-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I/kac47B77sMcmJREP2KrPXF4xF/ox8mNDH1Z+c+olqyUbYVfnPo2r9lx1bIqks3 t5yHJSZ62QVLAcDFbmewnQ== 0000950116-96-001345.txt : 19961120 0000950116-96-001345.hdr.sgml : 19961120 ACCESSION NUMBER: 0000950116-96-001345 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961115 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GATEWAY INDUSTRIES INC /CA/ CENTRAL INDEX KEY: 0000725876 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 953702929 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13803 FILM NUMBER: 96667221 BUSINESS ADDRESS: STREET 1: 101-01 FOSTER AVENUE CITY: BROOKLYN STATE: NY ZIP: 11236 BUSINESS PHONE: 7182729700 MAIL ADDRESS: STREET 1: 101-01 FOSTER AVENUE CITY: BROOKLYN STATE: NY ZIP: 11236 FORMER COMPANY: FORMER CONFORMED NAME: GATEWAY COMMUNICATIONS INC DATE OF NAME CHANGE: 19920703 10QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND 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 (I.R.S. Employer incorporation or organization) Identification No.) 101-01 Foster Avenue Brooklyn, New York 11236 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: 718-272-9700 Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 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 [ ] Transition Small Business Disclosure Format (check one): Yes [ ] No [X] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable data. As of November 1, 1996, the Registrant had approximately 3,603,000 shares of Common Stock outstanding. Gateway Industries, Inc. Index
Part I--Financial Information Page ---- Item 1. Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Balance Sheet--September 30, 1996 4 Condensed Consolidated Statements of Operations-- Three Months and Nine Months Ended September 30, 1996 and 1995 6 Condensed Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 1996 and 1995 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis or Plan of Operations 11 Part II--Other Information Item 3. Defaults upon Senior Securities 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14
3 PART I FINANCIAL INFORMATION AND FINANCIAL STATEMENTS Item 1. Gateway Industries, Inc. Condensed Consolidated Balance Sheet (Unaudited) September 30, 1996 Assets Current assets: Cash and cash equivalents $ 6,080,000 Accounts receivable, less allowance for doubtful accounts of $540,000 2,485,000 Inventories (Note 2) 2,435,000 Prepaid expenses and other current asset 285,000 ----------- Total current assets 11,285,000 Property, plant and equipment, at cost, less accumulated depreciation (Note 3) 6,537,000 ----------- Total assets $17,822,000 =========== Liabilities and shareholders' equity Current liabilities: Accounts payable $ 1,141,000 Accrued expenses and other liabilities 955,000 Short-term financing (Note 4) 3,225,000 Bond payable (Note 5) 4,780,000 Current portion of capital lease obligations 67,000 ----------- Total current liabilities 10,168,000 Accounts payable, less current portion 300,000 Capital lease obligations, less current portion 144,000 4 Other long-term liabilities 70,000 ------------ Total liabilities 10,682,000 Commitments and Contingencies (Notes 4 and 5) Shareholders' equity (Note 6): 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, 3,603,469 shares issued and outstanding 4,000 Capital in excess of par value 9,596,000 Accumulated deficit (2,414,000) Treasury stock (46,000) ------------ Total shareholders' equity 7,140,000 ------------ Total liabilities and shareholders' equity $ 17,822,000 ============ See accompanying notes 5 Gateway Industries, Inc. Condensed Consolidated Statements of Operations (Unaudited)
Three months ended Nine months ended September 30 September 30 1996 1995 1996 1995 ------------ ------------ ------------- ------------- Net sales $ 5,048,000 $ -- $ 13,447,000 $ -- Cost of sales 4,643,000 -- 12,179,000 -- ------------ ------------ ------------ ------------ Gross profit 405,000 -- 1,268,000 -- Sales and marketing 379,000 -- 1,072,000 -- General and administrative expenses 255,000 21,000 1,318,000 66,000 ------------ ------------ ------------ ------------ Operating loss (229,000) (21,000) (1,122,000) (66,000) Other income (expense): Interest income 7,000 47,000 22,000 139,000 Interest expense (197,000) -- (574,000) -- Other income 29,000 -- 30,000 -- ------------ ------------ ------------ ------------ Total other income (expense) (161,000) 47,000 (522,000) 139,000 ------------ ------------ ------------ ------------ Net income (loss) $ (390,000) $ 26,000 $ (1,644,000) $ 73,000 ============ ============ ============ ============ Net income (loss) per share $ (.29) $ .03 $ (1.24) $ .07 ============ ============ ============ ============ Weighted average number of shares outstanding 1,325,000 1,035,000 1,325,000 1,035,000 ============ ============ ============ ============
