sec document
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-13803
GATEWAY INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 33-0637631
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
150 East 52nd Street, 21st Floor
New York, New York 10022
(Address of principal executive offices including zip code)
(877) 431-2942
--------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $4,898,000
Based upon the closing price of the issuer's Common Stock on March 8, 2002, the
aggregate market value of the 2,517,816 outstanding shares of Common Stock held
by non-affiliates of the issuer was $2,467,460. Solely for the purposes of this
calculation, shares held by directors and officers of the issuer have been
excluded. Such exclusion should not be deemed a determination or an admission by
the issuer that such individuals are, in fact, affiliates of the issuer.
As of March 8, 2002, 4,192,024 shares of the issuer's Common Stock, $.001 par
value (the "Common Stock") were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Description of Business 2
Item 2. Description of Property 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote
of Security Holders 6
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters 7
Item 6. Management's Discussion and
Analysis or Plan of Operation 8
Item 7. Financial Statements 12
Item 8. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure 12
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With
Section 16(a) of the Exchange Act 13
Item 10. Executive Compensation 15
Item 11. Security Ownership of Certain Beneficial
Owners and Management 16
Item 12. Certain Relationships and Related
Transactions 17
Item 13. Exhibits and Reports on Form 8-K 18
Signatures 19
PART I
ITEM 1. Description of Business
OVERVIEW
Gateway Industries, Inc. (the "Company") was incorporated in
Delaware in July 1994. The Company had no operating business or full-time
employees from December 1996 to March 2000, when it acquired all of the
outstanding common stock of Oaktree Systems Inc. ("Oaktree").
OAKTREE SYSTEMS, INC.
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 nineteen 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 Facility 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.
Oaktree's system utilizes the PC Client/Server architecture.
Oaktree's DB_Cultivator database is a true SQL (Standard Query Language)
relational system that allows unlimited transactional data and relationships to
be maintained for each customer. Oaktree integrates all of a client's marketing
products into a single database. This solution offers true personalized customer
relationship management and sophisticated cross-promotional opportunities. The
system is designed to allow unlimited flexibility for different types of data
and products.
2
The Oaktree Business Model
The following diagram depicts the business model that Oaktree
provides for its clients. Oaktree provides an integrated, single source solution
that is driven by a centralized database.
Oaktree's single source solution provides the following services to its clients:
o Web-based Database Management o Fundraising Campaign Management
o Integrated Product Fulfillment o Physical Product Fulfillment
o Integrated List Rental Fulfillment o Mail Preparation Services
o Integrated Subscription Management o Web-site Design & Hosting
o Integrated E-Commerce Functions
Oaktree's Marketing Strategy
----------------------------
Oaktree has focused its marketing initiatives toward the following products and
services:
o Direct Marketing Database Management
o Related Product Fulfillment Processing & Management
o Related E-Commerce Development and Management
3
o Related Subscription Processing & Management
Oaktree's clients are comprised mostly of organizations with
multi-faceted marketing initiatives that have been frustrated by antiquated
marketing and operational database systems. These clients need to communicate
with their customers at a personal level with a complete understanding of the
current relationships and their current interests. Oaktree's single source
solution fills this need in a large and growing marketplace.
Management believes that the competitive marketplace continues to
favor Oaktree's PC Database and Internet business model. Oaktree believes that
customers will aggressively pursue solutions that improve operating efficiencies
and improve income potential. Oaktree's products offer opportunities that are
not offered by traditional, mainframe competitors and at a lower price.
Oaktree's Business Model & Growth Strategy
------------------------------------------
In developing a single source solution, Oaktree believes that all
customer data must be centralized and integrated into a single database. Oaktree
should not focus significant resources or capital to build the ancillary
functions needed to complete the marketing cycle. These ancillary functions
include printing and letter shop, large volume remittance processing, large
volume call center management and large product fulfillment warehousing. Oaktree
currently utilizes and will continue to utilize subcontracting vendors who
specialize in these functions. However, they must be committed to Oaktree's
Web-based, real-time reporting requirements and must utilize Oaktree's
technology within their organization wherever necessary. It is Oaktree's belief
that this business model will offer its clients the highest level of service,
technological excellence and cost effectiveness.
The business model should allow Oaktree to grow rapidly and to ramp
up its business without the need for large capital investments in ancillary
facilities. It should also allow Oaktree to implement opportunities quickly and
focus its resources on systems development and customer services that have
always been its core strengths.
Oaktree's Experience
--------------------
Oaktree's many years of providing direct marketing solutions include
Database Management expertise, Vendor Management, Campaign Management, Creative
Services, Multi-layered Analysis, Internet E-commerce and Multi-source Donation
Processing. All of these combined skills offer Oaktree's clients the opportunity
for full account management to manage an ongoing sophisticated direct marketing
program. Examples of Oaktree's work for clients include:
o Large Health Publishing Client - For the last 5 years, Oaktree has managed
for a large healthcare publishing client a fully integrated direct
marketing database containing over 5 million customers, subscribers and
supporters. Over this period, the data managed regarding each customer
includes financials, subscriptions, product purchases, interests, surveys,
overlay data and a complete history of all mailings sent. It is also
integrated with an E-Commerce solution marketing the same products.
Oaktree also manages an acquisition programming mailing 25 million pieces
each year. Oaktree works as a true partner in the development of marketing
strategies that utilize sophisticated reporting systems. Each of their
marketing efforts has shown considerable growth through the numerous
marketing initiatives developed and managed by Oaktree. As a result, the
database has grown over 300% since 1996.
4
o Large Fundraising Client - Oaktree was selected as the computer vendor to
implement a National Information Management System for this client's ten
million record customer database. The client has been an Oaktree customer
since 1982. Oaktree manages all aspects of the client's direct mail
program including strategic planning, creative, vendor selection, database
management and campaign management.
Competition
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 mail houses. Many of Oaktree's
competitors possess substantially greater financial, technical, marketing and
other resources than does Oaktree.
Employees
As of February 28, 2002, Oaktree employed 67 full-time and 42
part-time employees. None of the employees are subject to any collective
bargaining agreements and management believes that its relationship with
Oaktree's employees is good. The Company has no other employees.
FORMER INVESTMENTS
Marsel Mirror and Glass Products, Inc.
In November 1995, Glass Acquisition Corp., a wholly owned subsidiary
of the Company, acquired substantially all of the assets and business of Marsel
Mirror & Glass Products, Inc. ("Old Marsel") and a related real estate interest
from which Old Marsel conducted its business in Brooklyn, New York. Subsequent
to the closing, Glass Acquisition Corp. changed its name to Marsel Mirror &
Glass Products, Inc. ("Marsel".)
In December 1996, the Company sold all outstanding shares of Marsel
to a third party for $1.00 per share, pursuant to a Stock Purchase Agreement
(the "Agreement".) Under the Agreement, the Company had the right to purchase
50% of the outstanding shares of Marsel for $2.00 per share until December 1999.
Pursuant to the Agreement, the Company paid $75,000 to Marsel's lender and
issued approximately $300,000 of guarantees to vendors of Marsel, all of which
were fully satisfied by December 1998. In addition, the Agreement contains
provisions relating to the allocation between the Company and the third party of
the proceeds from the sale or liquidation of Marsel or the sale of equity in
Marsel by the third party, if either occurs. Since the Company had a contingent
50% interest in Marsel, the above transaction was not accounted for as a
discontinued operation.
