<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1999
REGISTRATION NO. 333-79751
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NETGATEWAY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 87-0591719
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
NETGATEWAY, INC.
300 OCEANGATE
5TH FLOOR
LONG BEACH, CALIFORNIA 90802
(Address of principal place of business)
------------------------------
KEITH D. FREADHOFF
Chairman of the Board of Directors
DONALD M. CORLISS, JR.
President
DAVID BASSETT-PARKINS
Chief Financial Officer and Chief Operating Officer
Netgateway, Inc.
300 Oceangate
5th Floor
Long Beach, California 90802
(562)308 0010/(562)308 0021 (Telecopy)
[email protected]
[email protected]
[email protected]
(Name, address, and telephone number of principal executive offices and agent
for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT STEVEN BROWN, ESQ. STEPHEN WEISS, ESQ.
AMOS S. EDELMAN, ESQ. LINDA MINTZ, ESQ.
KIM ELLEN LEFKOWITZ, ESQ. Greenberg Traurig
Brock Silverstein LLC Met Life Building
One Citicorp Center 200 Park Avenue
153 East 53rd Street New York, New York 10166
New York, New York 10022-4611 (212) 801-9200 / (212) 801-6400 (Telecopy)
(212) 371-2000 / (212) 371-5500 (Telecopy) [email protected]
[email protected] [email protected]
[email protected]
[email protected]
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
SEE ATTACHED PAGE.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
2,875,000
Common Stock, par value, $.001 per share.......... shares(2) $14.625 $42,046,875 $11,689.04
250,000
Representative's Warrants......................... warrants(3) $0.001 $250.00 $0.07
Common Stock, par value, $.001 per share, issuable
upon exercise of the Representative's
Warrants........................................ 250,000 shares(4) $17.55 $4,387,500 $1,219.73
Total............................................. -- -- $46,434,625 $12,908.84(5)
</TABLE>
(1) Estimated solely for purposes of calculation of the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended.
(2) Includes 375,000 shares of the Common Stock, par value $.001 per share, of
the Registrant, which the underwriters have the option to purchase solely to
cover over allotments, if any.
(3) To be acquired by the Representative.
(4) Issuable upon exercise of the Representative's Warrants.
(5) Previously paid.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 21, 1999
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
2,500,000 SHARES
NETGATEWAY, INC.
COMMON STOCK
------------------
We are a provider of turn-key electronic commerce services designed to
enable clients to extend their business to the Internet. Our Internet Commerce
Center provides our clients with a variety of features ranging from simple
Internet storefronts to complex systems designed to enable them to conduct
business-to-business electronic commerce by means of the Internet.
Our common stock currently trades on the OTC Bulletin Board under the symbol
"NGWY." We have applied to have the common stock quoted on the Nasdaq National
Market under the symbol "NGWY." On July 13, 1999, the last reported sale price
of our common stock on the OTC Bulletin Board was $11.25. We anticipate that the
public offering price per share will be between $11.00 and $13.00.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Offering Price................................. $ $
Underwriting Discounts and Commissions................ $ $
Proceeds, before expenses, to Netgateway.............. $ $
</TABLE>
The underwriters may, under certain circumstances, for 45 days after the
date of this prospectus, purchase up to an additional 375,000 shares of common
stock from us at the public offering price, less underwriting discounts and
commissions.
------------------------
[LOGO]
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
INSIDE FRONT COVER
PICTURES OR DIAGRAMS OF THE "HUB AND SPOKE" MODEL OF THE INTERNET COMMERCE
CENTER,
BRIEF SUMMARY OF SERVICES PROVIDED, AND IDENTIFICATION OF CERTAIN OF THE
PUBLICLY RECOGNIZABLE CLIENTS OF NETGATEWAY.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 3
Risk Factors............................................................................................... 9
Use of Proceeds............................................................................................ 23
Price Range of Common Stock................................................................................ 25
Dividend Policy............................................................................................ 25
Capitalization............................................................................................. 26
Dilution................................................................................................... 27
Selected Financial Data.................................................................................... 28
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 29
Business................................................................................................... 34
Management................................................................................................. 46
Principal Stockholders..................................................................................... 53
Related Party Transactions................................................................................. 55
Description of Securities.................................................................................. 57
Shares Eligible for Future Sale............................................................................ 59
Underwriting............................................................................................... 60
Legal Matters.............................................................................................. 62
Experts.................................................................................................... 62
Additional Information..................................................................................... 62
Index to Financial Statements.............................................................................. F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND
OUR BUSINESS AND THIS OFFERING FULLY, YOU SHOULD READ THIS ENTIRE PROSPECTUS
CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THE RELATED NOTES BEGINNING ON
PAGE F-1. WHEN WE REFER IN THIS PROSPECTUS TO "NETGATEWAY," "THE COMPANY," "WE,"
"OUR," AND "US," WE MEAN NETGATEWAY, INC., A DELAWARE CORPORATION, TOGETHER WITH
OUR SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO NETGATEWAY. SEE
"CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS" ON PAGE 22.
NETGATEWAY
OUR BUSINESS
We provide turn-key electronic commerce services designed to enable clients
to extend their business to the Internet to conduct commercial transactions
between business enterprises. The hub of our electronic commerce solution is our
proprietary Internet Commerce Center, which consists of the hardware,
proprietary and licensed software, and the related technical services necessary
for our clients to transact electronic commerce, known in our industry as
eCommerce. We also design and build custom interfaces, or SPOKES, to connect
business clients to the ICC. Our ICC provides a continuum of increasingly
sophisticated and technologically complex solutions, ranging from a simple
Internet storefront advertising their products and taking orders through e-mail
to a highly complex system of private Websites, known as EXTRANETS. These
extranets are accessible only by clients and selected outsiders, such as their
customers, suppliers, and vendors, to interact and transact business-to-business
electronic commerce.
OUR SERVICES
Our services currently include
- Web site development and design, including the development of electronic
storefronts for the conduct of electronic commerce on the Internet,
- Internet-based "shopping mall" and secure client extranet development and
design,
- transaction processing and clearing through standardized order formats and
commercial terms,
- data warehousing and transaction reporting,
- customer support services, and
- connectivity solutions.
We believe that our electronic commerce services have a number of advantages
over other currently available alternatives, in that:
- our customers do not invest in hardware, software, and staffing, but
rather connect to our existing hardware and software infrastructure, which
we believe is a highly economic method to obtain and maintain an
electronic commerce presence;
- clients with existing Web sites can maintain their investment in the
creation of that presence while seamlessly adding electronic commerce
capabilities;
- because our infrastructure enables our customers to access a continuum of
sophisticated and technologically complex electronic commerce solutions,
we can offer incremental services to our clients through the activation of
additional portions of our proprietary software in response to client
growth or commercial requirements quickly and cost-effectively; and
- because our proprietary and other software resides only on our servers, we
can offer clients easy access to additional functionality on a test or
temporary basis in order to permit our clients to
3
<PAGE>
try new or additional services with their respective customers on their
Web sites, and can provide real time updates, patches, and fixes to
software with no additional effort by the client.