See accompanying notes. 6 Gateway Industries, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30 1996 1995 ------------ ----------- Cash flows from operating activities Net income (loss) $(1,644,000) $ 73,000 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 259,000 2,000 Changes in operating assets and liabilities: Accounts receivable (285,000) -- Inventories 353,000 -- Prepaid expenses and other current assets 25,000 63,000 Accounts payable 532,000 (52,000) Accrued expenses and other liabilities 343,000 (48,000) ----------- ----------- Net cash (used in) provided by operating activities (417,000) 38,000 ----------- ----------- Cash flows from investing activities Purchase of machinery and equipment (82,000) -- ----------- ----------- Net cash used in investing activities (82,000) -- ----------- ----------- Cash flows from financing activities Proceeds from issuance of common stock 5,779,000 -- Share issuance expenses (130,000) -- Purchase of treasury stock (46,000) -- Repayments of capital lease obligations (169,000) -- Repayments of short-term financing (4,444,000) -- ----------- ----------- Proceeds from short-term financing 4,741,000 -- ----------- ----------- Net cash provided by financing activities 5,731,000 -- ----------- ----------- Increase in cash and cash equivalents 5,232,000 38,000 Cash and cash equivalents at beginning of year 848,000 3,474,000 ----------- ----------- Cash and cash equivalents at end of year $ 6,080,000 $ 3,512,000 =========== ===========
See accompanying notes 7 Gateway Industries, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 1. General The accompanying unaudited 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 consolidated 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, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 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, 1995. 2. Inventories The major components of inventories at September 30, 1996 are as follows: Raw materials $1,602,000 Work in process 316,000 Finished goods 517,000 ---------- $2,435,000 ========== 3. Property, Plant and Equipment The major components of property, plant and equipment at September 30, 1996 are as follows: Estimated Useful Lives in Years -------------- Building $5,196,000 40 Machinery and equipment 1,520,000 7 Office furniture and equipment 109,000 7 ---------- 6,825,000 Accumulated depreciation (288,000) ========== $6,537,000 ========== 8 Gateway Industries, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 4. Short-Term Financing Marsel has a line of credit with a domestic lender aggregating $4,000,000 of which borrowings of $2,800,000 were outstanding as of September 30, 1996. Borrowings under the line of credit is limited based on specified percentages of eligible inventories, accounts receivable and certain other assets of Marsel, as defined. Interest is payable at the prime rate plus 1-1/2%. Interest rates on the borrowings ranged from 10% to 10.25% in 1996. The line of credit expired on October 31, 1996; however, the lender has agreed to forbear exercising any of its rights and remedies until November 15, 1996. Marsel is in discussion with the lender to extend such date. If Marsel does not obtain a new commercial loan by such date (or the extended date), the lender could declare all outstanding amounts immediately due and payable. Marsel has signed a commitment letter with a new commercial lender to refinance its working capital needs. Closing of that loan is subject to various conditions. There can be no assurance that such financing will be completed. In addition, Marsel has a term loan with the domestic lender aggregating $425,000 at September 30, 1996. The term loan is payable in 60 monthly installments of approximately $8,333 plus interest at the prime rate plus 1-1/2% through December 1, 2000. The line of credit and term loan require Marsel, among other conditions, to meet various financial requirements, including minimum working capital and net worth as defined. Substantially all of Marsel's non-real estate assets are pledged as collateral for the outstanding borrowings. Marsel was not in compliance with certain loan covenants under the arrangement during 1996. Accordingly, the entire amount due under the term loan has been classified as current. 5. Bond Payable Marsel has a bond payable with a lender which requires principal payments of $450,000 per year. Interest is payable at an average rate of 7.5% per annum through November 1998. In November 1999, the remaining principal balance of $3,430,000 is due. The bond is secured by a letter of credit at 1% per year. The bank issuing the letter of credit requires Marsel, among other conditions, to meet various financial requirements, including minimum working capital and net worth as defined. Marsel's reimbursement obligations under the letter of credit are collateralized by all of Marsel's real estate related assets. The letter of credit expires on December 1, 1996. The outstanding principal balance as of September 30, 1996 approximated $4,780,000. Marsel was not in compliance with certain covenants under the financing arrangement during 1996. Accordingly, the entire amount due under the bond has been classified as current. Marsel is currently in discussion with the Bondholder and the L/C Bank to extend the maturity dated of the Bonds. 6. Rights Offering Gateway Industries, Inc. (the "Company") completed a rights offering of 2,568,456 shares of common stock at $2.25 per share in August 1996. Costs incurred with respect to the registration of the shares amounted to approximately $130,000. 