issued (including treasury shares)............... 4,000 Capital in excess of par value........................................ 11,051,000 Accumulated deficit................................................... (4,523,000) Treasury stock, 11,513 shares of common stock-at cost................. (46,000) ------------- Total shareholders' equity........................................ 6,486,000 ------------- Total liabilities and shareholders' equity................................. $ 7,582,000 =============

See accompanying notes. GATEWAY INDUSTRIES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

For the Three Months Ended September 30, 2000 1999 ---- ---- Sales...................................................................... $ 936,000 -- Cost of sales ............................................................. 133,000 -- ------------ ------------ Gross profit ............................................................. 803,000 -- Costs and expenses: Payroll expenses...................................................... $ 498,000 -- General and administrative............................................ 225,000 $ 108,000 Depreciation and amortization......................................... 144,000 -- Professional fees..................................................... 35,000 -- Occupancy............................................................. 33,000 -- ------------ ------------ Total costs and expenses.......................................... 935,000 108,000 ------------ ------------ Operating loss........................................................ (132,000) (108,000) Other income: Interest income................................................... 42,000 58,000 ------------ ------------ Net loss................................................................... $ (90,000) $ (50,000) ============ ============ Net loss per share - basic and diluted..................................... $ (.02) $ (.01) Weighted average number of shares - basic and diluted...................... 4,192,024 3,592,024

See accompanying notes. GATEWAY INDUSTRIES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

For the Nine Months Ended September 30, 2000 1999 ---- ---- Sales...................................................................... $ 1,899,000 -- Cost of sales ............................................................. 320,000 -- ------------ ------------ Gross profit ............................................................. 1,579,000 -- Costs and expenses: Payroll expenses...................................................... $ 1,032,000 -- General and administrative............................................ 643,000 $ 309,000 Depreciation and amortization......................................... 224,000 -- Professional fees..................................................... 154,000 -- Occupancy............................................................. 61,000 -- ------------ ------------ Total costs and expenses.......................................... 2,114,000 309,000 ------------ ------------ Operating loss........................................................ (535,000) $ (309,000) Other income: Interest income................................................... 150,000 169,000 Other income...................................................... 19,000 15,000 ------------ ------------ Total other income................................................ 169,000 184,000 ------------ ------------ Net loss................................................................... $ (366,000) $ (125,000) ============ ============ Net loss per share - basic and diluted..................................... $ (.09) $ (.03) Weighted average number of shares - basic and diluted...................... 4,014,652 3,592,024

See accompanying notes. GATEWAY INDUSTRIES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Nine Months Ended September 30, 2000 1999 ---- ---- Cash flows from operating activities: Net loss .............................................................. $ (366,000) $ (125,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation .......................................................... 70,000 -- Amortization of goodwill and other intangibles ........................ 154,000 -- Changes in assets and liabilities net of assets and liabilities acquired: Accounts receivable ............................................... (391,000) -- Prepaid expenses and other ........................................ 77,000 11,000 Security deposit .................................................. 25,000 -- Accounts payable .................................................. (1,000) (32,000) Deferred income ................................................... 268,000 -- Customer deposits ................................................. 560,000 -- ----------- ------------ Net cash provided by (used in) operating activities .......... 396,000 (146,000) Cash flows from investing activities: Purchase of property, plant, and equipment ........................ (85,000) -- Purchase of Oaktree Systems Inc., net of cash acquired ............ (2,693,000) -- Note receivable ................................................... -- 566,000 ------------ ------------ Net cash (used in) provided by investing activities .......... (2,778,000) 566,000 Cash flows from financing activities: Payments of obligation on capital lease ........................... (19,000) -- ------------ ------------ Net cash used in financing activities ................................. (19,000) -- ------------ ------------ Net (decrease) increase in cash and cash equivalents .................. (2,401,000) 420,000 Cash and cash equivalents at beginning of period ...................... 5,465,000 5,140,000 ------------ ------------ Cash and cash equivalents at end of period ............................ $ 3,064,000 $ 5,560,000 ============ ============