In December 1996, Marsel filed for bankruptcy under Chapter 11 of
the Bankruptcy Code. During 1999, the Company received $100,000, in complete and
court-approved settlement of all amounts due from Marsel. The Company expended
$79,000 in 1999 in professional fees to secure this settlement. During 1999, the
Company also exercised its option to acquire 50% of the outstanding stock of
Marsel. Marsel emerged from Bankruptcy on November 30, 2001 and completed its
refinancing and the Company did not retain any interest in Marsel as a result of
that Bankruptcy. The Company's investment in Marsel is now valueless.
5
ITEM 2. Description of Property.
The Company leased approximately 2,500 square feet of office space
at 150 East 52nd Street, New York, New York 10022. The lease expired on March
30, 2001. During 2000 and 2001 the rent on the office space was paid by Steel
Partners Services, Ltd. ("SPS"), an entity controlled by the Company's Chairman.
The Company had the non-exclusive right to use the office space along with SPS
and several other entities. The Company's share of the rent was (and will be for
2002) included in the management fee paid by the Company to SPS. See "Item 12,
Certain Relationships and Related Transactions."
Oaktree leases the following property:
Approximately 11,400 square feet of office space at 4462 Middle
Country Road, Calverton, New York 11933. The lease expires on September 30,
2005. Oaktree's senior managers sold their interest in the rental property on
October 26, 2001.
Approximately 1,600 square feet of office space at 1821 University
Avenue West, St. Paul, Minnesota 55104. The lease expires February 28, 2003.
Approximately 16,000 square feet of warehouse/office space at 657
Dowd Avenue, Elizabeth, New Jersey 07206. This is currently a month- to- month
arrangement with a formal lease expected to be executed in 2002.
ITEM 3. Legal Proceedings.
There is no action, suit, proceeding, or investigation pending or,
to the Company's knowledge, threatened against the Company, including any
investigation of any governmental authority or body.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
6
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.
MARKET FOR COMMON STOCK
The Common Stock of the Company has been listed on the OTC Bulletin
Board since November 17, 1994. The Common Stock currently trades under the
symbol "GWAY." The following table sets forth the high and low bid prices of the
Common Stock during the periods indicated. Such prices reflect inter-dealer
prices, without retail mark-up, markdown or commissions and may not necessarily
represent actual transactions.
2000
----
FIRST QUARTER 4.0625 1.8750
SECOND QUARTER 3.0725 1.7500
THIRD QUARTER 2.1875 1.5000
FOURTH QUARTER 1.5156 .8750
2001
----
FIRST QUARTER 1.06 .94
SECOND QUARTER 1.00 .97
THIRD QUARTER 1.20 .98
FOURTH QUARTER .98 .98
At March 6, 2002, there were approximately 1,353 holders of the
Company's Common Stock.
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock
during the last two fiscal years and does not anticipate doing so in the
foreseeable future.
7
ITEM 6. Management's Discussion and Analysis or Plan of Operation
FORWARD LOOKING STATEMENTS
Certain forward-looking statements, including statements regarding
the Company's expected financial position, business and financing plans are
contained in this Annual Report on Form 10-KSB. These forward-looking statements
reflect management's views with respect to future events and financial
performance. The words, "believe," "expect," "plans" and "anticipate" and
similar expressions identify forward-looking statements. Although management
believes that the expectations reflected in such forward-looking statements are
reasonable, management can give no assurance that such expectations will prove
to have been correct. Important factors that could cause actual results to
differ materially from such expectations are disclosed in this Annual Report on
Form 10-KSB. All subsequent written and oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by the
cautionary statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
On March 21, 2000, the Company acquired Oaktree, the Company's only
operating subsidiary. The purchase price of Oaktree consisted of $2 million in
cash, the issuance of 600,000 restricted shares of Common Stock of the Company,
the assumption of approximately $650,000 of debt which was repaid in full at
closing and certain fees and expenses. All referenced 2000 financial data for
Oaktree are for the stub period of March 21, 2000 through December 31, 2000
("2000 stub period").
MANAGEMENT'S DISCUSSION AND ANALYSIS
Oaktree's had revenues for its full fiscal year 2001 of $4,898,000
as compared to the 2000 stub period of $2,782,000. Therefore, revenues increased
76%, or $2,116,000 in 2001 from the 2000 stub period. $370,000 of this increase
was due to additional customer postage with most of the other increase being
generated by the introduction of Oaktree's new Product fulfillment, Processing
and Management capabilities, as well as additional Database management
contracts.
Management believes that modest or constrained overall economic
growth should provide additional opportunities to Oaktree as customers seek
improved operating efficiencies and income potential. Oaktree's products offer
both opportunities at lower costs than traditional, mainframe competitors.
Currently, five customers make up 68% of Oaktree's revenues.
Oaktree's largest customers have familiarized themselves with Oaktree's
expanding product lines and have continued to enhance and expand the services
Oaktree can provide for them. Oaktree's client profiles are organizations with
multi-faceted marketing initiatives that have been frustrated by antiquated
marketing and operational database systems. They need to communicate with their
customers at a personal level with a complete understanding of the current
relationships and their current interests. Oaktree's single source solution
fills this need in a large and growing marketplace.
8
Oaktree has focused its marketing initiatives toward direct
marketing database management, related product fulfillment processing and
management, e-commerce development and management and the subscription
processing and management.
Fulfillment, materials and postage costs were $1,266,000 in 2001 or
a 178% increase as compared to $456,000 in the 2000 stub period. Most of this
increase was due to Oaktree's increased infrastructure in generating the new web
based product fulfillment processing and management system (this includes a
fulfillment facility, call center operation and lockbox capabilities.) Over the
last two years Oaktree has made investments in migrating to the SQL platform and
to utilizing the internet for client access and reporting.
Personnel costs were $2,638,000 in 2001 or a 55% increase as
compared to $1,707,000 in the 2000 stub period. Most of this increase was due to
the development of Oaktree's internal sales and marketing department and
expanding the accounting and finance and customer service departments.
General and administrative costs were $1,814,000 in 2001 or a 25%
increase as compared to $1,454,000 in the 2000 stub period. Most of this
increase was due to the increased occupancy and infrastructure costs associated
with the fulfillment facility, call center operation and lockbox department.
Oaktree also had an increase in depreciation and amortization due to the 12
month calculation in 2001 vs. the 2000 stub period.
Oaktree has made a commitment to invest in its future by constantly
improving not only its customers' solutions but also its internal operations.
Oaktree believes that the expansion of its sales and marketing, accounting and
finance and customer service departments will give it the tools necessary to
increase market share, profitability and return on invested capital.
Net loss was $731,000 for 2001 as compared to a net loss of $623,000
in the 2000 stub period, an increase of 17%. Although revenue increased by
$2,116,000 or 76% in 2001, costs increased due to the expansion of
infrastructure as described above.
Oaktree provides a full set of database marketing solutions that
cover the full range of customer interaction. These entirely web based solutions
allow Oaktree 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 its clients. All
reports, data access and the status of production jobs are available 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 the highest degree of data integrity and
protection.
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 and at lower costs than traditional, mainframe competitors.
Income and Expenses Not Associated with Oaktree
The Company recognized $89,000 of other income in 2001 or a 58%
decrease compared to $212,000 in the 2000 stub period. Other Income was
primarily interest earned on available cash and cash equivalents. The decrease
in interest income in 2001 over the 2000 stub period was due primarily to
decreasing money market rates earned on cash held by the Company. General and
administrative expenses and professional fees not associated with Oaktree
totaled $360,000 and $158,000 respectively in 2001 compared to $327,00 and
$225,000, respectively, in the 2000 stub period. The increase in general and
administrative expenses is due to timing differences in one vendor's billing.