OUR MARKET
International Data Corp., an industry research firm, forecasts that the
market for Internet and electronic commerce services worldwide will grow from
$4.6 billion in 1997 to $43.7 billion by 2002. Forrester Research, another
technology industry research firm, estimates that the market for Internet and
electronic commerce services will grow from $5.4 billion in 1998 to $32.7
billion by 2002. These projections represent a compound annual growth rate of
more than 55% over these periods.
As a result of the recent growth of electronic commerce and its acceptance
as a mainstream medium for commercial transactions, businesses are investing in
the strategic use of Internet solutions to transform their core business and
technology strategies. This, in turn, has created a significant and growing
demand for third-party Internet professional services and has resulted in a
proliferation of companies offering specialized solutions, such as connectivity,
transaction reporting, security, and Web site design to business customers. This
specialization has resulted in a fragmented market that often requires the
business customer to seek solutions from a number of different providers using
differing, or even contradictory, strategies, models, and designs.
SIGNIFICANT RECENT DEVELOPMENTS
XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS:
XMCM), an electronic commerce Web portal with over 7.8 million members. Under
the terms of the agreement, we are the sole provider of a private labeled
version of XOOM.com's products and services which permit its members to create
and maintain storefronts on the Web through XOOM.com and are the sole provider
of electronic commerce processing services to XOOM.com's electronic commerce
customers. In addition, XOOM.com is reselling our electronic commerce services
and we are developing XOOM.com's Internet-based shopping mall located at
WWW.XOOMMEMBERSTORES.COM.
CB RICHARD ELLIS. In March 1999, we entered into an electronic commerce
services agreement with CB Richard Ellis (NYSE: CBG), one of the world's largest
building management and real estate services companies with over 12,000
properties under management and over $1 billion of revenue during 1998. Under
this agreement, we have been engaged to develop, manage, and service CB Richard
Ellis' Internet-based shopping mall and client extranet. This Web site is
designed to permit CB Richard Ellis personnel to conduct all of their corporate
materials purchasing, including computers and building and maintenance supplies,
and all global facilities management by means of the Internet. In addition, CB
Richard Ellis will be able to offer to the tenants in the buildings they manage
volume purchasing services on the Internet for a variety of office products and
supplies.
GATEWAY. In March 1999, we entered into an agreement with Gateway Inc.
(NYSE: GTW), a manufacturer of personal and business computers and service
provider. Under the terms of this agreement, we will offer our Internet
storefront services package, including Web site design, hosting, and transaction
processing services, to Gateway customers.
WIRELESS ONE. In June 1999, we entered into a reseller and mall agreement
with Wireless One, Inc. under which we will design and develop an Internet-based
shopping mall, to be branded with the Wireless One name, brand, and image, and
will offer our storefront creation and maintenance services to Wireless One's
subscribers. Under this agreement, we will be responsible for marketing support,
including development of mall content, training of Wireless One sales people,
development of Wireless One branded collateral material and periodic
distribution and updating of advertising spots to promote their services.
Wireless One will promote this mall with a total of 1,000 30-second spots every
month jointly developed by us and Wireless One in all systems in which it is
able to provide advertising.
4
<PAGE>
RELIANT INNOVATIONS. In June 1999, we entered into an electronic services
agreement with Reliant Innovations, under which we will develop an electronic
commerce site that will enable Reliant Innovations to sell computer products to
clients who are members of specific associations with which Reliant Innovations
has formed a partnership. We expect to complete implementation of this agreement
by August 31, 1999.
CABLECOMMERCE. In June 1999, we formed CableCommerce, a new operating
division which will focus on providing electronic commerce services and
solutions to cable television operators.
OTHER RESELLERS. We have also recently entered into reseller agreements,
under which the reseller offers our services to their customers, with FedPage
(www.fedpage.com), a division of Federal Business Council, Inc., the industry
leader in the production of on site federal technology shows, Ayrix
Technologies, OKC Webshopper, Country Wide Net, Hill Country Network, Encom
Industries, Epicycle Business Solutions, Integrated Systems Solutions, and Looks
Creative Designing Arts.
OUR HISTORY AND STRUCTURE
We were incorporated under the laws of the State of Nevada on April 13, 1995
under the name Video Calling Card, Inc. and on June 2, 1998 acquired all of the
outstanding capital stock of Netgateway, a Nevada corporation (formerly,
eClassroom.com) in exchange for 5,900,000 shares of our common stock.
Simultaneously with this acquisition, we acquired the assets of Infobahn, LLC
d/b/a Digital Genesis, an electronic commerce applications developer, in
exchange for 400,000 shares of our common stock. As of January 15, 1999, through
our subsidiary StoresOnline.com, Ltd., an Alberta, Canada corporation, we
acquired Spartan Multimedia, Inc., an Internet storefront developer and
storefront service provider, in exchange for 371,429 shares of Class B common
stock of StoresOnline.com, which shares are exchangeable for an aggregate of
371,429 shares of our common stock. We were reincorporated under the laws of the
State of Delaware prior to the date of this prospectus. Our executive offices
are located at 300 Oceangate, 5th Floor, Long Beach, California 90802 and our
telephone number is (562) 308-0010.
------------------------
UNLESS OTHERWISE STATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE
EFFECT TO
- THE REPRESENTATIVE'S WARRANTS OR THEIR EXERCISE,
- THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR ITS EXERCISE,
- UP TO 6,000,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE
EXERCISE OF OPTIONS WHICH MAY BE GRANTED PURSUANT TO OUR EXISTING STOCK
OPTION PLANS, OF WHICH, OPTIONS EXERCISABLE FOR AN AGGREGATE OF 3,894,967
SHARES OF COMMON STOCK HAVE BEEN GRANTED PRIOR TO THE DATE OF THIS
PROSPECTUS AND
- UP TO AN AGGREGATE OF 2,446,592 SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF OUTSTANDING WARRANTS OR UPON THE CONVERSION OF CONVERTIBLE
SECURITIES OR UPON THE EXCHANGE OF EXCHANGEABLE SECURITIES.
UNLESS OTHERWISE STATED, THE INFORMATION IN THIS PROSPECTUS REFLECTS
- ANY STOCK SPLITS TO DATE, AND
- OUR SPRING 1999 PRIVATE PLACEMENTS OF SECURITIES. PLEASE SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES."
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered............ 2,500,000 shares
Common stock outstanding
immediately prior to this
offering...................... 9,951,504 shares(1)
Common stock outstanding
immediately following this
offering...................... 12,451,504 shares(1)
Use of proceeds................. We intend to use the net proceeds of this offering to
repay indebtedness, to increase marketing and research and
development, to acquire additional capital equipment, and
for general corporate and working capital purposes,
including possible acquisitions of, and investment in,
businesses and technologies. See "Use of Proceeds."
Proposed Nasdaq National Market
trading symbol................ NGWY
OTC Bulletin Board trading
symbol........................ NGWY
Risk factors.................... An investment in our common stock is highly speculative
and involves a high degree of risk. You should read the
"Risk Factors" section beginning on page 10.
