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, 2002
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 (I.R.S. Employer Identification No.)
incorporation or organization)
150 East 52nd Street, 21st Floor
New York, New York 10022
------------------------
(Address of principal executive offices, including zip code)
(212) 813-1500
--------------
(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: $5,591,099
Based upon the closing price of the issuer's Common Stock on February 5, 2003,
the aggregate market value of the 2,372,785 outstanding shares of Common Stock
held by non-affiliates of the issuer was $2,610,064. 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 February 6, 2003, 4,192,000 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...........................................3
Item 2. Description of Property...........................................6
Item 3. Legal Proceedings.................................................7
Item 4. Submission of Matters to a Vote
of Security Holders...............................................7
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters.......................................8
Item 6. Management's Discussion and
Analysis or Plan of Operation.....................................9
Item 7. Financial Statements.............................................14
Item 8. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure.............................................14
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance With
Section 16(a) of the Exchange Act................................15
Item 10. Executive Compensation...........................................17
Item 11. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters............19
Item 12. Certain Relationships and Related
Transactions.....................................................21
Item 13. Exhibits, List and Reports on Form 8-K...........................22
Item 14. Controls and Procedures..........................................22
Signatures....................................................................23
Section 302 Certifications....................................................24
2
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 twenty 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 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.
3
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
4
o Related Subscription Processing & Management
Oaktree's clients are comprised mostly of organizations with
multi-faceted marketing initiatives 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 the competitive marketplace continues to favor
Oaktree's PC Database and Internet business model. Oaktree believes customers
will aggressively pursue solutions that improve operating efficiencies and
improve income potential. Oaktree's products offer opportunities 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 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 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 five years, Oaktree has
managed for a large healthcare publishing client a fully integrated direct
marketing database containing over five 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 its
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.
5
o Large Fundraising Client - Oaktree was selected as the computer vendor to
implement a National Information Management System for a 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.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
During each of the past two fiscal years, revenues from Oaktree's
services to a limited number of customers has accounted for a substantial
percentage of Oaktree's total revenue. For the years ended December 31, 2002 and
2001, Oaktree's three largest customers accounted for approximately 64% and 56%
of Oaktree's revenue, respectively, as follows:
2002 2001
---- ----
Customer A 29% 24%
Customer B 19% 21%
Customer C 16% 11%
The Company believes that significant business from a limited number
of customers will continue to account for a substantial portion of Oaktree's
revenues in any fiscal period. In any period the unexpected loss or decline in
net sales from a major customer, or the failure to generate significant revenues
from other customers, could have a material adverse effect on the Company's
financial results.
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 January 15, 2003, Oaktree employed 57 full-time and 65
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.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company occupies approximately 2,500 square feet of office space
at 150 East 52nd Street, 21st Floor, New York, NY 10022 pursuant to a management
agreement with Steel Partners, Ltd., an entity controlled by the Company's
Chairman and Chief Executive Officer. See "Certain Relationships and Related
Transactions." The Company had the non-exclusive right to use the office space
along with Steel Partners, Ltd. and several other entities.
6
Oaktree leases the following property:
o 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.
o Approximately 1,650 square feet of office space at 1821 University
Avenue West, St. Paul, Minnesota 55104. The lease expires on May 31,
2004.
o 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.
The Company believes that the facilities are adequate for its current needs and
that suitable additional space will be available as required.
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.
On December 2, 2002, the Company held its Annual Meeting of
Shareholders for the year ended December 31, 2001 whereby the shareholders (a)
elected four (4) directors and (b) ratified the appointment of Grant Thornton
LLP as independent accountants of the Company for the fiscal year ended December
31, 2002. The vote on such matters was as follows:
a) Election of Directors:
For Withheld
--- --------
Warren G. Lichtenstein 3,540,960 4,177
Jack L. Howard 3,540,978 4,159
Gary W. Ullman 3,540,978 4,159
Ronald W. Hayes 3,540,978 4,159
b) Ratification of Appointment of Independent Accountants:
For Against Abstain
--- ------- -------
3,542,836 1,690 611
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
The Common Stock of the Company is listed on the OTC Bulletin Board.
The Common Stock currently trades under the symbol "GWAY.OB." The following
table sets forth the high and low bid prices of the Common Stock during the
periods indicated as reported by the Bloomberg Reporting Service. Such prices
reflect inter-dealer prices, without retail mark-up, mark-down or commissions
and may not necessarily represent actual transactions.
2001 High Low
---- ---- ---
FIRST QUARTER 1.12 .94
SECOND QUARTER 1.20 .97
THIRD QUARTER 1.20 .98
FOURTH QUARTER 1.20 .98
2002
----
FIRST QUARTER 1.20 .98
SECOND QUARTER 1.20 .98
THIRD QUARTER 1.20 .98
FOURTH QUARTER 1.20 1.06
At February 6, 2003, there were approximately 265 holders of record of the
Company's Common Stock.
DIVIDENDS
The Company did not pay any cash dividends on its Common Stock
during the last two fiscal years and does not anticipate doing so in the
foreseeable future.
8
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company had revenues of $5,591,099 for the fiscal year ended
December 31, 2002 compared to $4,397,639 for the comparable period in 2001, a
27% increase. This increase was due primarily to customers expanding their use
of Oaktree's services, including new services such as Product Fulfillment,
Lockbox and Call Center Operations. Approximately $1.4 million of revenue is
derived from these new services. Oaktree introduced these services in August
2001.
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 account for 76% 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.
9
Oaktree has focused its marketing initiatives toward direct
marketing database management, related product fulfillment processing and
management, e-commerce development and management and subscription processing
and management.
Fulfillment and material costs were $595,034 for the fiscal year
ended December 31, 2002 compared to $164,839 for the comparable period in 2001,
a 261% increase. This increase was due primarily to the cost of operations of
Oaktree's new Product Fulfillment Facility, Lockbox and Call Center Operations,
which were introduced in 2001.