The decrease in professional fees reflects the end of the Marsel bankruptcy
issues.
9
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $2,042,000 at
December 31, 2001, compared with $2,604,000 at December 31, 2000. The decrease
in cash resulted principally from Oaktree's increased operating expenses and
working capital requirements during 2001. The Company remains in a highly liquid
position and believes that the resources available from cash and cash
equivalents are sufficient to meet the foreseeable requirements of its business.
Critical Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
Gateway Industries, Inc. and the operating company, Oaktree Systems Inc. All
significant intercompany account balances and transactions have been eliminated
in consolidation.
Revenue Recognition
Revenues are recognized upon delivery of services. The revenues
earned are based upon a fixed fee for the management of the customer's database.
In addition, the Company performs other fulfillment services for its customers.
These additional service revenues are transactional based, or earned based upon
the volume of transactions performed by the Company at rates specified in their
contracts. Some customers have fixed fee revenues, which are invoiced quarterly
and classified as deferred revenue on the balance sheet. These revenues are
recorded as earned in one-third increments over the period to which they
pertain.
10
Goodwill Impairment.
Our long-lived assets include goodwill of approximately $2.8 million as of
December 31, 2001. During 2001, we evaluated the recoverability of our goodwill
in accordance with Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which generally required us to assess these assets
for recoverability when events or circumstances indicate a potential impairment
by estimating the undiscounted cash flows to be generated from the use of these
assets. No impairment losses were recorded related to goodwill during 2001. We
are adopting SFAS 142 effective January 1, 2002. We do not expect that goodwill
will be impaired upon the adoption of SFAS 142 in connection with the transition
impairment tests, which are required to be completed no later than June 30,
2002. We have not yet determined the effects of this new accounting
pronouncement on the financial statements of the Company but expect to complete
that measurement by March 31, 2002. Any impairment losses recorded in the future
could have a material adverse impact on our financial conditions and results of
operations.
Income Tax
As of December 31, 2001, the Company had net operating loss
carryforwards available to reduce future federal and state taxable income. These
net operating loss carryforwards are carried on the Company's balance sheet as a
deferred tax asset, but due to the uncertainty surrounding the timing of
realizing the benefits of its deferred tax assets from its net operating loss
carryforwards in future years, the Company has recorded a 100% valuation
allowance against its deferred tax assets. Financial Accounting Statement
Standard No. 109, "Accounting for Income Taxes" (SFAS 109) requires that a
valuation allowance be setup to reduce a deferred tax asset to the extent it is
more likely than not that the related tax benefits will not be realized. In
order for a company to realize the tax benefits associated with a net operating
loss, it must have taxable income within the applicable carryback or carryfoward
periods.
New Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Accounting Standards (SFAS) 141, Business Combinations, and
SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these statements
and their effective dates for the Company are as follows:
o All business combinations initiated after June 30, 2001 must
use the purchase method of accounting. The pooling of interest
method of accounting is prohibited except for transactions initiated
before July 1, 2001.
o Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual or
other legal rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability.
o Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 1, 2002, all previously recognized goodwill and intangible
assets with indefinite lives will no longer be subject to
amortization.
o Effective January 1, 2002, goodwill and intangible assets
with indefinite lives will be tested for impairment annually and
whenever there is an impairment indicator.
11
o All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
The Company will continue to amortize goodwill and intangible assets
recognized prior to July 1, 2001, under its current method until January 1,
2002, at which time annual and quarterly goodwill amortization of approximately
$280,000 and $70,000 will no longer be recognized. The assignment of goodwill to
reporting units, along with competition of the transitional goodwill impairment
tests, must be completed during the first six months of 2002. The Company is
currently evaluating the impact of this statement.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, ("SFAS 144"). This statement is
effective for the fiscal years beginning after December 15, 2001. This
supercedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, while retaining many of the requirements of
such statement. The Company is currently evaluating the impact if any on SFAS
144. The Company is currently evaluating the impact of this statement.
Certain Considerations - Dependence on Significant Customers
For the fiscal year ended December 31, 2001, five (5) customers accounted
for an aggregate of 68% of the Company's revenues. The termination of the
Company's relationship with any of its significant customers or a material
reduction in the use of the Company's services by any such customer could have a
material adverse effect on the financial condition and results of operations of
the Company.
ITEM 7. Financial Statements
See the Company's financial statements beginning on page F-1.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
12
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The following sets forth the name, address, present principal
occupation, employment and material occupations, positions, offices and
employment for the past five years and ages as of March 4, 2002 for the
executive officers and directors of the Company. Members of the Board of
Directors shall be elected at the next annual meeting of stockholders and until
their respective successors shall have been duly elected and qualified.
NAME AGE POSITION
Warren G. Lichtenstein 36 Director
150 East 52nd Street Chairman of the Board
New York, NY 10022 Chief Executive Officer
Jack L. Howard 40 Director
2927 Montecito Avenue Vice President
Santa Rosa, CA 95404
Ronald W. Hayes 64 Director
810 Saturn Street
Suite 16-432
Jupiter, FL 33477-4398
Gary W. Ullman 60 Director
420 Woodland Acres Crescent
Maple, Ontario Canada
James Henderson 44 President
203 E. Jefferson Street
Falls Church, VA 22046
Glen M. Kassan 58 Vice President
8 Barkley Court Chief Financial Officer
East Brunswick, NJ 08816 Secretary
13
Warren G. Lichtenstein has served as a director and Chief Executive
Officer of the Company since 1994 and as Chairman of the Board since 1995. Mr.
Lichtenstein has served as the Chairman of the Board, Secretary and the Managing
Member of Steel Partners, L.L.C., the general partner of Steel Partners II, L.P.
("Steel"), since January 1, 1996. Prior to such time, Mr. Lichtenstein was the
Chairman and Director of Steel Partners, Ltd., the general partner of Steel
Partners Associates, L.P., which was the general partner of Steel, from 1993
until prior to January 1, 1996. Mr. Lichtenstein was the acquisition/risk
arbitrage analyst at Ballantrae Partners, L.P., a private investment partnership
formed to invest in risk arbitrage, special situations and undervalued
companies, from 1988 to 1990. He has been Chairman of the Board, President and
Chief Executive Officer of WebFinancial Corporation ("WebFinancial"), a consumer
and commercial lender since December 1997. Mr. Lichtenstein has served as a
director of SL Industries, Inc. ("SL"), a designer and producer of proprietary
advanced systems and equipment for the power and data quality industry from 1993
to 1997 and since January 2002. He has served as Chairman of the Board and Chief
Executive Officer of SL since February 2002. He has also served as Chairman of
the Board of Caribbean Fertilizer Group Ltd. ("Caribbean Fertilizer"), a private
company engaged in the production of agricultural products in Puerto Rico and
Jamaica, since June 2000. Mr. Lichtenstein has served as a Director and the
President and Chief Executive Officer of CPX Corp., a company with no
significant operating business, since June 1999 and as its Secretary and
Treasurer since May 2001. See "Certain Relationships and Related Transactions"
for information concerning the Company's relationship with CPX Corp. Mr.