</TABLE>
- ------------------------
(1) Does not reflect the representative's warrants or their exercise, the
underwriters' over-allotment option or its exercise, up to 6,000,000 shares
of common stock reserved for issuance upon the exercise of options which may
be granted pursuant to our existing stock option plans, of which options
exercisable for an aggregate of 3,894,967 shares of common stock have been
granted prior to the date of this prospectus, up to an aggregate of
2,207,350 shares of common stock issuable upon the exercise of outstanding
warrants, and up to 456,429 shares of common stock issuable upon the
conversion of convertible securities or upon the exchange of exchangeable
securities.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following selected statements of operations data for the period from our
inception on March 4, 1998 through June 30, 1998 and the selected balance sheet
data as of June 30, 1998 are derived from our consolidated financial statements
and related notes included elsewhere in this prospectus audited by KPMG LLP, our
independent auditors. The statement of operations data for the nine months ended
March 31, 1999 and the selected balance sheet data at March 31, 1999 are derived
from the audited consolidated financial statements included elsewhere in this
prospectus and include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
our financial position and results of operation. The results of operations for
any interim period are not necessarily indicative of the results to be expected
for the entire year. The selected statement of operations data for the period
from our inception on March 4, 1998 through March 31, 1999 includes the results
of operations of Digital Genesis from June 2, 1998, its date of acquisition, and
the pro forma selected statement of operations data for such period includes the
operations of Digital Genesis and Spartan Multimedia, Inc. as if they were
acquired by us on March 4, 1998. The selected statement of operations data for
the nine months ended March 31, 1999 includes the results of operations of
Spartan Multimedia, Inc. from January 15, 1999, its date of acquisition, and the
pro forma selected statement of operations data for such period includes the
operations of Spartan Multimedia, Inc. as if it was acquired by us on July 1,
1998. The pre-offering pro forma balance sheet data as of March 31, 1999 is
adjusted to reflect
- the net proceeds of $3,305,800 from our April 1999 private placement and
our May and June 1999 private placement of securities and
- the issuance of $150,000 of promissory notes and 15,000 shares of our
common stock to settle a financial obligation in May 1999,
and the post-offering pro forma, as adjusted balance sheet data as of March 31,
1999 is adjusted to reflect
- the net proceeds of $3,305,800 from our April 1999 private placement and
our May and June 1999 private placement of securities:
- the issuance of $150,000 of promissory notes and 15,000 shares of our
common stock to settle a financial obligation in May 1999; and
- the receipt of estimated net proceeds of approximately $25.6 million from
the sale of our common stock at the assumed public offering price of
$12.00 per share and the initial application of these proceeds as
described under "Use of Proceeds."
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes appearing elsewhere
in this prospectus.
7
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM MARCH 4, 1998
(INCEPTION) THROUGH NINE MONTHS ENDED
JUNE 30, 1998 MARCH 31, 1999
---------------------------- ----------------------------
ACTUAL ACTUAL
------------- ------------- CUMULATIVE PERIOD
FROM MARCH 4, 1998
(INCEPTION)
PRO FORMA THROUGH MARCH 31,
PRO FORMA ------------- 1999(2)
------------- (UNAUDITED) ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 2,800 $ 124,325 $ 113,959 $ 117,400 $ 116,759
Total operating expenses........ 4,555,459 4,711,795 7,523,868 7,827,762 12,079,327
Interest expense................ 19,277 19,277 342,795 342,795 362,072
Net loss before extraordinary
item.......................... (4,571,936) (4,606,747) (7,807,433 (1) (8,107,886 (1) (12,379,369)(1)
Loss before extraordinary item
per weighted average common
share outstanding (basic and
diluted)...................... (0.84) (0.81) (0.90 (1) (0.94 (1) (1.62)(1)
Weighted average common shares
outstanding (basic and
diluted)...................... 5,416,242 5,721,327 8,659,851 8,659,851 7,628,895
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------
PRO FORMA PRO FORMA,
JUNE 30, 1998 ACTUAL ----------- AS ADJUSTED
------------- ------------ (UNAUDITED) ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets........................................... $ 371,467 $ 304,216 3,569,755 26,048,855
Total assets............................................. 871,552 1,826,033 5,091,572 27,349,134
Working capital (deficit)................................ (1,959,776) (1,313,964) (2,010) 24,842,474
Long-term debt........................................... 367,892 -- -- --
Stockholders' equity (deficit)........................... (1,827,583) 207,853 1,564,807 26,187,753
</TABLE>
- ------------------------
(1) Before extraordinary gain of $1,653,232 relating to extinguishment of
indebtedness of $0.19, $0.19, and $0.22 per weighted-average common shares
outstanding during the nine months ended March 31, 1999 actual, pro forma,
and the cumulative period from March 4, 1998 (inception) through March 31,
1999, respectively.
(2) The cumulative period statement of operations data is included in
accordance with applicable generally accepted accounting standards since we
are a development stage company.
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A HIGH
DEGREE OF RISK, AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD A COMPLETE
LOSS. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH
THE OTHER INFORMATION IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND
THE RELATED NOTES, BEFORE YOU DECIDE TO BUY OUR COMMON STOCK.
RISKS SPECIFIC TO NETGATEWAY
WE HAVE HAD A DEFICIT IN STOCKHOLDERS' EQUITY; WE ANTICIPATE FUTURE LOSSES
We have incurred substantial losses since our inception and we anticipate
continuing to incur substantial losses for the foreseeable future. As of June
30, 1998 and as of March 31, 1999, we had a working capital (deficit) of
$(1,959,776) and $(1,313,964), respectively, and stockholders' equity (deficit)
of $(1,827,583) and $207,853 at June 30, 1998 and March 31, 1999, respectively.
See our financial statements and the related notes. We generated revenues of
$2,800 during the period from our inception on March 4, 1998 through June 30,
1998, and $113,959 for the nine months ended March 31, 1999. For the period from
our inception on March 4, 1998 through June 30, 1998 and the nine months ended
March 31, 1999, we incurred net losses of $(4,571,936), and $(6,154,201),
respectively. We may never achieve profitability. In addition, during the period
from our inception on March 4, 1998 through June 30, 1998 and during the nine
months ended March 31, 1999, we recorded negative cash flows from operations of
$(253,119) and $(2,156,859), respectively. To succeed, we must leverage our
existing relationships and develop new relationships to substantially increase
our revenue derived from more comprehensive electronic commerce services. We
have expended and will continue to expend significant resources to build our
internal systems, to grow our infrastructure, to add additional participating
companies and employees, and to establish access to the ICC platform for
participating companies, directly and as resellers. These development expenses
must be incurred well in advance of the recognition of revenue. Under generally
accepted accounting principles we recognize revenue only upon completion of a
customer transaction through the ICC. This requires the realization of expenses
in advance of associated related revenue. Our performance will depend in large
part upon our ability to estimate accurately these resource requirements and the
revenues generated by customers engaging in the transactions through the ICC. To
date, the volume of our transactions has been limited, and, accordingly, the
revenue recognized has been minimal. We intend to continue to invest heavily in
acquisitions, infrastructure, development, and marketing. As result, we may not
be able to achieve or sustain profitability.
OUR AUDITORS HAVE QUALIFIED THEIR REPORT ON OUR FINANCIAL STATEMENTS WITH
RESPECT TO OUR ABILITY TO CONTINUE AS A GOING CONCERN
The report of KPMG LLP, our independent auditors, with respect to our
financial statements and the related notes, indicate that, at the date of their
report, we were in the development stage, had not commenced our planned
principal operations, and had generated minimal revenues since inception.