Personnel costs were $3,351,469 for the fiscal year ended December
31, 2002 compared to $3,109,885 for the comparable period in 2001, an 8%
increase. This increase was due primarily to the increase in personnel costs
associated with the Product Fulfillment Facility, Lockbox and Call Center
Operations, which were introduced in 2001.
Selling general and administrative costs were $1,624,950 for the
fiscal year ended December 31, 2002 compared to $1,943,093 for the comparable
period in 2001, a 16% decrease. This decrease was primarily due to cost
reductions achieved by implementing improvements to internal policies and
procedures which reduced unnecessary spending. The adoption of SFAS No. 142;
Goodwill and Other Intangible Assets ("SFAS 142") also reduced costs by
$208,000.
Other income and expenses were $27,317 and $12,885, respectively,
for the fiscal year ended December 31, 2002 compared to $92,876 and $4,112,
respectively, for the comparable period in 2001, an 84% net decrease. This
decrease was primarily due to decreasing money market rates earned on cash held
by the Company.
The Company had net profits of $34,078 for the fiscal year ended
December 31, 2002 compared to a net loss of $731,414 for the comparable period
in 2001, a 105% increase. This increase was primarily due to cost reductions
achieved by implementing improvements to internal policies and procedures which
reduced unnecessary spending. The adoption of SFAS 142 also represented $208,000
in additional net profits.
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.
10
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $1,844,512 at
December 31, 2002, compared with $2,041,315 at December 31, 2001. The decrease
in cash resulted primarily from the Company's normal operating expenses and
working capital requirements during 2002. The Company continues to seek an
acquisition or other business combination; although no definitive agreements,
arrangements or understandings have been reached. Management believes the
Company's cash position is sufficient to cover administrative expenses and
current obligations for the foreseeable future.
Contractual Obligations and Commercial Commitments
Payments Due by Period
Contractual Cash Obligations Total Less than 1 year 1-3 years 4 - 5 years After 5 years
---------------------------- ----- ---------------- --------- ----------- -------------
Long Term Debt 0
Capital Lease Obligations $ 26,175 $ 10,010 $ 16,165
Operating Leases $622,955 $239,956 $382,999
Unconditional Purchase Obligations 0
Other Long Term Obligations 0
Total Contractual Cash Obligations $649,130 $249,966 $399,164
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles accepted in the United States requires management to
make judgments, assumptions, and estimates that affect the amounts reported in
the Consolidated Financial Statements and accompanying notes. Note B to the
Consolidated Financial Statements in the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2002 describes the significant accounting
policies and methods used in the preparation of the Consolidated Financial
Statements. Estimates are used for, but not limited to, the accounting for the
allowance for doubtful accounts and goodwill impairments, contingencies, and
other special charges and taxes. Actual results could differ materially from
these estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions, and estimates used in the preparation
of the Consolidated Financial Statements.
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.
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. 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 its
contracts.
11
Income Tax
As of December 31, 2002, 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.
GOODWILL IMPAIRMENT
Our long-lived assets include goodwill of approximately $2.8 million
as of December 31, 2002. We adopted SFAS 142 on January 1, 2002. We did not find
that goodwill was impaired upon the adoption of SFAS 142 in connection with the
transition impairment test, which was completed February 25, 2002 and the
impairment test that we completed during the fourth quarter of 2002. No
adjustment to the carrying value of goodwill was required. Any impairment losses
recorded in the future could have a material adverse impact on our financial
conditions and results of operations.
If the Company continued amortizing goodwill, net income would have
decreased by $208,000 or $0.05 per share for the fiscal year ended December 31,
2002. The Company recorded amortization of goodwill for the fiscal year ended
December 31, 2001 of $208,000. If this standard was adopted as of January 1,
2001, the pro-forma net loss for the fiscal year ended December 31, 2001 would
have been $523,414 or $0.12 per share.
There has been no change to the carrying value of the Company's
goodwill since January 1, 2002. The Company's intangible assets subject to
amortization primarily consists of software of approximately $165,000 net of
accumulated amortization of $198,000 at December 31, 2002 and is included in
other assets. Amortization expense was $71,000 for each of the twelve months
ended December 31, 2002 and 2001. There were no other intangible assets with
indefinite useful lives.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB")
adopted Statement of Financial Accounting Standards SFAS 145 Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections SFAS 145. This Statement rescinds FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002.
The Company believes that this statement will not have a significant impact on
its results of operations or financial position upon adoption.
12
In July 2002, the Financial Accounting Standards Board FASB issued
Statement 146, Accounting for Costs Associated with Exit or Disposal Activities
SFAS 146. This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The principal difference between this
Statement and Issue 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes that this new standard will not have a
material effect on its results of operations or financial condition.
In December 2002, the Financial Accounting Standards Board FASB
issued Statement 148, Accounting for Stock Based Compensation Transition and
Disclosure. This Statement amends FASB Statement No. 123, Accounting for Stock
Based Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results. The
transition guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. Under the provisions of
Statement 123 that remain unaffected by Statement 148, companies may either
recognize expenses on a fair value based method in the income statement or
disclose the pro forma effects of that method in the footnotes to the financial
statements. The Company is still assessing this new standard but does not
believe that it will have a material effect on its results of operation or
financial condition upon adoption.
CERTAIN CONSIDERATIONS
WHILE THE COMPANY HAS A NET PROFIT IN 2002, IT HAD A NET LOSS IN 2001
The Company had net profits of $34,078 for the fiscal year ended
December 31, 2002. However, profit was due in part to the adoption of SFAS 142.
In addition, during fiscal 2001, the Company had a net loss of $731,414. The
Company is not able to predict whether it will be profitable in the future.