Lichtenstein is also a director of the following publicly held companies: TAB
Products Co., a document management company; Tandycrafts, Inc. ("Tandycrafts"),
a manufacturer of picture frames and framed art; Puroflow Incorporated, a
designer and manufacturer of precision filtration devices; ECC International
Corp. ("ECC"), a manufacturer and marketer of computer-controlled simulators for
training personnel to perform maintenance and operator procedures on military
weapons; United Industrial Corporation, a designer and producer of defense,
training, transportation and energy systems; and US Diagnostic Inc. ("US
Diagnostic"), an operator of outpatient medical diagnostic imaging and related
facilities
Jack L. Howard served as President of the Company since September
1994 until December 2001 when he became Vice President and as director of the
Company since May 1994. Since prior to 1996 he has been a principal of Mutual
Securities, Inc., a registered broker-dealer. Mr. Howard serves on the Boards of
Directors of WebFinancial ; Pubco Corporation, a printing supplies and
construction equipment manufacturer and distributor; Castelle, a maker and
marketer of application server appliances; and US Diagnostic.
Ronald W. Hayes has served as a director of the Company since May
1993. Mr. Hayes is the owner of Lincoln Consultors & Investors, Inc., an
investing and consulting firm.
Gary W. Ullman has served as a director of the Company since October
2000. Mr. Ullman has been President and Chief Executive Officer of Unitron,
Inc., a designer, manufacturer and distributor of hearing aids since January
1998. From June 1996 to January 1998, Mr. Ullman was Chief Executive Officer of
Fluid Packaging, a contract manufacturer of pharmaceuticals and beauty products.
Prior to 1996, Mr. Ullman served for 26 years as Chief Executive Officer of CCL
Industries, Inc., a manufacturer of consumer products, containers, and labels.
James R. Henderson became President of the Company in December 2001.
Mr. Henderson has served as Vice President of Steel Partners Services, Ltd.
("SPS"), a management and advisory company, since August 1999. SPS has provided
management services to Steel and other affiliates of Steel. From 1996 to July
1999, Mr. Henderson was employed in various positions with Aydin Corporation, a
defense-electronics manufacturer, which included tenure as president and Chief
Operating Officer from October 1998 to June 1999. Prior to his employment with
Aydin Corporation, Mr. Henderson was employed as an executive with UNISYS
Corporation, an e-business solutions provider. Mr. Henderson is a director of
ECC. During January 2002, Mr. Henderson served as a director of SL.
14
Glen M. Kassan has served as Vice President, Chief Financial Officer
and Secretary of the Company since June 2000. He has also served as Vice
President, Chief Financial Officer and Secretary of WebFinancial. He served as
Executive Vice President of SPS, since June 2001, and Vice President since
October 1999. SPS provides management services to Steel and other affiliates of
Steel. Mr. Kassan has served as Vice Chairman of the Board of Directors of
Caribbean Fertilizer since June 2000. He served as a director of SL since
January 2002 and as its President since February 2002. From 1997 to 1998, Mr.
Kassan was chairman and Chief Executive Officer of Long Term Care Services,
Inc., a privately owned healthcare services company which he co-founded prior to
1995 and initially served as Vice Chairman and Chief Financial Officer. Mr.
Kassan serves on the Board of Directors of Tandycrafts; Puroflow Incorporated, a
designer and manufacturer of precision filtration devices; and as Chairman of
the Board of US Diagnostic since January 2002.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater-than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file. The Company believes that all such reports required to be filed during
fiscal 2001 were filed on a timely basis. However, Gary Ullman inadvertently
reported late on a Form 5.
ITEM 10. Executive Compensation
The following table sets forth information concerning the
compensation paid by the Company to the Chief Executive Officer during the
fiscal years ended December 31, 2001, 2000, and 1999. No other executive officer
received annual compensation in excess of $100,000 during the fiscal year ended
December 31, 2001.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
Compensation
Awards
Name and Principal Position Salary Bonus($)
--------------------------- Fiscal ------ -------- Securities
Year Compensation Underlying Options
------ ------------ ------------------
Warren G. Lichtenstein 2001 -- -- 50,000
Chairman 2000 -- -- --
and Principal Executive Officer 1999 -- -- 50,000
The following sets forth information relating to an option grant to Mr.
Lichtenstein during the fiscal year ended December 31, 2001.
Percent of
Number of Total Options
Securities Granted to
Underlying Employees in Exercise
Name Options Fiscal Year Price Expiration
---- ------- ----------- ----- ----------
Warren Lichtenstein 50,000 20.6 $.98 12/19/06
15
Option Grants in Last Fiscal Year
Mr. Lichtenstein did not exercise any options as of December 31,
2001. The following table sets forth certain information regarding unexercised
stock options held by Mr. Lichtenstein as of December 31, 2001.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Value of
Number Number of Unexercised
of Securities Underlying in-the-Money
Shares Unexercised Options at Options at
Acquired Value FY-End (#) FY-End ($) (1)
On Realized
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
-----------------------------------------------------------------------------------------------------------------------------------
Warren G. Lichtenstein 0 0 50,000/50,000 0/0
Chairman
-----------
(1) Based on the market value, as reported on the OTC Bulletin Board, of
$.98 per share of Common Stock at December 31, 2001 and a weighted average
exercise price of $2.86 per share.
Director Compensation
Directors who are not employees or officers of the Company are
granted options to purchase 2,000 shares upon appointment to the Company's
Board, and options to purchase 2,000 shares on the day of each annual
meeting of shareholders in which such director is elected or re-elected to
office.
ITEM 11 Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 8, 2002
regarding the beneficial ownership of the Common Stock by each person known
by the Company to own beneficially more than 5% of the Common Stock, by
each director and executive officer, individually, and by all directors and
executive officers as a group.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
------------------- -------------------- --------
Steel Partners II, L.P.
150 East 52nd Street
New York, NY 10022 1,674,208 39.94%
Warren G. Lichtenstein
150 East 52nd Street
New York, NY 10022 1,765,760 (1) 41.63%
16
Ronald W. Hayes
810 Saturn Street
Suite 16-432
Jupiter, FL 33477-4398 102,840 (2) 2.42%
Jack L. Howard
2927 Montecito Avenue
Santa Rosa, CA 95404 162,720 (3) 3.78%
Gary W. Ullman
420 Woodland Acres Crescent
Maple, Ontario Canada 2,000 (4) *
George Soros
888 Seventh Avenue
New York, NY 10022 827,716 (6) 19.75%
All directors and executive officers as a
group (four persons)(5) 2,033,320 46.15%
*Less than 1%
(1) Consists of: (i) 1,674,208 shares of Common Stock owned by Steel
Partners II, L.P, (ii) 41,552 shares of Common stock owned directly
by Mr. Lichtenstein, and (iii) 50,000 shares of Common Stock
issuable upon the exercise of options within 60 days of March 8,
2002. Mr. Lichtenstein is the sole managing member of the general
partner of Steel Partners II, L.P. Mr. Lichtenstein disclaims
beneficial ownership of the shares of Common Stock owned by Steel
Partners II, L.P. except to the extent of his pecuniary interest
therein.
(2) Consists of (i) 48,340 shares owned directly by Mr. Hayes and
(ii) 54,500 shares of Common Stock issuable upon the exercise of
options within 60 days of March 8, 2002.
(3) Consists of (i) 55,220 shares owned directly by Mr. Howard, (ii)
5,800 shares owned by JL Howard, Inc., a California Corporation,
controlled by Mr. Howard, and (iii) 107,500 shares of Common Stock
issuable upon the exercise of options within 60 days of March 8,
2002.
(4) Consists of 2,000 shares of Common Stock issuable upon the
exercise of options within 60 days of March 8, 2002.