Accordingly, KPMG qualified their report to indicate that these matters raise
substantial doubt, at such date, about our ability to continue as a going
concern. Our financial statements do not include any adjustments that might
result from this uncertainty. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the related notes.
BECAUSE WE HAVE BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME, THERE IS
LIMITED INFORMATION UPON WHICH INVESTORS CAN EVALUATE OUR BUSINESS
We began our operations in March 1998 and are currently a development stage
company. Consequently, we have a very limited operating history upon which you
may base an evaluation of our business and determine our prospects for achieving
our intended business objectives. Although we have
9
<PAGE>
recently entered into agreements with electronic commerce resellers providing us
with access to more than eight million potential clients, we are currently
providing electronic commerce transaction processing services to only
approximately 550 clients. We are prone to all of the risks inherent to the
establishment of any new business venture, including unforeseen changes in our
business plan. For example, in June 1998, we changed our business plan to the
development of technology to enable businesses and other organizations to engage
in electronic commerce, whereas our prior efforts focused on the licensing and
distribution of software support materials for the governmental and educational
markets. You should consider the likelihood of our future success to be highly
speculative in light of our limited operating history, as well as the limited
resources, problems, expenses, risks, and complications frequently encountered
by similarly situated companies in the early stages of development, particularly
companies in new and rapidly evolving markets, such as electronic commerce. To
address these risks, we must, among other things,
- maintain and increase our client base,
- implement and successfully execute our business and marketing strategy,
- continue to develop and upgrade our technology and transaction processing
systems,
- continually update and improve our service offerings and features,
- provide superior customer service,
- respond to industry and competitive developments, and
- attract, retain, and motivate qualified personnel.
We may not be successful in addressing these risks. If we are unable to do
so, our business prospects, financial condition, and results of operations would
be materially and adversely affected.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY AFFECT OUR STOCK PRICE
As a result of our limited operating history and the emerging nature of the
markets in which we compete, we believe that our operating results may fluctuate
materially, as a result of which quarter-to-quarter comparisons of our results
of operations may not be meaningful. If in some future quarter, whether as a
result of such a fluctuation or otherwise, our results of operations fall below
the expectations of securities analysts and investors, the trading price of our
common stock would likely be materially and adversely affected. You should not
rely on our results of any interim period as an indication of our future
performance. Additionally, our quarterly results of operations may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside our control. Factors that may cause our quarterly results to
fluctuate include, among others:
- our ability to retain existing clients and electronic commerce resellers,
to attract new clients and electronic commerce resellers at a steady rate,
and to maintain client satisfaction;
- the announcement or introduction of new services and products by us and
our competitors;
- price competition or higher prices in the industry;
- pricing of hardware and software required for the transaction of
electronic commerce;
- the level of use of the Internet and online services and the rate of
market acceptance of the Internet and other online services for
transacting commerce;
- our ability to upgrade and develop our systems and infrastructure in a
timely and effective manner;
- our ability to attract, train, and retain skilled management, strategic,
technical, and creative professionals;
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- technical difficulties, system downtime, or Internet brownouts;
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations, and infrastructure;
- unanticipated technical, legal, and regulatory difficulties with respect
to use of the Internet; and
- general economic conditions and economic conditions specific to Internet
technology usage and electronic commerce.
OUR MARKETING STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT IN SUCCESS
To date, we have conducted limited marketing efforts directly and have
relied substantially upon the marketing efforts of the electronic commerce
resellers with which we have contracts or strategic relationships. All of our
marketing efforts, including our marketing through these resellers, have been
largely untested in the marketplace, and may not result in sales of our products
and services. To penetrate our market, we will have to exert significant efforts
to create awareness of, and demand for, our products and services. With respect
to our marketing efforts conducted directly, we intend to begin to do the
following after this offering:
- advertise on the Internet;
- advertise on television in selected markets;
- direct mail;
- targeted e-mail campaigns;
- advertise in technology, financial, and business publications having wide
readership; and
- expand our sales staff.
With respect to our marketing efforts conducted through resellers, we intend to
do the following after this offering:
- create a group within our sales staff trained to assist resellers in
marketing our products and services to their customers, members,
employees, and relationships;
- create branded promotional brochures and other marketing materials to
inform resellers and their constituencies as to our products and services,
and
- advertise in trade publications in strategic industries.
Our failure to further develop our marketing capabilities and successfully
market our products and services could have a material adverse effect on our
business, prospects, financial condition, and results of operations. See "Use of
Proceeds," "Business--Business Strategy," "Business--Clients and Strategic
Relationships," and "Business--Sales and Marketing."
IF WE ARE UNABLE TO UPGRADE OUR INFRASTRUCTURE, WE MAY BE UNABLE TO PROCESS
AN INCREASED VOLUME OF TRANSACTIONS
A key element of our strategy is to provide on a cost-effective basis the
means by which our clients can generate a high volume of electronic commerce
transactions through the use of our hardware and software infrastructure. If the
volume of transactions through our infrastructure substantially increases, we
will have to expand and further upgrade our technology, transaction processing
systems, and hardware and software infrastructure to accommodate these increases
or our systems may suffer from
- unanticipated system disruptions,
- slower response times,
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- degradation in levels of customer service,
- impaired quality and speed of transaction processing, and
- delays in reporting accurate financial information.
We may be unable to effectively upgrade and expand our hardware and software
infrastructure or to integrate smoothly any newly developed or purchased
software with our existing systems, which could have a material adverse effect
on our business, prospects, financial condition, and results of operations. See
"Business--Business Strategy."
WE RELY ON INTERNALLY DEVELOPED SYSTEMS WHICH ARE INEFFICIENT, WHICH MAY PUT
US AT A COMPETITIVE DISADVANTAGE
We use an internally developed system for a portion of our transaction
processing software, as well as the software required to interconnect our
clients' systems with our own. As we developed these systems primarily to
support the rapid growth of transaction submission volume and customer service
and less on traditional accounting, control, and reporting, these systems are
inefficient and require a significant amount of manual effort to prepare
information for financial and accounting reporting. Such manual effort is
time-consuming and costly and may place us at a competitive disadvantage when
compared to competitors with more efficient systems. We intend to upgrade and
expand our claims processing systems and to integrate newly-developed and
purchased software with our existing systems in order to improve the efficiency
of our reporting methods and support increased transaction volume, although we
are unable to predict whether these upgrades will improve our competitive
position when compared to our competitors.
BECAUSE OUR MANAGEMENT WILL CONTINUE TO OWN A SUBSTANTIAL PORTION OF OUR
COMMON STOCK FOLLOWING THIS OFFERING, INVESTORS MAY HAVE DIFFICULTY
OBTAINING THE NECESSARY STOCKHOLDER VOTE FOR CORPORATE ACTIONS CONTRARY TO
THE WISHES OF MANAGEMENT
Upon the completion of this offering, our current directors and executive
officers will together beneficially own approximately 4,003,288, or 36.9%, of
the outstanding shares of common stock, or approximately 30.0% of the
outstanding shares of our common stock if the underwriters' over-allotment
option is exercised in full. As a result of their stock ownership:
- our current officers and directors will have the ability to substantially
influence the outcome of all matters on which stockholders are entitled to
vote, including the elections of our directors and the approval of
significant corporate transactions; and
- investors in this offering may have difficulty obtaining the necessary
stockholder vote required for corporate actions contrary to the wishes of
management.