THE COMPANY DEPENDS ON SIGNIFICANT CUSTOMERS
During each of the past two fiscal years, revenues from Oaktree's
services to a limited number of customers has accounted for a substantial
percentage of Oaktree's total revenue. For the years ended December 31, 2002 and
2001, Oaktree's three largest customers accounted for approximately 64% and 56%
of Oaktree's revenue, respectively, as follows:
2002 2001
---- ----
Customer A 29% 24%
Customer B 19% 21%
Customer C 16% 11%
13
The Company believes that significant business from a limited number
of customers will continue to account for a substantial portion of Oaktree's
revenues in any fiscal period. In any period the unexpected loss or decline in
net sales from a major customer, or the failure to generate significant revenues
from other customers, could have a material adverse effect on the Company's
financial results.
THE COMPANY DEPENDS ON THE INTERNET
Oaktree's database and marketing solutions are entirely Web based.
The technology required to provide Internet and IT professional services is
rapidly evolving. Significant technological changes could render Oaktree's
existing products and services obsolete. To be successful, Oaktree must adapt to
this rapidly changing technology environment by continually improving the
responsiveness, functionality and features of its products and services to meet
customers' needs. If Oaktree is unable to respond to technological advances and
conform to emerging industry standards in a cost-effective and timely basis, it
may render Oaktree's existing products and services obsolete which could have a
material and adverse affect on Oaktree's and the Company's financial position
and results of operation.
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.
14
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 February 6, 2003 for the
executive officers and directors of the Company. Members of the Board of
Directors shall serve until the next annual meeting of stockholders and until
their respective successors shall have been duly elected and qualified.
NAME AGE POSITION
Warren G. Lichtenstein 37 Director
c/o Steel Partners II, L.P. Chairman of the Board
150 East 52nd Street, 21st Floor Chief Executive Officer
New York, NY 10022
Jack L. Howard 41 Director
c/o Mutual Securities, Inc. Vice President
150 East 52nd Street, 21st Floor
New York, NY 10022
Ronald W. Hayes 65 Director
810 Saturn Street
Suite 16-432
Jupiter, FL 33477-4398
Gary W. Ullman 61 Director
420 Woodland Acres Crescent
Maple, Ontario Canada L6A1G2
James Henderson 45 President
c/o Steel Partners, Ltd.
150 East 52nd Street, 21st Floor
New York, NY 10022
Maritza Ramirez 42 Chief Financial Officer
c/o Oaktree Systems, Inc.
657 Dowd Avenue
Elizabeth, NJ 07201
Steven Wolosky 47 Secretary
c/o Olshan Grundman Frome Rosenzweig
& Wolosky LLP
505 Park Avenue
New York, NY 10022
15
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 a 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. Mr. Lichtenstein has served as a director of
WebFinancial Corporation, a consumer and commercial lender, since 1996 and as
its President and Chief Executive Officer since December 1997. Mr. Lichtenstein
has served as a director of SL Industries, Inc., 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 Industries, Inc. since February
2002. Mr. Lichtenstein has served as a director and the President and Chief
Executive Officer of Steel Partners, Ltd., a management and advisory company
that provides management services to Steel and other affiliates of Steel, since
June 1999 and as its Secretary and Treasurer since May 2001. He has also served
as Chairman of the Board of Directors of Caribbean Fertilizer Group Ltd., a
private company engaged in the production of agricultural products in Puerto
Rico and Jamaica, since June 2000. Mr. Lichtenstein is also a director of the
following publicly held companies: Puroflow Incorporated, a designer and
manufacturer of precision filtration devices; ECC International Corp., a
manufacturer and marketer of computer-controlled simulators for training
personnel to perform maintenance and operator procedures on military weapons;
and United Industrial Corporation, a designer and producer of defense, training,
transportation and energy systems.
JACK L. HOWARD has served as Vice President of the Company since
December 2001 and as a director since May 1994. From September 1994 to December
2001, Mr. Howard served as President of the Company. For more than the past five
years, Mr. Howard has been a registered principal of Mutual Securities, Inc., a
registered broker-dealer. Mr. Howard has served as a director of WebFinancial
Corporation since 1996 and as its Vice President since December 1997. Mr. Howard
is a director of Pubco Corporation, a printing supplies and construction
equipment manufacturer and distributor.
RONALD W. HAYES has served as a director of the Company since May
1993. For more than the past five years, Mr. Hayes has been 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 Chairman and Chief Executive Officer of HMR Foods,
Inc., a food conglomerate in the home meal replacement business, since September
2002. From January 1998 to September 2002, Mr. Ullman served as President and
Chief Executive Officer of Unitron, Inc., a designer, manufacturer and
distributor of hearing aids. 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 has served as President of the Company since
December 2001. Mr. Henderson has served as a Vice President of Steel Partners,
Ltd., a management and advisory company, since March 2002. Steel Partners, Ltd.
has provided management services to Steel and its affiliates since March 2002.
Mr. Henderson served as a Vice President of Steel Partners Services, Ltd.
("SPS"), a management and advisory company, from August 1999 through March 2002.
16
SPS provided management services to Steel and other affiliates of Steel until
March 2002, when Steel Partners, Ltd. acquired the rights to provide certain
management services from SPS. He has also served as Vice President of Operations
of WebFinancial Corporation since September 2000. Mr. Henderson has served as a
director since December 1999 and acting Chief Executive Officer since July 2002
of ECC International Corp. He has served as a director of SL Industries, Inc.
since January 2002. 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.
MARITZA RAMIREZ has served as Chief Financial Officer of the Company
since May 2002 and as Chief Financial Officer of Oaktree Systems, Inc., the
Company's operating subsidiary, since August 2001. From February 2001 to July
2001, Ms. Ramirez served as Vice President of Finance and Administration of MDM
Technologies, Inc., a direct mail and marketing company that was principally
controlled by the Company's Chief Executive Officer and Chairman. From November
1999 to February 2001, she served as a Vice President of Finance of Edgix
Corporation, a start-up global Internet content delivery Company. From April
1998 to November 1999, she was a financial business development consultant to
numerous start-up corporations. From November 1988 to April 1998, she served as
Director of Finance and the Controller of Radio-Active Media, Inc., a national
radio syndication and public company (a division of Jacor Communications, Inc.).