Supplemental information: On March 21, 2000, the Company acquired 100% of the common stock of Oaktree Systems, Inc. for $4,078,000 which included the issuance of 600,000 shares of common stock of Gateway Industries, Inc. (see Note 3). See accompanying notes. GATEWAY INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) 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 contain all adjustments (consisting only of normal recurring accruals) necessary to make such financial statements not misleading. Results for the three and nine months ended September 30, 2000, are not necessarily indicative of the results that may be expected either for any other quarter in the year ending December 31, 2000, or for the entire year ending December 31, 2000. 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, 1999. 2. Operations Gateway Industries, Inc. (the "Company") was incorporated in Delaware in July 1994. The Company had no operating business from December 1996 to March 2000, when it acquired all of the outstanding common stock of Oaktree Systems, Inc. ("Oaktree"). Oaktree provides database development consolidation and management services, and 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 in March 2000. The Company's officers and Steel Partners Services, Ltd. (an entity controlled by the Company's Chairman) devote time to the Company's administration and in exploring potential acquisitions and other business opportunities. 3. Purchase of Subsidiary In March 2000 the Company acquired 100% of the outstanding stock of Oaktree for a purchase price of $4,078,000, consisting of $2,000,000 in cash, the issuance of 600,000 shares of common stock of the Company, the repayment of existing Oaktree bank debt of $640,000 and expenses of $70,000. The acquisition was accounted for as a purchase, and, accordingly include the results of operations since the date of acquisition. The excess of purchase price over the fair value of net assets acquired was recorded as goodwill of $3,124,000 and other intangible assets of $350,000 which will be amortized over 15 and 5 years, respectively. The following consolidated condensed unaudited proforma statement of operations, as if the Oaktree acquisition had occurred at January 1, 1999.

Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 -------------------- -------------------- Sales $ 936,000 $ 728,000 $ 2,557,000 $2,055,000 Cost of expenses 1,068,000 895,000 3,280,000 2,472,000 Other income 42,000 59,000 171,000 197,000 ----------- ----------- ----------- ----------- Net loss $ (90,000) $ (108,000) $ (552,000) $ (220,000) =========== =========== =========== =========== Net loss per share --basic and diluted $ (.02) $ (.03) $ (.13) $ (.05)

Assets acquired and liabilities acquired at estimated fair value at March 21, 2000 are as follows: Cash $ 8,000 Accounts receivable 376,000 Other current assets 99,000 Fixed assets, net 320,000 Security deposits 13,000 Accounts payable and accrued expense (191,000) Capital leases (22,000) ---------- Total tangible net assets $ 603,000 =========== 4. Significant Accounting Policies Revenue Recognition: Revenues are recognized upon delivery of services. Billings on contracts which extend beyond one month are deferred and then recognized as earned. Customer deposits are used to pay for printing and materials for customer mailings. The Company receives these deposits and then makes payments as directed by the customer for printing and materials as a service only. 5. Lease Commitments The Company entered into a three-year operating lease for office space in New York, NY which began April 1, 1998. The Company has sublet a portion of its office space to affiliated companies. Oaktree leases 9,008 square feet of office space in Calverton, New York. The lease expires on February 1, 2003. The space is rented from a partnership in which two of the senior managers of Oaktree each own a material interest. Oaktree has a lease for 1,650 square feet in St. Paul, Minnesota which expires on Dec 31, 2000. Future minimum lease payments under these leases are as follows:

Deduct Net Sublease Rental Commitments Rentals Commitments 2000 57,000 17,000 40,000 2001 126,000 16,000 110,000 2002 105,000 -- 105,000 ------- -------- -------- $288,000 $ 33,000 $255,000 ======== ======== ========