See "Principal Stockholders."
INVESTORS WILL NOT HAVE THE OPPORTUNITY TO REVIEW THE SPECIFIC ALLOCATION OF
THE NET PROCEEDS OF THIS OFFERING IN DECIDING WHETHER TO PURCHASE OUR
COMMON STOCK
Management has allocated approximately $7.7 million, or 30.0%, of the
estimated net proceeds of this offering for marketing, research and development,
and general corporate and working capital purposes. Accordingly, our management
will have broad discretion in how to use the net proceeds of this offering, and
investors will not have the opportunity to review the specific allocation of our
net proceeds in deciding whether to purchase our common stock. The failure of
management to apply these proceeds effectively could have a material adverse
affect on our business, prospects, financial condition, and results of
operation. See "Use of Proceeds."
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OUR MANAGEMENT TEAM IS RELATIVELY NEW; MANY OF OUR EMPLOYEES HAVE RECENTLY
JOINED US AND MUST BE INTEGRATED INTO OUR OPERATIONS
From our inception on March 4, 1998 to June 30, 1998, and during the year
ended June 30, 1999, we expanded from seven to 16 employees and from 16 to 68
employees, respectively. Some of our officers have no prior senior management
experience in public companies and have only recently joined us. Our new
employees include a number of key managerial, technical, financial, marketing,
and operations personnel who have not yet been fully integrated into our
operations, and we expect to add additional key personnel in the near future.
Our failure to fully integrate our new employees into our operations could have
a material adverse effect on our business, prospects, financial condition, and
results of operations. See "Business--Employees" and "Management."
WE HAVE LIMITED HUMAN RESOURCES; WE NEED TO ATTRACT AND RETAIN HIGHLY
SKILLED PERSONNEL; AND WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH
WITH OUR LIMITED RESOURCES
We expect that the expansion of our business will place a significant strain
on our limited managerial, operational, and financial resources. We will be
required to expand our operational and financial systems significantly and to
expand, train, and manage our work force in order to manage the expansion of our
operations. Our future success will depend in large part on our ability to
attract, train, and retain additional highly skilled executive level management,
creative, technical, and sales personnel. Competition is intense for these types
of personnel from other technology companies and more established organizations,
many of which have significantly larger operations and greater financial,
marketing, human, and other resources than we have. We may not be successful in
attracting and retaining qualified personnel on a timely basis, on competitive
terms, or at all. If we are not successful in attracting and retaining these
personnel, our business, prospects, financial condition, and results of
operations will be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations,"
"Business--Business Strategy," and "Business-- Employees."
WE DEPEND UPON OUR SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY COULD
PUT US AT A COMPETITIVE DISADVANTAGE
Our success depends largely on the skills of certain key management and
technical personnel. The loss or unavailability of any of these individuals for
any significant period of time could have a material adverse effect on our
business, prospects, financial condition, and results of operations. We have
obtained, own, and are the sole beneficiary of, key-person life insurance in the
amount of $1,000,000 on the life each of Keith D. Freadhoff, our Chairman of the
Board of Directors and Chief Executive Officer, Donald M. Corliss, Jr., our
President and a Director, and David Bassett-Parkins, our Chief Operating
Officer, Chief Financial Officer, and a Director. We cannot guarantee that we
will be able to replace any of these key individuals in the event their services
are unavailable. See "Management-- Employment Agreements."
AS OUR CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE HAS PLEDGED
HIS STOCK, WE MAY EXPERIENCE A CHANGE OF CONTROL
Keith D. Freadhoff, our Chairman of the Board of Directors and Chief
Executive Officer, has pledged 825,000 shares of our common stock held by him as
security for his personal financial obligations, which, at the date of this
prospectus, are approximately $1,100,000. These financial obligations are due on
demand. If Mr. Freadhoff defaults on these obligations, Mr. Freadhoff may lose
ownership of these shares, including the right to vote these shares, which could
result in a change of control of Netgateway and would have a material adverse
effect on our business, prospects, financial condition, and results of
operations. See "Principal Stockholders."
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WE MAY BE REQUIRED TO USE FUNDS WHICH WE WOULD OTHERWISE USE FOR GROWTH TO
RESCIND OUR MAY AND JUNE 1999 PRIVATE PLACEMENT
During May and June 1999, we completed a private placement of notes and
common stock for aggregate gross proceeds of approximately $2,930,000. Pursuant
to the Securities Act, the rules and regulations under the Securities Act, and
the interpretations of the Commission, we may be required to offer the investors
in this private placement the opportunity to require us to repurchase the
securities which they purchased in this private placement for a price equal to
the amount they paid for these securities when they were purchased from us. If
we are so required to offer the investors this opportunity to rescind these
investments and all of these investors determine to exercise these rescission
rights, we would be required to refund all of the gross proceeds of this private
offering to the investors. These proceeds would be paid in part with the net
proceeds of this offering. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Our ability to compete effectively will depend on our ability to maintain
the proprietary nature of our services and technologies, including our
proprietary software and the proprietary software of others with which we have
entered into software licensing agreements. We hold no patents and rely on a
combination of trade secrets and copyright laws, nondisclosure, and other
contractual agreements and technical measures to protect our rights in our
technological know-how and proprietary services. We depend upon confidentiality
agreements with our officers, directors, employees, consultants, and
subcontractors to maintain the proprietary nature of our technology. These
measures may not afford us sufficient or complete protection, and others may
independently develop know-how and services similar to ours, otherwise avoid our
confidentiality agreements, or produce patents and copyrights that would
materially and adversely affect our business, prospects, financial condition,
and results of operations. We believe that our services are not subject to any
infringement actions based upon the patents or copyrights of any third parties;
however, our know-how and technology may in the future be found to infringe upon
the rights of others. Others may assert infringement claims against us, and if
we should be found to infringe upon their patents or copyrights, or otherwise
impermissibly utilize their intellectual property, our ability to continue to
use our technology could be materially restricted or prohibited. If this event
occurs, we may be required to obtain licenses from the holders of this
intellectual property, enter into royalty agreements, or redesign our products
and services so as not to utilize this intellectual property, each of which may
prove to be uneconomical or otherwise impossible. Licenses or royalty agreements
required in order for us to use this technology may not be available on terms
acceptable to us, or at all. These claims could result in litigation, which
could materially adversely affect our business, prospects, financial condition,
and results of operations. See "Business-- Intellectual Property."
WE MAY BE HELD LIABLE FOR ONLINE CONTENT PROVIDED BY THIRD PARTIES
We may face potential liability for defamation, negligence, copyright,
patent, or trademark infringement and other claims based on the nature and
content of the materials that appear on storefronts and Web pages that utilize
our services. Claims of this type have been brought, and sometimes successfully
pursued, against online services. Although we carry general liability insurance,
our insurance may not cover all claims or may not be adequate to indemnify us
for any liability that may be imposed. Any imposition of liability, particularly
liability that is not covered by insurance or is in excess of our insurance
coverage, could have a material adverse effect on our reputation, business,
prospects, financial condition, and results of operations.