Ms. Ramirez has over 15 years of experience in financial management and
accounting system implementations of start-ups and small to midsize companies.
STEVEN WOLOSKY has served as Secretary of the Company since May
2002. For more than the past five years, Mr. Wolosky has been a partner of
Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel to the Company. Mr.
Wolosky is also a director of SL Industries, Inc.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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 (the "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 the Commission's regulations to furnish the Company with copies
of all Section 16(a) forms they file. Based solely upon a review of copies of
such forms received by it, or written representation from certain reporting
persons, the Company believes, during the fiscal year ended December 31, 2002,
that there was compliance with all Section 16(a) filing requirements applicable
to its officers, directors and 10% shareholders. However, the Company has been
made aware that an employee of Oaktree who became a 10% shareholder in 2000
failed to file a Form 3 reporting his beneficial ownership and failed to file
the requisite Section 16(a) filings to report the transfer of certain stock
options to employees of Oaktree in 2001.
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, 2002, 2001, and 2000. No executive officer
17
received annual compensation in excess of $100,000 during the fiscal year ended
December 31, 2002.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
Compensation
Awards
Fiscal Salary Bonus($) Securities
Name and Principal Position Year Compensation Underlying Options
--------------------------- ---- ------------ ------------------
Warren G. Lichtenstein 2002 -- -- --
Chairman 2001 -- -- 50,000
and Chief Executive Officer 2000 -- -- --
OPTION GRANTS IN LAST FISCAL YEAR
No options were awarded to Mr. Lichtenstein during the fiscal year
ended December 31, 2002. The following table sets forth certain information
regarding unexercised stock options held by Mr. Lichtenstein as of December 31,
2002.
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 83,333/16,667 0/0
-----------
(1) Based on the market value, as reported on the OTC Bulletin Board, of
$1.20 per share of Common Stock at December 31, 2002 and a weighted
average exercise price of $2.38 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.
18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information as of February 5, 2003
regarding the beneficial ownership of the Company's Common Stock by each person
known by the Company to own beneficially more than 5% of the Common Stock, by
each director and the Chief 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 (1)
------------------- -------------------- ------------
Steel Partners II, L.P.
150 East 52nd Street, 21st Floor
New York, NY 10022 1,674,208 39.94%
Warren G. Lichtenstein
c/o Steel Partners II, L.P.
150 East 52nd Street, 21st Floor
New York, NY 10022 1,799,093(2) 42.08%
Ronald W. Hayes
810 Saturn Street
Suite 16-432
Jupiter, FL 33477-4398 110,840(3) 2.61%
Jack L. Howard
c/o Mutual Securities, Inc.
150 East 52nd Street, 21st Floor
New York, NY 10022 179,387(4) 4.16%
Gary W. Ullman
420 Woodland Acres Crescent
Maple, Ontario Canada 17,000(5) *
George Soros
Soros Management LLC
888 Seventh Avenue
New York, NY 10022 827,716(6) 19.75%
Frank Mackay, Jr.
c/o Oaktree Systems, Inc.
4462 Middle Country Road
Calverton, NY 11933-1185 469,120(7) 11.02%
All directors and executive officers as a
group (six persons)(8) 2,151,320 47.55%
19
---------------------------------------
*Less than 1%
(1) A person is deemed to be the beneficial owner of voting securities that can
be acquired by such person within 60 days after February 5, 2003 upon
exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that options,
warrants or convertible securities that are held by such person (but not
those held by any other person) and that are currently exercisable (i.e.,
that are exercisable within 60 days after February 5, 2003) have been
exercised. Unless otherwise noted, the Company believes that all persons
named in the table have sole voting and investment power with respect to
all shares beneficially owned by them.
(2) Consists of (i) 1,674,208 shares of Common Stock owned directly by Steel,
(ii) 41,552 shares of Common Stock owned directly by Mr. Lichtenstein, and
(iii) 83,333 shares of Common Stock issuable upon the exercise of options
within 60 days of February 5, 2003 granted to Mr. Lichtenstein. Mr.
Lichtenstein is the sole managing member of the general partner of Steel.
Mr. Lichtenstein disclaims beneficial ownership of the shares of Common
Stock owned by Steel except to the extent of his pecuniary interest
therein.
(3) Consists of (i) 32,340 shares of Common Stock owned directly by Mr. Hayes,
(ii) 16,000 shares of Common Stock owned by Mr. Hayes' spouse, and (iii)
62,500 shares of Common Stock issuable upon the exercise of options within
60 days of February 5, 2003 granted to Mr. Hayes.
(4) Consists of (i) 44,420 shares of Common Stock owned directly by Mr. Howard,
(ii) 5,800 shares of Common Stock owned by JL Howard, Inc., a California
corporation controlled by Mr. Howard, (iii) 5,000 shares of Common Stock
held by Mr. Howard in joint tenancy with his spouse, and (iv) 124,167
shares of Common Stock issuable upon the exercise of options within 60 days
of February 5, 2003 granted to Mr. Howard.
(5) Consists of 17,000 shares of Common Stock issuable upon the exercise of
options within 60 days of February 5, 2003.
(6) As reported in the shareholder's most recent Schedule 13D.
(7) Consists of (i) 405,840 shares of Common Stock owned directly by Mr.
Mackay, and (ii) 63,280 shares of Common Stock issuable upon the exercise
of options within 60 days of February 5, 2003. Mr. Mackay is the President
of Oaktree. These shares and options were issued to Mr. Mackay on March 21,
2000 in connection with the acquisition of Oaktree by the Company.