(5) Consists of (i) 1,819,320 shares (ii) 214,000 shares of Common
Stock issuable upon the exercise of options within 60 days of March
8, 2002
(6) As reported in the shareholder's most recent Schedule 13D.
ITEM 12. Certain Relationships and Related Transactions
Pursuant to the Management Agreement approved by a majority of the
Company's disinterested directors, Steel Partners Services, Ltd. ("SPS")
provides the Company with office space and certain management, consulting and
advisory services. The Management Agreement is automatically renewed on an
annual basis until terminated by either party, at any time and for any reason,
upon at least 60 days written notice. The Management Agreement also provides
that the Company shall indemnify, save and hold SPS harmless from and against
any obligation, liability, cost or damage resulting from SPS's actions under the
terms of the Management Agreement, except to the extent occasioned by gross
negligence or willful misconduct of SPS's officers, directors or employees. In
consideration of the services rendered by SPS, the Company pays to SPS a fixed
monthly fee, which is adjustable annually upon agreement of the Company and SPS.
During the fiscal years ended December 31, 2001 and 2000, SPS received fees of
$280,000 and $280,000, respectively, from the Company. The Company believes that
the cost of obtaining the type and quality of services rendered by SPS under the
Management Agreement is no less favorable than the cost at which the Company
could obtain from unaffiliated entities. SPS is owned by an entity which is
controlled by Warren Lictenstein, the Company's Chairman of the Board and Chief
Executive Officer. As of March 26, 2002, the Management Agreement described
above was assigned by SPS to CPX Corp. and the employees of SPS became employees
of the Steel Partners Services Division of CPX Corp. Warren Lichtenstein, the
Company's Chairman of the Board and Chief Executive Officer, owns approximately
19% of the CPX Corp. and is the President and Chief Executive Officer of CPX
Corp. Steel Partners II, L.P. owns approximately 16% of CPX Corp. Mr.
Lichtenstein is the sole managing member of the general partner of Steel
Partners II, L.P. Mr. Lichtenstein disclaims beneficial ownership of the shares
of Common Stock of CPX Corp. owned by Steel Partners II, L.P. (except to the
extent of his pecuniary interest in such shares of Common Stock, which is less
than the 16%).
17
Until July 26, 2001, the products and services of Oaktree were
marketed, in part, by MDM Technologies ("MDM"), an entity which was principally
controlled by the Company's Chief Executive Officer and Chairman, pursuant to a
reciprocal agency agreement, dated March 21, 2000. During the year ended
December 31, 2000, the Company had sales to MDM of $30,000 and accounts
receivable from MDM of $28,000. During the same period, the Company had
purchases from MDM of $54,000 and accounts payable to MDM of $1,500. During the
year ended December 31, 2001, the Company had sales to MDM of $86,235 and
accounts receivable from MDM of $86,235. During 2001 the Company has phased out
the joint marketing with MDM and developed internal marketing strategies.
ITEM 13. Exhibits, Lists and Reports on Form 8-K
(a) Exhibits
See exhibits index immediately following the signature page.
(b) Reports on Form 8-K:
None
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 29, 2002
By /s/ James R. Henderson
-------------------------
James R. Henderson,
President
19
Power of Attorney
Gateway Industries, Inc. and each of the undersigned do hereby
appoint James R. Henderson and Glen M. Kassan, and each of them singly, its or
his true and lawful attorney to execute on behalf of Gateway Industries, Inc.
and the undersigned any and all amendments to the Annual Report on Form 10-KSB
and to file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Warren G. Lichtenstein
------------------------------ Date: March 29, 2002
Warren G. Lichtenstein,
Director
/s/ James R. Henderson
------------------------------ Date: March 29, 2002
James R. Henderson,
President
/s/ Jack L. Howard
------------------------------ Date: March 29, 2002
Jack L. Howard,
Vice President
Director
/s/ Glen M. Kassan
------------------------------ Date: March 29, 2002
Glen M. Kassan,
Chief Financial Officer
/s/ Ronald W. Hayes
------------------------------ Date: March 29, 2002
Ronald W. Hayes,
Director
/s/ Gary W. Ullman
------------------------------ Date: March 29, 2002
Gary W. Ullman,
Director
EXHIBIT INDEX
2.1 Agreement and Plan of Merger - Incorporated by reference to Exhibit
C to Proxy Statement on Schedule 14A filed August 16, 1994.
3.1 Articles of Incorporation - Incorporated by reference to Exhibit D
to Proxy Statement on Schedule 14A filed August 16, 1994.
3.2 By laws - Incorporated by reference to Exhibit E to Proxy Statement
on Schedule 14A filed August 16, 1994.
10.8 Amended and Restated 1990 Incentive Stock Option Plan and 1990
Nonstatutory Stock Option Plan - Incorporated herein by reference to
Exhibit 10.8 to Annual Report on Form 10-KSB filed April 16, 1996.
10.9 Form of Indemnity Agreement between the Registrant and certain of
its Officers and Directors. - Incorporated by reference to Exhibit
19.1 to Quarterly Report on Form 10-Q filed August 14, 1989.
10.10 Stock Purchase Agreement, dated December 21, 1996, between Gateway
Industries, Inc. and Richard A. Hickland. - Incorporated by
reference to Exhibit 1 to Current Report on Form 8-K filed January
6, 1997.
10.11 Stock Purchase Agreement, dated as of March 21, 2000, by and among
Gateway Industries, Inc., Frank C. Mackay, Jr., Thomas Tomaszewski
and Edward W. Testa, Jr. - Incorporated by reference to Exhibit 2.1
to Current Report on Form 8-K filed March 31, 2000.
*21.1 Subsidiaries of Registrant.
------------
*Filed Herein.
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Reports of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets as of December 31, 2001 F-3
Statements of Operations for the Years Ended
December 31, 2001 and 2000 F-4
Statement of Shareholders' Equity for the Years Ended
December 31, 2001 and 2000 F-5
Statements of Cash Flows for the Years Ended
December 31, 2001 and 2000 F-6
Notes to Financial Statements F-7 - F-16
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Gateway Industries, Inc.
We have audited the accompanying consolidated balance sheets of Gateway
Industries, Inc. and Subsidiary as of December 31, 2001 and 2000 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gateway Industries,
Inc. and Subsidiary at December 31, 2001 and 2000 and the results of its
operations and its cash flows for the years ended December 31, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Grant Thornton LLP
------------------------------------------
Grant Thornton LLP
New York, New York
March 8, 2002 (Except for Note G, as to
which the date is March 26, 2002)
F-2
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
BALANCE SHEETS
December 31,
ASSETS 2001 2000
Cash and cash equivalents $ 2,042,000 $ 2,604,000
Accounts receivable, net of allowance for doubtful accounts
of $0 and $10,000 at December 31, 2001 and 2000,
respectively 863,000 497,000
Prepaid expenses 64,000 43,000
Other current assets 41,000 13,000
------------ ------------
Total current assets 3,010,000 3,157,000
Security deposits and other 19,000 42,000
Fixed assets, net 407,000 382,000
Intangible assets, net of accumulated amortization of $497,000
and $217,000 at December 31, 2001 and 2000, respectively 2,991,000 3,267,000
------------ ------------
Total assets $ 6,427,000 $ 6,848,000
============ ============
Liabilities and Shareholders' Equity
Liabilities
Accounts payable and accrued expenses $ 570,000 $ 162,000
Deferred income 270,000 253,000
Customer deposits 70,000 202,000
Current portion, capital lease 11,000 7,000
------------ ------------
Total current liabilities 921,000 624,000
Capital lease obligation 13,000 --
------------ ------------
Total liabilities 934,000 624,000
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; 4,192,024 shares issued and outstanding
at December 31, 2001 and 2000, respectively 4,000 4,000
Capital in excess of par value 11,046,000 11,046,000
Accumulated deficit (5,511,000) (4,780,000)
Treasury stock, 11,513 shares of common stock, at cost (46,000) (46,000)
------------ ------------
Total shareholders' equity 5,493,000 6,224,000
------------ ------------
Total liabilities and shareholders' equity $ 6,427,000 $ 6,848,000
============ ============
The accompanying notes are an integral part of these statements.