9 Gateway Industries, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 7. Pro Forma Information (Unaudited) On November 22, 1995, the Company acquired certain assets and acquired the business of Marsel (a manufacturer of mirrors). The operations of Marsel are included in the consolidated statements of operations from the date of acquisition. The transaction was accounted for as a purchase. The pro forma unaudited results of operations for the nine months ended September 30, 1995, assuming the purchase of Marsel had been consummated as of January 1, 1995, are as follows (in thousands, except per share data): 1995 ---- Revenues $17,000,000 Net loss (369,000) Net loss per common share (.36) 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Introduction The financial statements included in this Report as of, and for the quarter ended, September 30, 1996 contain the consolidated financial condition and results of operation for the Company and its wholly-owned subsidiary, Marsel Mirror & Glass Products, Inc. ("Marsel"). During the comparable fiscal quarter last year, the Company had no operating business and a comparison of last year's quarter with this year's quarter is not meaningful. However, where information concerning Old Marsel's results of operation are ascertainable and deemed to be meaningful for an understanding of the Company's business and financial condition, the following discussion will attempt to compare results from period to period. The financial data with respect to Old Marsel was not prepared by the Company or Management and it is assumed, without any independent verification, to accurately reflect Old Marsel's results in accordance with generally accepted accounting principles. Results of Operations Net sales were $5,048,000 for the quarter ended September 30, 1996, which represents a 13.6% decrease from Old Marsel's net sales for a comparable quarter last year. Net sales for the nine month end period were $13,447,000 representing a 21% decrease from old Marsel's net sales for the comparable nine month period last year. Management believes that the decline resulted primarily because Old Marsel, prior to its acquisition by the Company or November 24, 1995, was not included in the annual programs of several of its larger customers due to their uncertainty regarding Old Marsel's ability to fill such customer's orders in a timely and complete manner. Current members of Marsel's new management have met with such customers in an attempt to restore their confidence in Marsel. Gross profit margin was 8% for the quarter ended September 30, 1996, lower than Old Marsel's historical norms. Management believes that gross profit margin for the quarter was negatively impacted by reduced sales. Marsel is focusing on increasing sales to new customers and has targeted the home improvement, craft, and kitchen and bath distribution channels. For the quarter, the Company experienced an operating loss of $229,000 and a net loss (before taxes) but after interest of $390,000. For the nine month period, the Company experienced an operating loss of $1,122,000 and a net loss (before taxes) but after interest of $1,644,000. The losses were principally the result of lower revenues. Liquidity and Capital Resources The Company's consolidated net working capital surplus at September 30, 1996 was $1,117,000, which included cash of $6,080,000 held by the Company at the parent level and reflects the classification of $4,780,000, the entire amount due under the IDA Bonds, as current. Since December 31, 1995, net working capital increased by $4,136,000, giving effect to the net proceeds of the "Rights Offering", offset in part by losses sustained by Marsel. Sources of cash for Marsel include income from operations, if any, and borrowings under the Commercial Loan Agreement, as defined below. If Marsel does not secure a new commercial lender, it will not have sufficient funds to finance continued operations unless the Company advances such funds. The Company is exploring its options with respect to such advances, but has not made any decision to do so. In addition, if Marsel continues to sustain large operating losses, it may not be able to provide cash to fund its working capital needs or to continue its operations. Marsel is party to a loan agreement (the "Commercial Loan Agreement") with a commercial bank (the "Commercial Lender," and collectively with the L/C Bank, the "Banks") which provides for revolving loans 11 of up to $4 million and a term loan of $500,000. The loans are secured by all Marsel's non-real estate related assets. The Commercial Loan Agreement provides for revolving loans based upon 50% of Marsel's eligible inventory and 80% of its eligible accounts receivable. Outstanding amounts under the revolver and term loan bear interest at 1.5% per annum above the Commercial Lender's prime rate. The Commercial Loan Agreement terminated on October 31, 1996. Marsel has received notice from its Commercial Lender of its intention not to renew the Loan Agreement. However, the lender has agreed to forbear exercising any of its rights and remedies until November 15, 1996. Marsel is in discussion with the Commercial Lender to extend such date. If Marsel does not obtain a new commercial loan by such date (or the extended date), the Commercial Lender could declare all outstanding amounts immediately due and payable. Marsel does not have the financial resources to make such payments and there can be no assurance that it could obtain financing