(8) Includes the shares and options shown in footnotes (2) to (5) above and
45,000 shares of Common Stock issuable upon the exercise of options within
60 days of February 5, 2003 held by executive officers who are not
specifically named in the security ownership table.
20
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information regarding the
Company's equity compensation plans.
Number of Number of securities
securities to be Weighted- remaining available for
issued upon average exercise future issuance under equity
exercise of price of compensation plans
outstanding outstanding (excluding securities
options options reflected in column (a))
Plan Category (a) (b) (c)
------------- ---- --- ---
Equity compensation 794,000 $2.38 56,000
plans approved by security
holders(1)
Equity compensation 0 0 0
plans not approved by
security holders
Total 794,000 $2.38 56,000
--------------------
(1) Consists of Amended and Restated 1990 Incentive Stock Option Plan and 1990
Nonstatutory Stock Option Plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to a Management Agreement unanimously approved by the
Company's disinterested directors, Steel Partners Services, Ltd. ("SPS")
provided the Company with office space and certain management, consulting and
advisory services. The Management Agreement is automatically renewable on an
annual basis unless terminated by either party, 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 paid to SPS a fixed monthly fee,
adjustable annually upon agreement of the Company and SPS, totaling $280,000 per
annum. The Company believes that the cost of obtaining the type and quality of
services rendered by SPS under the Management Agreement was 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 Steel Partners, Ltd.
("SPL") and the employees of SPS became employees of the Steel Partners Services
Division of SPL. Warren Lichtenstein, the Company's Chairman of the Board and
Chief Executive Officer, is an affiliate of SPL based on his ownership of SPL,
directly and through Steel, and by virtue of his positions as Chairman,
President and Chief Executive Officer of SPL. Mr. Lichtenstein is the sole
managing member of the general partner of Steel. Mr. Lichtenstein disclaims
beneficial ownership of the shares of Common Stock of SPL owned by Steel (except
to the extent of his pecuniary interest in such shares of Common Stock). During
fiscal 2001, SPS received fees of $280,000 from the Company for services
rendered under the Management Agreement. These payments represented in excess of
five percent of the Company's consolidated gross revenues and SPS's consolidated
gross revenues during fiscal 2001. During fiscal 2002, SPS and SPL received fees
of $70,000 and $210,000, respectively, for services rendered under the
Management Agreement. These payments in the aggregate represented in excess of
five percent of the Company's consolidated gross revenues for the fiscal year.
The payments to each of SPS and SPL represented in excess of five percent of
SPS's and SPL's consolidated gross revenues, respectively, for the fiscal year.
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, 2001, the Company had sales to MDM of $86,235 and accounts
21
receivable from MDM of $86,235. During 2001, the Company phased out the joint
marketing arrangement with MDM and developed internal marketing strategies. No
sales were made to MDM during the year ended December 31, 2002 and the Company
had no outstanding receivables from MDM for the year ended December 31, 2002.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits
See exhibits index immediately following the signature page.
(b) Reports on Form 8-K:
None
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiary) required to be included in the Company's periodic Commission
filings.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
(c) Asset-backed issuers
Not applicable.
22
SIGNATURES
In accordance with 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 10, 2003
By /s/ James R. Henderson
------------------------
James R. Henderson,
President
Power of Attorney
Gateway Industries, Inc. and each of the undersigned do hereby
appoint James R. Henderson and Warren G. Lichtenstein, 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.
In accordance with 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 10, 2003
--------------------------
Warren G. Lichtenstein,
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
/s/ Maritza Ramirez Date: March 10, 2003
-------------------
Maritza Ramirez,
Chief Financial Officer
(principal financial and
accounting officer)
/s/ Jack L. Howard Date: March 10, 2003
------------------
Jack L. Howard,
Director
/s/ Ronald W. Hayes Date: March 10, 2003
-------------------
Ronald W. Hayes,
Director
Date: March 10, 2003
-------------------
Gary W. Ullman
Director
23
CERTIFICATION
Section 302 Certification
I, Warren G. Lichtenstein, certify that:
1. I have reviewed this annual report on Form 10-KSB of Gateway
Industries, Inc., a Delaware corporation (the "Registrant");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of,
and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
Registrant's auditors and the audit committee of Registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: March 7, 2003 By: /s/ Warren G. Lichtenstein
---------------------------
Warren G. Lichtenstein
Chief Executive Officer
24
CERTIFICATION
Section 302 Certification
I, Maritza Ramirez, certify that:
1. I have reviewed this annual report on Form 10-KSB of Gateway
Industries, Inc., a Delaware corporation (the "Registrant");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of,
and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
Registrant's auditors and the audit committee of Registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: March 7, 2003 By: /s/ Maritza Ramirez
-------------------
Maritza Ramirez
Chief Financial Officer
25
EXHIBIT INDEX
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.
10.1 Amended and Restated 1990 Incentive Stock Option Plan and 1990
Nonstatutory Stock Option Plan - Incorporated by reference to
Exhibit 10.8 to Annual Report on Form 10-KSB filed April 16, 1996.
10.2 Form of Indemnity Agreement between Gateway Industries, Inc. 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.
10.3 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.
*10.4 Management Agreement, dated as of January 2000, between Gateway
Industries, Inc. and Steel Partners Services, Ltd.
*21.1 Subsidiaries of Registrant.
*23.1 Consent of Grant Thornton LLP.
*99.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*99.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
------------
*Filed Herein.
26
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2002 and 2001 F-4
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7 - F-17
F-1
GATEWAY INDUSTRIES, INC. AND SUBSIDIARY
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, 2002 and 2001 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, 2002 and 2001 and the results of its
operations and its cash flows for the years ended December 31, 2002 and 2001, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note B to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002.