F-3
STATEMENTS OF OPERATIONS
Year ended
December 31,
2001
----
Revenues $ 4,898,000 $ 2,782,000
Costs and expenses
Fulfillment, materials and postage 1,266,000 456,000
Personnel costs 2,638,000 1,707,000
General and administrative 1,814,000 1,454,000
----------- -----------
Total costs and expenses 5,718,000 3,617,000
----------- -----------
Operating loss (820,000) (835,000)
Other income
Interest 93,000 193,000
Other income (expenses), net (4,000) 19,000
----------- -----------
Total other income 89,000 212,000
----------- -----------
Net loss $ (731,000) $ (623,000)
=========== ===========
Net loss per share - basic and diluted $ (.17) $ (.15)
=========== ===========
Weighted average shares outstanding used in
computing basic and diluted net loss per share 4,192,024 4,058,873
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
STATEMENT OF SHAREHOLDERS' EQUITY
Common stock Capital in
---------------------- excess of Accumulated Treasury
Shares Amount par value deficit stock Total
------ --------- ----------- ----------- ---------- ------------
Balance at December 31, 1999 3,592,024 $ 4,000 $ 9,683,000 $(4,157,000) $ (46,000) $ 5,484,000
Shares issued in connection with
acquisition of Oaktree Systems, Inc. 600,000 1,363,000 1,363,000
Net loss for the year ended December 31, 2000 (623,000) (623,000)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 4,192,024 4,000 11,046,000 (4,780,000) (46,000) 6,224,000
Net loss for the year ended December 31, 2001 (731,000) (731,000)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 4,192,024 $ 4,000 $11,046,000 $(5,511,000) $ (46,000) $ 5,493,000
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
F-5
STATEMENTS OF CASH FLOWS
Year ended December 31,
2001 2000
---- ----
Cash flows from operating activities:
Net loss $ (731,000) $ (623,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 366,000 256,000
Net changes in operating assets and liabilities:
Accounts receivable (366,000) (121,000)
Prepaid expense and current other assets net of assets
and liabilities acquired (26,000) 65,000
Account payable and accrued expenses 408,000 (104,000)
Deferred income 17,000 253,000
Customer deposits (132,000) 202,000
----------- -----------
Net cash used in operating activities (464,000) (72,000)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (83,000) (100,000)
Purchase of Oaktree Systems, Inc., net of cash acquired -- (2,674,000)
----------- -----------
Net cash used in investing activities (83,000) (2,774,000)
----------- -----------
Cash flows from financing activities:
Payments of capital lease (15,000) (15,000)
----------- -----------
Net cash used in financing activities (15,000) (15,000)
----------- -----------
Net decrease in cash and cash equivalents (562,000) (2,861,000)
Cash and cash equivalents at beginning of year 2,604,000 5,465,000
=========== -----------
Cash and cash equivalents at end of year $ 2,042,000 $ 2,604,000
=========== ===========
Supplemental cash flow information:
Cash paid during the year for
Income taxes $ 26,000 $ 2,000
Interest $ 5,000 $ 29,000
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., valued at $2.27 per share.
During 2001, the Company entered into 2 capital leases for an approximate value
of $32,000.
The accompanying notes are an integral part of these statements.
F-6
NOTE A - ORGANIZATION AND BUSINESS ACTIVITIES
1. Organization and Business Activities
Gateway Industries, Inc. (the "Company") was incorporated under the
laws of the State of Delaware on September 24, 1994. The Company had
no operating business from December 31, 1996 to March 2000.
Oaktree is incorporated in New York and leases office space in
Calverton, New York. Oaktree also has a marketing office in St. Paul
Minnesota and fulfillment facilities in Elizabeth, New Jersey.
2. Acquisition of Oaktree Systems, Inc.
On March 21, 2000, the Company acquired all of the outstanding
common stock of Oaktree Systems, Inc. ("Oaktree"). Oaktree provides
database management services and web site design and maintenance for
numerous national not-for-profit, healthcare and publishing
entities. The purchase price of $4,087,000 consisted of $2 million
in cash paid at closing and the issuance of 600,000 shares of common
stock of the Company with an average quoted market value of $2.27
per share, the assumption of approximately $650,000 of bank debt
(which was repaid in full at the closing date) and expenses of
$75,000.
The acquisition was accounted for as a purchase, and, accordingly
includes 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 $3,122,000 and other intangible
assets of $362,000, which will be amortized over 15 and 5 years,
respectively
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary from the date of
acquisition. All significant intercompany balances have been
eliminated in consolidation.
2. Cash Equivalents
The Company considers all highly liquid debt instruments with an
original maturity date of three months or less and investments in
money market accounts to be cash equivalents. At December 31, 2001
and 2000, cash and cash equivalents were held principally at one
financial institution.
3. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
F-7
4. Net Loss Per Share
For the years ended December 31, 2001 and 2000, the weighted-average
number of shares outstanding used in the basic and diluted
weighted-average numbers were 4,192,024 and 4,058,873, respectively
For the years ended December 31, 2001 and 2000, options and warrants
to purchase 794,000 and 517,000 shares of common stock,
respectively, has not been considered as such items are
antidilutive.
5. Income Taxes
The Company utilizes the provisions of Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for
Income Taxes." Under SFAS No. 109, deferred income taxes are
recognized for temporary differences between financial statement and
income tax bases of assets and liabilities, loss carryforwards and
tax credit carryforwards for which income tax benefits are expected
to be realized in future years. A valuation allowance is established
to reduce deferred tax assets if it is more likely than not that
all, or some portion, of such deferred tax assets will not be
realized.
6. Stock-Based Compensation
As permitted by the FASB's Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," the Company has elected to follow Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for
Stock-Issued to Employees," 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.
7. Advertising
Advertising costs are expensed when the advertising first takes
place. Total advertising expense was $57,000, for the year ended
December 31, 2000.
8. Long Lived Assets
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of
those assets.
9. Revenue Recognition
Revenues are recognized upon delivery of services. The revenues
earned are based upon a fixed fee for the management of the
customer's database. In addition the Company performs certain
additional services for the customer. For these additional services
revenues are earned based upon the volume of transactions performed
by the Company at rates specified in their contracts. The fixed fee
revenues are earned over a period extending more than one month,
therefore the Company recognizes this revenue in the month which it
is earned and records the amount unearned in deferred revenue on the
Balance Sheet.
10. Postage Revenue/Reimbursement
Postage Expense incurred to mail customer product is advanced and
invoiced to the customer at the end of the month when they are
invoiced for services performed. Customer deposits are taken to
offset postage cash flow. Postage income is included in revenue, and
postage expense has been recorded in fulfillment, materials and
postage.
F-8
11. Fixed Assets
Fixed Assets are stated at cost, less accumulated depreciation.
Depreciation is computed using straight-line over the estimated
useful lives of the assets. The estimated useful lives of the assets
are as follows:
Furniture and fixtures 5-7 years
Computer Equipment 3-5 years
Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements,
whichever is shorter.