to do so. Marsel has signed a Commitment Letter with a new commercial lender to refinance its working capital needs. Closing of that loan is subject to various conditions. There can be no assurance that such financing will be completed. As of September 30, 1996, $2,800,000 and $425,000 were outstanding under the revolver and term loan, respectively. Marsel is also a party to an Amended and Restated Loan and Security Agreement (the "L/C Loan Agreement") with National Bank of Canada (the "L/C Bank"), which provides for the L/C Bank to issue a letter of credit securing all of Marsel's obligations under the IDA Bonds, which as of September 30, 1996 was $4,780,000 plus accrued interest of $140,000. Marsel has agreed to reimburse the L/C Bank for all payments made to or on behalf of Marsel including drawings on the L/C. Marsel's reimbursement obligations are secured by a lien on all its real estate related assets. The L/C expires on December 1, 1996. The L/C Loan Agreement provides that the L/C Bank is required to renew the L/C annually on or before October 1 if Marsel (a) meets certain financial covenants and reporting requirements, (b) has met all L/C reimbursement obligations, (c) either (x) renewed the Commercial Loan Agreement, or obtained a new loan agreement (in either case on terms reasonably satisfactory to the L/C Bank) to finance its working needs for at least one year past the then expiration date of the L/C, or (y) has deposited cash collateral sufficient to make the next annual payment under the Bonds with the L/C Bank. Marsel has not satisfied the foregoing conditions, and the L/C Bank did not renew the L/C. Marsel is currently negotiating with the L/C Bank to extend the L/C. The L/C Bank has demanded that Marsel make monthly sinking fund payments of $66,000 toward the next principal payment due on the Bonds, which Marsel has not done. If the L/C is not renewed, all amounts due under the Bonds will become due and payable. In such event, Marsel will require financing. Marsel is currently in negotiations to provide such financing. There can be no assurance that such financing could be obtained, or, if obtained, would be on advantageous terms. Marsel has an annual principal payment due of $450,000 and a semi-annual interest payment of approximately $183,000 also due under the IDA Bond on November 15, 1996. Marsel does not have the resources to make such payment, and the Company has not yet determined whether or not to advance funds to Marsel to make such payment when due. If it does not, Marsel will be in default under the terms of the IDA Bond and L/C Agreement, which would require Marsel to immediately repay all indebtedness under such Bond. In such event, Marsel will require financing. Marsel is currently in negotiations to provide such financing. There can be no assurance that such financing could be obtained, or, if obtained, would be on advantageous terms. In August 1996, the Company completed a Rights Offering whereby each shareholder of the Company was granted the right to purchase three shares of common Stock for each share held of record on June 27, 1996, at a purchase price per share of $2.25. The net proceeds to the Company from the Rights Offering was approximately $5,649,000. Management has not yet decided how to allocate the proceeds of the Offering. 12 PART II Item 3. Defaults upon Senior Securities. Marsel does not meet the financial covenants set forth in the Commercial Loan Agreement and the L/C Loan Agreement. As a result of these Events of Default, the Commercial Lender may refuse to make further advances to, or to issue letters of credit on behalf of, Marsel, may accelerate Marsel's payment obligations and declare all amounts immediately due and payable and may avail itself of a variety of other remedies. In addition, the occurrence of the above Events of Default causes an event of default under the L/C Loan Agreement. During the continuance of such an Event, the L/C Bank may accelerate all amounts due from Marsel and foreclose its interest in the collateral securing all amounts due from Marsel. The L/C Bank may also notify the trustee under the IDA Bonds that the L/C Bank will not reinstate the interest component of the letter of credit and thereby cause an acceleration of the Bonds. Marsel is negotiating with another commercial lender for a new financial agreement and with the L/C Bank to extend the L/C. See Management's Discussion and Analysis. Item 6. Exhibits. Exhibit 27 -- Financial Data Schedule. 13 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Gateway Industries, Inc. ------------------------ (Registrant) Date: November 14, 1996 By:/s/ Warren G. Lichtenstein ----------------- -------------------------- Warren G. Lichtenstein Chairman of the Board and Principal Financial and Accounting Officer 14 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1996 CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED AS ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1996 SEP-30-1996 6,080,000 0 3,025,000 540,000 2,435,000 11,285,000 6,825,000 288,000 17,822,000 10,168,000 8,216,000 0 0 4,000 7,136,000 17,822,000 13,447,000 13,447,000 12,179,000 12,179,000 2,305,000 55,000 574,000 (1,644,000) 0 (1,644,000) 0 0 0 (1,644,000) (1.24) (1.24)
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