/s/ Grant Thornton LLP
-----------------------------
Grant Thornton LLP
New York, New York
February 6, 2003
F-2
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2002 2001
Cash and cash equivalents $ 1,844,512 $ 2,041,315
Accounts receivable 800,766 863,702
Prepaid expenses 94,652 70,590
Other current assets 45,584 44,602
------------ ------------
Total current assets 2,785,514 3,020,209
Security deposits 18,857 18,857
Fixed assets, net 379,050 407,251
Software, net 165,066 235,986
Goodwill, net 2,751,288 2,751,288
------------ ------------
Total assets $ 6,099,775 $ 6,433,591
============ ============
Liabilities and Shareholders' Equity
Liabilities
Accounts payable and accrued expenses $ 278,308 $ 570,218
Deferred income 227,537 269,735
Customer deposits 40,958 69,942
Current portion, capital lease 10,010 8,196
------------ ------------
Total current liabilities 556,813 918,091
Capital lease obligation 16,165 22,781
------------ ------------
Total liabilities 572,978 940,872
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; 4,192,000 shares issued and outstanding at
December 31, 2002 and 2001,
respectively 4,192 4,192
Capital in excess of par value 10,999,746 10,999,746
Accumulated deficit (5,477,141) (5,511,219)
------------ ------------
Total shareholders' equity 5,526,797 5,492,719
------------ ------------
Total liabilities and shareholders' equity $ 6,099,775 $ 6,433,591
============ ============
The accompanying notes are an integral part of these statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year Ended
December 31, December 31,
2002 2001
---- ----
Revenues $ 5,591,099 $ 4,397,639
Costs and expenses
Fulfillment & materials 595,034 164,839
Personnel costs 3,351,469 3,109,885
Selling general and administrative 1,624,950 1,943,093
----------- -----------
Total costs and expenses 5,571,453 5,217,817
----------- -----------
Operating Income or (loss) 19,646 (820,178)
Other income
Interest 27,317 92,876
Other income (expenses), net (12,885) (4,112)
----------- -----------
Total other income 14,432 88,764
----------- -----------
Net Income or (loss) $ 34,078 $ (731,414)
=========== ===========
Net earnings(loss) per share - basic $ .01 $ (.17)
=========== ===========
Net earnings(loss) per share - diluted $ .01 $ (.17)
=========== ===========
Weighted average shares outstanding - basic 4,192,000 4,192,000
Weighted average shares outstanding - diluted 4,196,000 4,192,000
The accompanying notes are an integral part of these statements.
F-4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common stock
------------
Capital in
excess of Accumulated
Shares Amount par value deficit Total
------ ------ --------- -------- -----------
Balance at December 31, 2000 4,192,000 $ 4,192 $ 10,999,746 $ (4,779,805) $ 6,224,133
Net loss for the year ended December 31,
2001 (731,414) (731,414)
--------- ------- ------------ ------------ ---------
Balance at December 31, 2001 4,192,000 4,192 10,999,746 (5,511,219) 5,492,719
Net income for the year ended December
31, 2002 34,078 34,078
--------- ------- ------------ ------------ ----------
Balance at December 31, 2002 4,192,000 $ 4,192 $10,999,746 $ (5,477,141) $5,526,797
========= ======= =========== ============= =========
The accompanying notes are an integral part of this statement.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2002 2001
---------- -------
Cash flows from operating activities:
Net Income (loss) $ 34,078 $ (731,414)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 121,648 85,525
Amortization 70,920 279,330
Net changes in operating assets and liabilities:
Accounts receivable 62,936 (366,073)
Prepaid expense and current other assets (25,044) (59,896)
Security Deposit -- 22,978
Account payable and accrued expenses (291,910) 408,262
Deferred income (42,198) 16,942
Customer deposits (28,984) (132,705)
----------- -----------
Net cash used in operating activities (98,554) (477,051)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (88,677) (72,767)
----------- -----------
Net cash used in investing activities (88,677) (72,767)
----------- -----------
Cash flows from financing activities:
Payments of capital lease (9,572) (13,288)
----------- -----------
Net cash used in financing activities (9,572) (13,288)
----------- -----------
Net decrease in cash and cash equivalents (196,803) (563,106)
Cash and cash equivalents at beginning of year 2,041,315 2,604,421
----------- -----------
Cash and cash equivalents at end of year $ 1,844,512 $ 2,041,315
=========== ===========
Supplemental cash flow information:
Cash paid during the year for
Income taxes $ 12,450 $ 63,175
Interest $ 12,885 $ 6,122
Supplemental information:
Oaktree acquired $23,953 of assets under a capital lease in 2001 and $4,770 in
2002.
The accompanying notes are an integral part of these statements.
F-6
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Systems, Inc. ("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. 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. Goodwill is no longer amortized in accordance with SFAS 142.
Other intangible assets which consist of software is being amortized
over the useful life of 5 and 15 years.
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, 2002 and 2001,
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
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Net Income (Loss) Per Share
For the years ended December 31, 2002 and 2001, the weighted-average
number of shares outstanding used in the basic and diluted
weighted-average numbers was 4,192,000 and 4,196,400, respectively, and
4,192,000 and 4,192,000, respectively. For the years ended December 31,
2002 and 2001, options and warrants to purchase 424,500 and 644,000
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.
The exercise price of all other options equals the market price of the
Company's common stock on the date of grant. Accordingly, no
compensation cost has been recognized for the Company's employee stock
option plans. Had compensation cost for such plans been determined
based on the fair value of the options at the grant dates consistent
with the method of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below.