12. Comprehensive Income
Components of comprehensive income (loss) may include net income
(loss), unrealized gains (losses) on available-for-sale investment
securities, foreign currency translation adjustments, changes in the
market value of futures contracts that qualify as a hedge, and net
loss recognized as an additional pension liability not yet
recognized in net periodic pension cost. For the years ended
December 31, 2001 and 2000, the comprehensive loss was $731,000 and
$623,000, respectively.
13. Segments
The Company has adopted Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131"), "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes
standards for the way companies report information about operating
segments in annual financial statements. SFAS No. 131 also
establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company has
determined that it operates as a one-business segment, a provider of
Internet database management services.
14. Reclassification
Certain prior year account balances have been reclassified to
conform to the current year's presentation.
15. New Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 141,
Business Combinations, and SFAS 142, Goodwill and Intangible Assets.
SFAS 141 is effective for all business combinations completed after
June 30, 2001. SFAS 142 is effective for fiscal years beginning
after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired
between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements and their effective dates for the
Company are as follows:
o All business combinations initiated after June 30, 2001 must
use the purchase method of accounting. The pooling of interest
method of accounting is prohibited except for transactions initiated
before July 1, 2001.
o Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual or
other legal rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability.
o Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 1, 2002, all previously recognized goodwill and intangible
assets with indefinite lives will no longer be subject to
amortization.
F-9
o Effective January 1, 2002, goodwill and intangible assets
with indefinite lives will be tested for impairment annually and
whenever there is an impairment indicator.
o All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
The Company will continue to amortize goodwill and intangible assets
recognized prior to July 1, 2001, under its current method until
January 1, 2002, at which time annual and quarterly goodwill
amortization of approximately $280,000 and $70,000 will no longer be
recognized. The assignment of goodwill to reporting units, along
with completion of the transitional goodwill impairment tests, must
be completed during the first six months of 2002. The Company is
currently evaluting the impact of this statement.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, ("SFAS 144"). This
statement is effective for the fiscal years beginning after December
15, 2001. This supercedes SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, while
retaining many of the requirements of such statement. The Company is
currently evaluating the impact of the statement.
NOTE C - FIXED ASSETS
Fixed Assets consist of the following:
December 31
-----------
2001 2000
-------------------
Leasehold improvements $ 29,000 $ 23,000
Furniture and fixtures 56,000 43,000
Equipment 447,000 355,000
--------- ---------
532,000 421,000
Accumulated depreciation (125,000) (39,000)
--------- ---------
$ 407,000 $ 382,000
========= =========
NOTE D - INCOME TAXES
The Company has not provided for income taxes since they have
generated net operating losses. Deferred income tax assets have been
fully reserved in all periods. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows:
F-10
December 31,
------------
2001 2000
---------------------
Reserves $ -- $ 4,000
Tax effect of net operating loss carryforward 3,386,000 3,152,000
----------- -----------
Total deferred tax assets 3,386,000 3,156,000
Valuation allowance (3,386,000) (3,156,000)
----------- -----------
Deferred tax assets, net of
valuation allowance $ -- $ --
=========== ===========
The deferred tax assets were offset by a valuation allowance due to
the uncertainty of realizing the income tax benefits associated with
these deferred tax assets.
At December 31, 2001, the Company has Federal net operating loss
carryforwards of approximately $8,600,000 that expire through 2020.
Utilization of the net operating losses may be subject to annual
limitation due to the ownership change rules provided by Section 382
of the Internal Revenue Code and similar state provisions.
NOTE E WARRANT AGREEMENTS
On May 18, 2001, the Company issued warrants to Mayo Foundation for
Medical Education and Research ("Mayo") to purchase 150,000 shares
of common stock at an exercise price of $1.75 per warrant. The
warrants are issued in consideration for fulfillment of product
services agreements and were measured at fair market value using the
Black Scholes valuation model and will expire on various dates
through May 31, 2006. The estimated fair market value of these
warrants was approximately $0.50 per warrant and will be recognized
in the statement of operations as they become exercisable.
Under the first warrant agreement, Mayo may exercise warrants to
purchase up to 100,000 shares of common stock. The warrants may be
exercised over four years beginning May 2002 according to a formula
based in part on (a) the per share market price of the Company's
stock, (b) Oaktree and Mayo continuing to be parties to a product
fulfillment services agreement dated April 2001 and (c) at least 90%
of Agreed Fulfillment (as defined in the warrant agreement) being
performed by the Company during the preceding year through Oaktree's
fulfillment services provided under the fulfillment services
agreement. The second warrant agreement entered into by the Company
and Mayo on May 18, 2001 allows exercise of a total of 50,000
warrants in two equal amounts and is subject to attainment of
certain revenue goals.
F-11
NOTE F - STOCK OPTION PLANS
The Company's Incentive Stock Option Plan and Nonstatutory Stock
Option Plan (collectively, the "Plans"), as amended in December
1995, provide for the granting of nonqualified and qualified stock
options under the Internal Revenue Code. An aggregate of 850,000
shares of Common Stock have been reserved for issuance at December
31, 2001 and 2000. Persons who are not employees of the Company are
eligible to receive only nonqualified stock options. The options may
be granted for a term of up to five years, which generally vest over
2 to 4 years.
If an incentive stock option is granted to an individual owning more
than 10% of the total combined voting power of all classes of the
Company's stock, the exercise price of the option may not be less
than 110% of the fair market value of the underlying shares on the
date of the grant. Directors who are not employees or officers of
the Company are granted 2,000 options upon joining the Company's
Board, and 2,000 options on the day of each annual meeting of
shareholders in which such director is elected or re-elected to
office.
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2001 and 2000 risk-free interest
rates of 5.66% and 5.44%; respectively. Volatility factors of the
expected market price of the Company's Common Stock are 83.98% and
81.49% for 2001 and 2000, respectively. The weighted-average
expected life of the option for 2001 and 2000 is 4.02 and 3.87
years, respectively. Dividends are not expected in the future.
The exercise price of all other options equals the market price of
the Company's stock on the date of grant. Accordingly, no
compensation cost has been recognized for the plan. Had compensation
cost for the plan 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.
Year ended December 31,
-------------------------
2001 2000
---- ----
Actual net loss $ (731,000) $ (623,000)
Actual net loss per share
Basic and diluted $ (0.17) $ (0.15)
Pro forma net loss $ (801,000) $ (875,000)
Pro forma net loss per
share - basic and diluted $ (0.19) $ (0.22)
F-12
The weighted-average fair value of all Plan options granted during the years
ended December 31, 2001 and 2000 was $.43 and $.36, respectively, and the
weighted-average exercise price was $2.59 and $3.64, respectively.
Employee stock option activity under the Plan during the years ended December
31, 2001 and 2000 is summarized below:
Weighted-
average
exercise
Shares price
------ -----
Options outstanding at December 31, 1999 320,500 $ 2.47
Expired and cancelled (102,000) 3.91
Granted 242,000 3.64
--------
Options outstanding at December 31, 2000 460,500 2.78
Expired and cancelled -- --
Granted 132,000 .98
--------
Options outstanding at December 31, 2001 592,500 $ 2.59
========
The following tables summarize information concerning currently outstanding and
exercisable stock options under the Plan for employee options.