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WE INTEND TO USE FUNDS WHICH WE WOULD OTHERWISE USE FOR GROWTH TO REPAY
INDEBTEDNESS TO INVESTORS IN OUR MAY AND JUNE 1999 PRIVATE PLACEMENT, WHICH
COULD LIMIT OUR ABILITY TO EXPAND
We intend to use approximately $3.2 million, or 12.5%, of the net proceeds
of this offering to repay the promissory notes issued in our private placement
which closed in May and June 1999. As a result, we will be unable to utilize
these funds for growth, which could limit our ability to implement our current
plans for expansion. See "Use of Proceeds" "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING
We believe that the net proceeds from this offering, together with
anticipated revenues from operations, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 18 months. Our belief is based on our operating plan which in turn is
based on assumptions, which may prove to be incorrect. As a result, our
financial resources may not be sufficient to satisfy our capital requirements
for this period. In addition, we may need to raise significant additional funds
sooner in order to support our growth, develop new or enhanced services and
products, respond to competitive pressures, acquire or invest in complementary
or competitive businesses or technologies, or take advantage of unanticipated
opportunities. If our financial resources are insufficient and, in any case,
after this 18-month period, we will require additional financing in order to
meet our plans for expansion. We cannot be sure that this additional financing,
if needed, will be available on acceptable terms or at all. Furthermore, any
additional debt financing, if available, may involve restrictive covenants,
which may limit our operating flexibility with respect to business matters. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our existing stockholders will be reduced, our
stockholders may experience additional dilution in net book value per share, and
such equity securities may have rights, preferences, or privileges senior to
those of our existing stockholders. If adequate funds are not available on
acceptable terms, we may be unable to develop or enhance our services and
products, take advantage of future opportunities, repay debt obligations as they
become due, or respond to competitive pressures, any of which would have a
material adverse effect on our business, prospects, financial condition, and
results of operations. See "Use of Proceeds," "Dilution," and
"Business--Business Strategy."
WE COULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR
MATERIAL THIRD PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT
Many currently installed computer systems and software products are coded to
accept only two-digit entries to identify a year in the date code field.
Consequently, on January 1, 2000, many of these systems could fail or
malfunction because they may not be able to distinguish between 20th century
dates and 21st century dates. Accordingly, in the coming year, many companies,
including our customers, potential customers, vendors, and strategic partners,
may need to upgrade their systems to comply with applicable "Year 2000"
requirements.
Because we and our clients are dependent, to a very substantial degree, upon
the proper functioning of our and their computer systems, a failure of our or
their systems to correctly recognize dates beyond December 31, 1999 could
materially disrupt our operations, which could materially adversely affect our
business, prospects, financial condition, and results of operations.
Additionally, our failure to provide Year 2000 compliant products and services
to our clients could result in financial loss, harm to our reputation, and legal
liability. Likewise, the failure of the computer systems and products of the
third parties with which we transact business to be Year 2000 compliant could
materially disrupt their and our operations, which could materially adversely
affect our business, prospects, financial condition, and results of operations.
We have already completed an internal review, and we are conducting a formal
assessment to determine the Year 2000 readiness of our proprietary software. We
are also in the process of contacting third party vendors, licensors of
hardware, software, and services
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and clients regarding their Year 2000 readiness. Following our assessment and
after contacting these third parties, we will be able to make an evaluation of
our state of readiness, risks, and costs, and determine whether a contingency
plan is necessary. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
BECAUSE WE WILL NOT PAY CASH DIVIDENDS, INVESTORS MAY HAVE TO SELL THEIR
SHARES IN ORDER TO REALIZE THEIR INVESTMENT
We have not paid any cash dividends on our common stock and do not intend to
pay cash dividends in the foreseeable future. We intend to retain future
earnings, if any, for reinvestment in the development and expansion of our
business. Any credit agreements into which we may enter with institutional
lenders may restrict our ability to pay dividends. Whether we pay cash dividends
in the future will be at the discretion of our board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, and any other factors that the board of directors decides is
relevant. See "Dividend Policy" and "Description of Securities--Common Stock."
BECAUSE WE DEPEND UPON A SINGLE SITE FOR OUR COMPUTER AND COMMUNICATIONS
SYSTEMS, WE ARE MORE VULNERABLE TO THE EFFECTS OF NATURAL DISASTERS,
COMPUTER VIRUSES, AND SIMILAR DISRUPTIONS
Our ability to successfully process transactions and provide high-quality
customer service largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and software systems. Our proprietary
and licensed software resides solely on our servers, all of which, as well as
all of our communications hardware, are located in a monitored server facility
in Irvine, California. Our systems and operations are in a secured facility with
hospital-grade electrical power, redundant telecommunications connections to the
Internet backbone, uninterruptible power supplies, and generator back-up power
facilities. In addition, we maintain redundant systems for backup and disaster
recovery. Despite these safeguards, we remain vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake, and similar events. In addition, we do not, and may not
in the future, carry sufficient business interruption insurance to compensate us
for losses that may occur. Despite our implementation of Internet security
measures, our servers are vulnerable to computer viruses, physical or electronic
break-ins, and similar disruptions, which could lead to interruptions, delays,
loss of data, or the inability to process client transactions. The occurrence of
any of these events could have a material adverse effect on our business,
prospects, financial condition, and results of operations. See
"Business--Facilities."
USERS MAY CONFUSE OTHER COMPANIES' DOMAIN NAMES WITH OUR OWN
We have registered with the InterNIC registration service the Internet
domain names: www.netgateway.net, www.netgateway.org, www.federalbuyersmall.com,
www.storesonlinemall.com, www.solint.net, www.solint.net,
www.Clevelandstores.com, www.Clevelande-mall.com, www.Clevelandemall.com,
www.E-Cart.com, www.golfmate.com, www.openemail.net, www.opentrade.net,
www.eknowledge.net, www.dgenesis.com, www.paulrodriguez.com,
www.communicationsgroup.com, www.quickgrill.com, www.flashgrill.com,
www.afisteaks.com, and www.storesonline.com. We have registered with
Internic.com the Internet domain names: www.millenniumemall.com AND
www.millenniumemall.net. However, there are other substantially similar domain
names which are registered by companies which may compete with us, which may
cause potential users and advertisers to confuse our domain name with other
similar domain names. In addition, new domains may be added in the future,
allowing combinations and similar domain names that may be confusingly similar
to our own.
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If that confusion occurs,
- we may inadvertently lose business to a competitor,
- we may have to adjust our advertising rates and service fees accordingly,
or
- some users of our services may have negative experiences with other
companies on their Web sites that those users erroneously associate with
us. See "Business--Intellectual Property."
SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER
TAKEOVER ATTEMPTS, WHICH MAY LIMIT THE OPPORTUNITY OF OUR STOCKHOLDERS TO
SELL THEIR SHARES AT A PREMIUM TO THE THEN MARKET PRICE
Some of the provisions of our certificate of incorporation and our by-laws
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders by providing them with the opportunity
to sell their shares at a premium to the then market price. Our by-laws contain
provisions which regulate the introduction of business at annual meetings of our
stockholders by other than the board of directors. These provisions may have the
effect of rendering more difficult, delaying, discouraging, preventing, or
rendering more costly an acquisition of the Company or a change in control of
the Company. In addition, our certificate incorporation authorizes the board of
directors to issue up to 4,000,000 share of preferred stock, which may be issued
in one or more series, the terms of which may be determined at the time of
issuance by the board of directors, without further action by stockholders, and
may include voting rights, including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion, and redemption
rights, and sinking fund provisions. No shares of preferred stock are currently
outstanding, and we have no present plans for the issuance of any preferred
stock. However, the issuance of any preferred stock could materially adversely
affect the rights of holders of our common stock, and, therefore, could reduce
its value. In addition, specific rights granted to future holders of preferred
stock could be used to restrict the Company's ability to merge with, or sell its
assets to, a third party. The ability of the board of directors to issue
preferred stock could have the effect of rendering more difficult, delaying,
discouraging, preventing, or rendering more costly an acquisition of us or a
change in our control thereby preserving our control by the current
stockholders. See "Description of Securities."
RISKS SPECIFIC TO OUR INDUSTRY
INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS
The processing of electronic commerce transactions by means of our hardware
and software infrastructure involves the transmission and analysis of
confidential and proprietary information of the consumer, the merchant, or both,
as well as our own confidential and proprietary information. The compromise of
our security or misappropriation of proprietary information could have a
material adverse effect on our business, prospects, financial condition, and
results of operations. We rely on encryption and authentication technology
licensed from other companies to provide the security and authentication
necessary to effect secure Internet transmission of confidential information,
such as credit information and proprietary consumer information. Advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments may result in a compromise or breach of the technology
used by us to protect client transaction data. Anyone who is able to circumvent
our security measures could misappropriate proprietary information or cause
interruptions in our operations, as well as the operations of the merchant. We
may be required to expend significant capital and other resources to protect
against security breaches or to minimize problems caused by security breaches.
Concerns over the security of the Internet and other electronic transactions and
the privacy of consumers and merchants may also inhibit the growth of the
Internet and other online services generally, especially as a means of
conducting commercial transactions. To the extent that our activities or the
activities of others involve the storage and transmission of proprietary
information,
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security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches. Our failure to prevent these security breaches may have a
material adverse effect on our business, prospects, financial condition, and
results of operations.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF ELECTRONIC COMMERCE
CONTINUES TO GROW
Our future revenues and any future profits are substantially dependent upon
the widespread acceptance and use of the Internet and other online services as
an effective medium of commerce by merchants and consumers. If use of the
Internet and other online services does not continue to grow or grows more
slowly than we expect, if the infrastructure for the Internet and other online
services does not effectively support the growth that may occur, or if the
Internet and other online services do not become a viable commercial
marketplace, our business, prospects, financial condition, and results of
operations could be materially adversely affected. Rapid growth in the use of,
and interest in, the Internet, the Web, and online services is a recent
phenomenon, and may not continue on a lasting basis. In addition, customers may
not adopt, and continue to use, the Internet and other online services as a
medium of commerce. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and few services and products have generated profits. For us to be
successful, consumers of both retail and business to business services must be
willing to accept and use novel and cost efficient ways of conducting business
and exchanging information.
In addition, the public in general may not accept the Internet and other
online services as a viable commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies and performance
improvements. To the extent that the Internet and other online retail and
business to business services continue to experience significant growth in the
number of users, their frequency of use, or in their bandwidth requirements, the
infrastructure for the Internet and online services may be unable to support the
demands placed upon them. In addition, the Internet or other online services
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Significant issues
concerning the commercial use of the Internet and online services technologies,
including security, reliability, cost, ease of use, and quality of service,
remain unresolved and may inhibit the growth of Internet business solutions that
utilize these technologies. Changes in, or insufficient availability of,
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online services generally and our product and services in
particular.
WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ELECTRONIC COMMERCE, THE
ELECTRONIC COMMERCE SERVICES INDUSTRY, AND CUSTOMER DEMANDS CONTINUE TO
EVOLVE
We may not be able to adapt as the Internet, electronic commerce, the
electronic commerce services market, and consumer demands continue to evolve.
Our failure to respond in a timely manner to changing market conditions or
client requirements would have a material adverse effect on our business,
prospects, financial condition, and results of operations. The Internet, the
electronic commerce, and the electronic commerce services industry are
characterized by:
- rapid technological change;
- changes in user and customer requirements and preferences;
- frequent new product and service introductions embodying new technologies;
and
- the emergence of new industry standards and practices that could render
proprietary technology and hardware and software infrastructure obsolete.
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Our success will depend, in part, on our ability to:
- enhance and improve the responsiveness and functionality of our online
transaction processing services;
- license or develop technologies useful in our business on a timely basis,
enhance our existing services, develop new services and technology that
address the increasingly sophisticated and varied needs of our prospective
or current customers; and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
See "Business--Business Strategy."
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY
While the market for electronic commerce services is relatively new, it is
already highly competitive and characterized by an increasing number of entrants
that have introduced or developed products and services similar to those offered
by us. We believe that competition will intensify and increase in the future.
Our target market is rapidly evolving and is subject to continuous technological
change. As a result, our competitors may be better positioned to address these
developments or may react more favorably to these changes, which could have a
material adverse effect on our business, prospects, financial condition, and
results of operations. We compete on the basis of a number of factors, including
the attractiveness of the electronic commerce services offered, the breadth and
quality of these services, creative design and systems engineering expertise,
pricing, technological innovation, and understanding clients' strategies and
needs. A number of these factors are beyond our control. Existing or future
competitors may develop or offer electronic commerce services that provide
significant technological, creative, performance, price, or other advantages
over the services offered by us.
Our competitors can be divided into several groups:
- large systems integrators;
- Internet service providers and portals;
- large information technology consulting services providers;
- computer hardware and service vendors; and
- strategic consulting firms.
We also may compete with telecommunications companies. Although most of
these types of competitors to date have not offered a full range of Internet
professional services, many are currently offering these services or have
announced their intention to do so. These competitors at any time could elect to
focus additional resources in our target markets, which could materially
adversely affect our business, prospects, financial condition, and results of
operations. Many of our current and potential competitors have longer operating
histories, larger customer bases, longer relationships with clients, and
significantly greater financial, technical, marketing, and public relations
resources than we do. Competitors that have established relationships with large
companies, but have limited expertise in providing Internet solutions, may
nonetheless be able to successfully use their client relationships to enter our
target market or prevent our penetration into their client accounts. We believe
that our primary competitors currently include, without limitation, Broadvision,
Open Market, Commerce One, Intel, Microsoft, AT&T, Intershop, MCI, Yahoo!
Stores, ICAT, GE Information Services, IBM, and smaller Internet services
providers.
Additionally, in pursuing acquisition opportunities we may compete with
other companies with similar growth strategies, certain of which may be larger
and have greater financial and other resources
19
<PAGE>
than we have. Competition for these acquisition targets likely could also result
in increased prices of acquisition targets and a diminished pool of companies
available for acquisition.