Year ended December 31,
2002 2001
---- ----
Actual net Income (loss) $ 34,078 $ (731,414)
Actual net Income (loss) per share
Basic $ 0.01 $ (0.17)
Diluted $ 0.01 $ (0.17)
Pro forma net Income (loss) $ 14,388 $ (800,955)
Pro forma net (loss) per share
Basic - Pro forma $ 0.00 $ (0.19)
Diluted - Pro forma $ 0.00 $ (0.19)
F-8
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Advertising
Advertising costs are expensed when the advertising is incurred. Total
advertising expense was $36,733 and $0 for the years ended December 31,
2002 and 2001, respectively.
8. Long Lived Assets
As of January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 ("SFAS No. 144"),"Accounting for the
Impairment or Disposal of Long Lived Assets", which supersedes SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of". Accordingly, whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable, the Company assesses the recoverability of the asset. It
compares estimated cash flows, on a discounted basis, expected to be
generated from the related assets to the carrying amounts to determine
whether impairment has occurred. If the estimate of cash flows expected
to be generated changes in the future, the Company may be required to
record impairment charges that were not previously recorded for these
assets. The adoption of SFAS No. 144 had no effect on the Company.
9. Goodwill and Other Intangible Assets
We adopted SFAS 142 on January 1, 2002. We did not find that goodwill
was impaired upon the adoption of SFAS 142 in connection with the
transition impairment test, which was completed February 25, 2002 and
the impairment test that was completed during the fourth quarter of
2002. No adjustment to the carrying value of goodwill was required. Any
impairment losses recorded in the future could have a material adverse
impact on our financial conditions and results of operations.
If the Company continued amortizing goodwill, the net income would have
decreased by $208,000 or $0.05 per share for the fiscal year ended
December 31, 2002. The Company recorded amortization of goodwill for
the fiscal year ended December 31, 2001 of $208,000. If this standard
was adopted as of January 1, 2001 the proforma net loss for the fiscal
year ended December 31, 2001 would have been $523,414 or $0.12 per
share.
There has been no change to the carrying value of the Company's
goodwill since January 1, 2002. The Company's intangible assets subject
to amortization primarily consists of software of approximately
$165,000 net of accumulated amortization of $198,000 at December 31,
2002 and is included in other assets. Amortization expense was $71,000
for each of the twelve months ended December 31, 2002 and 2001. There
were no other intangible assets with indefinite useful lives.
10. 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.
11. Postage Reimbursement
Postage is advanced to mail customer product. It is recorded as a
pass-through item 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. Some customers have postage bank
accounts; Oaktree can reimburse the postage as it incurs the advance.
No postage advance is included in revenue.
F-9
12. 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.
13. 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, 2002 and 2001,
the comprehensive Income or (loss) was $34,078 and $(731,414),
respectively. The Company does not have any other type of comprehensive
income or (loss).
14. Segments
The Company has adopted Statement of Financial Accounting Standards No.
131 SFAS 131 "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 establishes standards for the way companies
report information about operating segments in annual financial
statements. SFAS 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.
15. Reclassification
Certain prior year account balances have been reclassified to conform
to the current year's presentation.
16. New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board FASB adopted
Statement of Financial Accounting Standards 145 Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections SFAS 145. This Statement rescinds FASB Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements. This Statement also
rescinds FASB Statement No. 44, Accounting for Intangible Assets of
Motor Carriers. This Statement amends FASB Statement No. 13, Accounting
for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. Statement No. 145 is effective for fiscal years
beginning after May 15, 2002. The Company believes that this statement
will not have a significant impact on its results of operations or
financial position upon adoption.
F-10
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In July 2002, the Financial Accounting Standards Board FASB issued
Statement 146 Accounting for Costs Associated with Exit or Disposal
Activities SFAS 146. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between this Statement and
Issue 94-3 relates to its requirements for recognition of a liability
for a cost associated with an exit or disposal activity. This Statement
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company
believes that this new standard will not have a material effect on its
results of operations or financial condition.
In December 2002, the Financial Accounting Standards Board FASB issued
Statement 148, Accounting for Stock Based Compensation Transition and
Disclosure. This Statement amends FASB Statement No. 123, Accounting
for Stock Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results.
The transition guidance and annual disclosure provisions of Statement
148 are effective for fiscal years ending after December 15, 2002, with
earlier application permitted in certain circumstances. The interim
disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15,
2002. Under the provisions of Statement 123 that remain unaffected by
Statement 148, companies may either recognize expenses on a fair value
based method in the income statement or disclose the pro forma effects
of that method in the footnotes to the financial statements. The
Company adopted the provision of this statement. There was no
significant impact on the financial statements upon adoption.
NOTE C - FIXED ASSETS
Fixed Assets consist of the following:
December 31
2002 2001
--------------------------
Leasehold improvements $ 31,050 $ 28,425
Furniture and fixtures 91,460 82,129
Equipment 503,205 421,713
---------- ---------
625,715 532,267
Accumulated depreciation (246,665) (125,016)
---------- ---------
$ 379,050 $ 407,251
========== =========
F-11
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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:
December 31
2002 2001
-------------------------
Reserves $ -- $ --
Tax effect of net operating loss carryforward 3,432,000 3,386,000
---------- ----------
Total deferred tax assets 3,432,000 3,386,000
Valuation allowance (3,432,000) (3,386,000)
----------- ----------
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, 2002, the Company had Federal net operating loss
carryforwards of approximately $8,800,000 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 - STOCK OPTION PLANS
The Company's Incentive Stock Option Plan and Nonstatutory Stock Option
Plan (collectively, the "Plan"), 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, 2002 and 2001. As of
December 31, 2002, options to purchase 56,000 shares remain available
for future issuance. 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 options to purchase 3,000 shares upon joining the Company's
Board, and options to purchase 3,000 shares on the day of each annual
meeting of shareholders in which such director is elected or re-elected
to office.
F-12
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 2002 and 2001 risk-free interest rates
of 3.82% and 5.66%; respectively. Volatility factors of the expected
market price of the Company's Common Stock are 33.96% and 83.98% for
2002 and 2001, respectively. The weighted-average expected life of the
option for 2002 and 2001 is 5.00 and 4.02 years, respectively.