6. Net Loss Per Share Net loss per share was calculated using the weighted average number of common shares outstanding. The effect of all common stock equivalents is not included in the per share computation for the three and nine months ended September 30, 2000 and 1999, as such items are anti-dilutive in these quarters. Accordingly, basic and diluted income per share are the same for the three and nine months ended September 30, 2000 and 1999. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The Company acquired Oaktree on March 21, 2000, for a purchase price of 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 $640,000 of debt (which was repaid in full at closing), and certain fees and expenses. Oaktree had revenues of approximately $3.0 million in 1999 and was marginally profitable. Oaktree's 1999 operating income was adversely impacted by expenses related to Year 2000 preparedness, unusually large software and system upgrades and web design development projects which are not expected to recur annually to the extent incurred in 1999. The Company believes that these expenditures will enable Oaktree to significantly enhance the services provided to its customers. The Company intends to continue to enhance Oaktree's internal growth opportunities and efforts, and explore acquisitions of established products and service providers that will provide opportunities to present customers to an integrated, full-service product offering. The Company's ability to make further product acquisitions will depend on, among other things, the availability of appropriate acquisition opportunities, the ability to obtain appropriate financing and the Company's ability to consummate acquisitions on acceptable terms. There can be no assurance that the Company will be able to consummate any such acquisition on acceptable terms. Oaktree competes in a highly fragmented industry with many national and local competitors. Competition comes from many sources including database development companies, service bureaus, and mailhouses. Many of the competitors of Oaktree possess substantially greater financial, technical, marketing and other resources than Oaktree. As of September 30, 2000, Oaktree employed 64 full time and part time employees. None of the employees are subject to any collective bargaining agreements and the Company believes that the relationship with its employees is good. REVENUES AND EXPENSES The Company had no operating business from 1996 until the acquisition of Oaktree in March 2000. During the three month period ended September 30, 2000, Oaktree had revenues of $936,000, cost of sales of $133,000 and a gross profit of $803,000. Gateway's consolidated costs and expenses for the three month period ended September 30, 2000 aggregated $935,000, consisting of payroll expenses of $498,000, professional fees of $35,000, general and administrative expense of $225,000, rental cost of $33,000, and depreciation and amortization of $144,000. During the period from March 22, 2000 to September 30, 2000, Oaktree had revenues of $1,899,000 and cost of sales of $320,000 and a gross profit of $1,579,000. Gateway's consolidated costs and expenses for the nine month period ended September 30, 2000 totaled $2,114,000, including payroll expenses of $1,032,000, professional fees of $154,000, general and administrative expenses of $643,000, rental costs of $61,000, and depreciation and amortization of $224,000. The proforma income statement in Note 3 shows that the net loss incurred by the Company for the three and nine months ended September 30, 2000 calculated as if Oaktree had been acquired on January 1, 1999, decreased for the three month period and increased for the nine month period over the net loss incurred during the same periods in 1999. Sales are higher in both periods in 2000 versus 1999. Higher expenses in 2000 are attributable to increased payroll and related costs at Oaktree that were incurred as a result of increased sales in 2000 and in preparation for higher sales expected to be realized starting in early 2001. OTHER INCOME During the third quarter of 2000, the Company recognized $42,000 of net interest income compared with $58,000 in the comparable period of 1999. For the nine months ended September 30, 2000, other income totaled $169,000 including interest income of $150,000 and other income of $19,000. For the nine months ended September 30, 1999, other income consisted of interest income of $169,000 and other income of $15,000. The difference results primarily from less cash equivalents on hand during 2000 earning interest income since the Company invested cash in the operating business of Oaktree in March 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents totaled $3,064,000 at September 30, 2000 and $5,465,000 at December 31, 1999. $2,643,000 cash was expended March 21, 2000 for the acquisition of Oaktree. At September 30, 2000, the Company's working capital balance was $2,767,000. There were no long term liabilities. While the Company seeks an acquisition or other business combination, management believes its cash position is sufficient to cover administrative expenses and current obligations for the foreseeable future. PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits (27) Financial Data Schedule (filed as part of the electronic filing only) (b) Reports on Form 8-K The Registrant filed the following current report on Form 8-K during the period covered by this report: (i) Report on Form 8-K as amended dated May 22, 2000, reporting the acquisition of Oaktree. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GATEWAY INDUSTRIES, INC. /s/ Jack Howard Jack Howard, Acting President Date: November 13, 2000

EX-27

 


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