Weighted-
Average Weighted- Weighted-
Range Remaining Average Average
of exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (years) Price Exercisable Price
----- ----------- ------------ ----- ----------- -----
$.98 - 1.99 249,000 4.37 1.39 97,000 1.80
2.00 - 2.99 86,500 2.84 2.02 86,500 2.02
3.00 - 3.99 40,000 1.58 3.53 40,000 3.53
4.00 - 5.00 217,000 4.05 4.03 117,000 4.05
---------- -----------
592,500 340,500
========== ===========
Subsequent to the acquisition of Oaktree Systems the Company granted options to
the three previous shareholders of Oaktree Systems pursuant to their employment
agreements. The options contain a cashless exercise provision. The aggregate
option grant was for 200,000 options with an exercise price of $4.00 per share.
Half of the options granted vest on the first anniversary of the date of grant
and are included above. The balance vest on the second anniversary of the date
of grant and the options expire in five years. Under the current accounting
guidance of FIN 44 a cashless option is treated as a variable option and
therefore requires that a portion of the difference between the market value of
the stock and the exercise price of the option be charged to earnings of the
current period. As of December 31, 2001 and 2000 the Company has not recorded an
expense for this since the market value of the underlying stock is less than the
exercise price of the option.
The Company granted 40,000 options to a consultant of the Company during 2000.
The options are exercisable at $1.9375 per share and vest on a pro rata basis
over 36 months from the date of grant. Under the provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123) Accounting for Stock Based
F-13
Compensation the Company is required to record an expense for this option based
upon the Fair Market Value of the option, as of December 31, 2000 was
approximately $48,000 which will be amortized over the life of the option.
Non employee stock option activity under the Plan during the years ended
December 31, 2001 and 2000 is summarized below:
Weighted-
average
exercise
Shares price
------ -----
Options outstanding at December 31, 1999 103,500 $ 1.95
Expired and cancelled 47,000 1.90
Granted --
-------
Options outstanding at December 31, 2000 56,500 2.00
Expired and cancelled (5,000) 2.00
Granted 150,000 1.75
-------
Options outstanding at December 31, 2001 201,500 $ 1.81
=======
NOTE G - RELATED PARTY TRANSACTIONS
1. MDM Technology
Until July 26, 2001, the products and services of Oaktree were
marketed, in part, by MDM Technologies ("MDM"), an entity which was
principally controlled by the Company's Chief Executive Officer and
Chairman, pursuant to a reciprocal agency agreement, dated March 21,
2000. During the year ended December 31, 2000, the Company had sales
to MDM of $30,000 and accounts receivable from MDM of $28,000.
During the same period, the Company had purchases from MDM of
$54,000 and accounts payable to MDM of $1,500. During the year ended
December 31, 2001, the Company had sales to MDM of $86,235 and
accounts receivable from MDM of $86,235. During 2001 the Company
phased out the joint marketing with MDM and developed internal
marketing strategies.
F-14
2. Management Agreement
Pursuant to the Management Agreement approved by a majority of the
Company's disinterested directors, Steel Partners Services, Ltd.
("SPS") provides the Company with office space and certain
management, consulting, and advisory services. The Management
Agreement is automatically renewed on an annual basis until
terminated by either party, at any time and for any reason, upon at
least 60 days written notice. The Management Agreement also provides
that the Company shall indemnify, save and hold SPS harmless from
and against any obligation, liability, cost or damage resulting from
SPS's actions under the terms of the Management Agreement, except to
the extent occasioned by gross negligence or willful misconduct of
SPS's officers, directors or employees. In consideration of the
services rendered by SPS, the Company pays to SPS a fixed monthly
fee, which is adjustable annually upon agreement of the Company and
SPS. During the fiscal years ended December 31, 2001 and 2000, SPS
received fees of $280,000 and $280,000, respectively, from the
Company. The Company believes that the cost of obtaining the type
and quality of services rendered by SPS under the Management
Agreement is no less favorable than the cost at which the Company
could obtain from unaffiliated entities. SPS is owned by an entity
which is controlled by Warren Lichtenstein, the Company's Chairman
of the Board and Chief Executive Officer. As of March 26, 2002, the
Management Agreement described above was assigned by SPS to CPX
Corp. and the employees of SPS became employees of the Steel
Partners Services Division of CPX Corp. Warren Lichtenstein, the
Company's Chairman of the Board and Chief Executive Officer, owns
approximately 19% of CPX Corp. and is the President and Chief
Executive Officer of CPX Corp. Steel Partners II, L.P. owns
approximately 16% of CPX Corp. Mr. Lichtenstein is the sole managing
member of the general partner of Steel Partners II, L.P. Mr.
Lichtenstein disclaims beneficial ownership of the shares of Common
Stock of CPX Corp. owned by Steel Partners II, L.P. (except to the
extent of his pecuniary interest in such shares of Common Stock,
which is less than the 16%)." (See note H).
NOTE H - COMMITMENTS AND CONTINGENCIES
1. Leases
The Company entered into a three-year operating lease for office
space commencing April 1, 1998. The rent was paid by Steel Partners
Services, Ltd. ("SPS") and the Company paid a management fee to SPS
(See Note G). Oaktree leases 11,400 square feet of office space in
Calverton, New York. The lease expires on September 30, 2005 and has
an annual lease commitment of $143,000 per year. The space is rented
from a partnership in which two of the senior managers of Oaktree
each owned material interest until October 2001 when they sold their
interests to an unrelated third party. Oaktree has a lease for 1,650
square feet in St. Paul, Minnesota, which expires on February 28,
2003. Oaktree has operating leases for equipment with remaining
terms of 2 to 4 years. Future minimum lease payments under the real
property and equipment leases are as follows:
Rental
Commitments
-----------
2002 294,000
2003 218,000
2004 202,000
2005 165,000
2006 2,000
---------------
$ 881,000
===============
The Company has sublet a portion of its office space to companies
affiliated with its Chairman. Rent expense for the year ended
December 31, 2001 and 2000 was $340,000 and $153,000, respectively.
F-15
2. Capital Leases
The Company has entered into capital leases for certain machinery
and equipment utilized by Oaktree. The gross value of the assets
that were leased is $33,000 and as of December 31, 2001. As of
December 31, 2001 the Company recorded depreciation of $2,000
against these assets.
Future obligations under capital leases are as follows:
Capital Lease
Commitments
2002 11,000
2003 11,000
2004 10,000
2005 0
---------------
$ 32,000
Amount representing interest 8,000
------
Present value of minimum lease payments 24,000
Short-term 11,000
------
Long-term 13,000
======
3. Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of cash,
cash equivalents and accounts receivable. Substantially all of the
Company's cash, cash equivalents are maintained at one financial
institution.
Accounts receivable are typically unsecured and are derived from
revenues earned from customers primarily located in the United
States. The Company performs ongoing credit evaluations of its
customers and maintain allowances for potential credit losses, when
necessary. Historically, such losses have been within management's
expectations.
Sales to and receivables from major customers that were over 10% of
all net sales included three customers in 2001 and two customers in
2000 as follows:
2001 2000
---- ----
net sales receivables net sales receivables
--------- ----------- --------- -----------
Customer A 24% 24% 18% 24%
Customer B 21% 13% 13% 5%
Customer C 11% 6% -- --
For the year ended December 31, 2000, the make up of the Oaktree customers were
generally the same as for the year ended December 31, 2001.
4. 401K Plan
The Company has a defined contribution pension plan for the
employees. The Company's contributions to the plan are based on
management determination. For the year ended December 31, 2001 and
2000 the Company recorded expenses of $20,000 and $19,000,
respectively, related to this plan.
F-16