Dividends are not expected in the future.
The weighted-average fair value of all Plan options granted during the
years ended December 31, 2002 and 2001 was $.17 and $.43, respectively,
and the weighted-average exercise price was $1.13 and $0.98,
respectively.
Employee stock option activity under the Plan during the years ended
December 31, 2002 and 2001 is summarized below:
Weighted-
average
exercise
Shares price
------ -----
Options outstanding at December 31, 2000 460,500 $2.78
Expired and cancelled 2001 -- --
Granted 2001 132,000 .98
-------
Options outstanding at December 31, 2001 592,500 2.59
Expired and cancelled 2002 2,000 5.00
Granted 2002 4,000 1.13
-------
Options outstanding at December 31, 2002 594,500 $2.57
=======
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 - 1.99 253,000 4.20 1.38 209,333 1.67
2.00 - 2.99 86,500 2.41 2.02 86,500 2.02
3.00 - 3.99 40,000 0.94 3.53 40,000 3.53
4.00 - 5.00 215,000 1.38 4.02 215,000 4.02
------- -------
594,500 550,833
======= =======
In 2000, the Company granted an aggregate of options to purchase
200,000 shares to the three previous shareholders of Oaktree pursuant
to their employment agreements at an exercise price of $4.00 per share.
All of the options granted have vested and are included above. The
options expire five years from the date of grant. Under the current
accounting guidance of FIN 44 a cashless option is treated as a
variable option
F-13
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2002 and
2001, 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.
NOTE F 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
were 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.
The Company granted options to purchase 40,000 shares to a consultant
of the Company during 2000, which will expire in 2005. 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 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 the value was approximately $48,000 which will be
amortized over the vesting period of the option.
Non employee stock option activity under the Plan during the years
ended December 31, 2002 and 2001 is summarized below:
Weighted-
Average
Exercise
Shares price
Options outstanding at December 31, 2000 56,500 $1.94
Expired and cancelled (5,000) 2.00
Granted 150,000 1.75
-------
Options outstanding at December 31, 2001 201,500 1.79
Expired and cancelled (2,000) 2.00
Granted -- --
--------
Options outstanding at December 31, 2002 199,500 $1.79
=========
F-14
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 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 arrangement with MDM
and developed internal marketing strategies. No sales were made to MDM
during the year ended December 31, 2002 and the Company had no
outstanding receivables from MDM for the year ended December 31, 2002.
2. Management Agreement
Pursuant to a Management Agreement unanimously approved by the
Company's disinterested directors, Steel Partners Services, Ltd.
("SPS") provided the Company with office space and certain management,
consulting and advisory services. The Management Agreement is
automatically renewable on an annual basis unless terminated by either
party, 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 paid to SPS a fixed monthly fee, adjustable annually upon
agreement of the Company and SPS, totaling $280,000 per annum. The
Company believes that the cost of obtaining the type and quality of
services rendered by SPS under the Management Agreement was 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 Steel Partners, Ltd. (SPL) and
the employees of SPS became employees of the Steel Partners Services
Division of SPL. Warren Lichtenstein, the Company's Chairman of the
Board and Chief Executive Officer, is an affiliate of SPL based on his
ownership of SPL, directly and through Steel, and by virtue of his
positions as Chairman, President and Chief Executive Officer of SPL.
Mr. Lichtenstein is the sole managing member of the general partner of
Steel. Mr. Lichtenstein disclaims beneficial ownership of the shares of
Common Stock of SPL owned by Steel (except to the extent of his
pecuniary interest in such shares of Common Stock). During fiscal 2001,
SPS received fees of $280,000 from the Company for services rendered
under the Management Agreement. These payments represented in excess of
five percent of the Company's consolidated gross revenues and SPS's
consolidated gross revenues during fiscal 2001. During fiscal 2002, SPS
and SPL received fees of $70,000 and $210,000, respectively, for
services rendered under the Management Agreement. These payments in the
aggregate represented in excess of five percent of the Company's
consolidated gross revenues for the fiscal year. The payments to each
of SPS and SPL represented in excess of five percent of SPS's and SPL's
consolidated gross revenues, respectively, for the fiscal year.
F-15
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 $155,735 per year. Oaktree has a lease for 1,650 square
feet in St. Paul, Minnesota, which expires on May 31, 2004. 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
-----------
2003 239,956
2004 218,015
2005 162,255
2006 2,729
2007 --
---------
$622,955
=========
The Company has sublet a portion of its office space to companies
affiliated with its Chairman. Rent expense for the year ended December
31, 2002 and 2001 was $182,348 and $340,000, respectively.
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 $30,604 as of December 31, 2002. As of December 31, 2002, the
Company recorded depreciation of $2,000 against these assets. Future
obligations under capital leases are as follows:
Capital Lease
Commitments
-----------
2003 $ 10,010
2004 11,000
2005 5,165
2006 0
---------
26,175
Short-term 10,010
---------
Long-term $ 16,165
=========
F-16
GATEWAY INDUSTRIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 and 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
maintains allowances for potential credit losses, when necessary.
Historically, such losses have been within management's expectations.
Sales to and receivables from major customers (greater than 10% of
total revenues) included three customers in 2002 and 2001 as follows:
2002 2001
---- ----
net sales receivables net sales receivables
--------- ----------- --------- -----------
Customer A 29% 24% 24% 24%
Customer B 19% 16% 21% 13%
Customer C 16% 21% 11% 6%
4. 401K Plan
The Company has a defined contribution pension plan for its employees.
The Company's contributions to the plan are determined by management on
an annual basis. For the year ended December 31, 2002, management
determined that no contributions would be made to the employee 401K
Plan, and for the year 2001 the Company recorded expenses of $20,000
related to this plan.
F-17