There are relatively low barriers to entry into our business. We have no
patented, and only a limited amount of other proprietary, technology that would
preclude or inhibit competitors from entering the electronic commerce services
market. Therefore, we must rely on the skill of our personnel and the quality of
our client service. The costs to develop and provide electronic commerce
services are relatively low. Therefore, we expect that we will continually face
additional competition from new entrants into the market in the future, and we
are subject to the risk that our employees may leave us and may start competing
businesses. The emergence of these enterprises could have a material adverse
effect on our business, prospects, financial condition, and results of
operations. See "Business--Industry Background--Electronic Commerce Services
Industry" and "Business--Competition."
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS
We are not currently subject to direct regulation by any government agency
other than laws or regulations applicable generally to electronic commerce. Any
new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services, could have a material adverse effect on our business, prospects,
financial condition, and results of operations. Due to the increasing popularity
and use of the Internet and other online services, federal, state, and local
governments may adopt laws and regulations, or amend existing laws and
regulations, with respect to the Internet or other online services covering
issues such as taxation, user privacy, pricing, content, copyrights,
distribution, and characteristics and quality of products and services. In 1998,
the United States Congress established the Advisory Committee on Electronic
Commerce which is charged with investigating, and making recommendations to
Congress regarding, the taxation of sales by means of the Internet. Furthermore,
the growth and development of the market for electronic commerce may prompt
calls for more stringent consumer protection laws to impose additional burdens
on companies conducting business online. The adoption of any additional laws or
regulations upon the recommendation of this Advisory Committee or otherwise may
decrease the growth of the Internet or other online services, which could, in
turn, decrease the demand for our services and increase our cost of doing
business, or otherwise have a material adverse effect on our business,
prospects, financial condition, and results of operations. Moreover, the
relevant governmental authorities have not resolved the applicability to the
Internet and other online services of existing laws in various jurisdictions
governing issues such as property ownership and personal privacy and it may take
time to resolve these issues definitively.
RISKS SPECIFIC TO THIS OFFERING
OUR COMMON STOCK TRADES SPORADICALLY, THE OFFERING PRICE OF OUR COMMON STOCK
IS ARBITRARY, THE MARKET PRICE OF OUR SECURITIES MAY BE VOLATILE, AND WE
MUST SATISFY THE APPLICABLE REQUIREMENTS FOR OUR COMMON STOCK TO TRADE ON
THE NASDAQ NATIONAL MARKET.
Our common stock currently trades sporadically on the OTC Bulletin Board. We
have applied to have our common stock quoted on the Nasdaq National Market
commencing on the date of this prospectus. Even if our common stock were quoted
on the Nasdaq National Market, the market for our common stock may not be an
active market. Accordingly, unless and until an active public market develops,
you may have difficulty selling your shares of common stock at a price that is
attractive to you.
The initial public offering price of the shares was arbitrarily determined
by negotiations between the underwriters and us principally on the basis of the
market price for our common stock prior to the date of this prospectus. See
"Underwriting." From time to time after this offering, the market price of
20
<PAGE>
our common stock may experience significant volatility. Our quarterly results,
failure to meet analysts expectations, announcements by us or our competitors
regarding acquisitions or dispositions, new procedures or technology, changes in
general conditions in the economy, and general market conditions could cause the
market price of the common stock to fluctuate substantially. In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the trading prices of equity securities of many technology
companies. These price and volume fluctuations often have been unrelated to the
operating performance of the affected companies. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. This type of
litigation, regardless of the outcome, could result in substantial costs and a
diversion of management's attention and resources, which could materially
adversely affect our business, prospects, financial condition, and results of
operations.
Under the currently effective criteria for initial listing of securities on
the Nasdaq National Market, a company must have at least $75 million in market
capitalization, a minimum bid price of $5.00 per share, and securities in the
hands of the public with a market value of at least $20 million. For continued
listing, a company must maintain $50 million in market value, a minimum bid
price of $5.00, and a public float of at least $15 million. If we cannot
maintain the standards for continued listing, our common stock could be subject
to delisting from the Nasdaq National Market. Trading, if any, in our common
stock would then be conducted in either the Nasdaq SmallCap Market or in the
over-the-counter market on the OTC Bulletin Board established for securities
that do not meet the Nasdaq SmallCap Market listing requirements or in what are
commonly referred to as the "pink sheets." As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, our shares.
YOU MAY HAVE DIFFICULTY SELLING YOUR SHARES OF COMMON STOCK AND THE MARKET
PRICE OF OUR COMMON STOCK MAY DECLINE IF CRUTTENDEN ROTH DISCONTINUES
MAKING A MARKET FOR ANY REASON
A significant number of the shares sold in this offering may be sold to
customers of the underwriters. These customers may engage in transactions for
the sale or purchase of the shares through or with the underwriters. Although it
has no obligation to do so, Cruttenden Roth intends to make a market in the
shares and may otherwise effect transactions in our common stock. If Cruttenden
Roth participates in the market, it may influence the market, if one develops,
for our common stock. Cruttenden Roth may discontinue making a market in the
common stock at any time. Moreover, if Cruttenden Roth sells the shares of
common stock issuable upon exercise of the representatives' warrants, it may be
required under the Exchange Act to temporarily suspend its market-making
activities. The price and liquidity of the common stock may be significantly
affected by the degree, if any, of its direct or indirect participation in the
market.
INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The public offering price per share in this offering exceeds the net
tangible book value per share of our outstanding common stock immediately after
the offering. Accordingly, if you purchase shares in this offering, you will
- pay a price per share which substantially exceeds the value of our assets
after subtracting our intangible assets and liabilities and
- contribute 71.0% of the total amount invested to date to fund us, but will
only own 20.0% of the shares of common stock outstanding.
We also have outstanding a large number of stock options and warrants to
purchase common stock with exercise prices significantly below the public
offering price of our common stock in this offering. To the extent such options
or warrants are exercised, there will be further dilution. In addition, in the
21
<PAGE>
event that any future financing should be in the form of, be convertible into,
or exchangeable for, equity securities, and upon the exercise of options and
warrants, investors may experience additional dilution. See "Dilution."
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY
AFFECT OUR STOCK PRICE
The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market after this offering, or
the perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. After this offering, we will have outstanding
12,451,504 shares of common stock. Of these shares, an aggregate of 2,950,000
shares, including the 2,500,000 shares being offered in this offering, will be
freely tradeable. Our directors and officers and a number of our stockholders
who hold shares in the aggregate have entered into lock-up
agreements by which they have agreed that they will not sell, directly or
indirectly, any shares of common stock without the prior written consent of the
underwriters for a period of six months from the date of this prospectus. The
number of shares of common stock and the dates when these shares will become
freely tradeable in the market is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- -----------------------------------------------------------------------------------------------
<C> <S>
At the date of this prospectus
7,230,204 Six months from the date of this prospectus
1,713,200 Between six and twelve months from the date of this prospectus
</TABLE>
As of the date of this prospectus, we have reserved an aggregate of
2,113,779 shares of common stock issuable upon the exercise of outstanding
warrants and convertible securities. Following this offering, we intend to file
a registration statement to register for issuance and resale the 6,000,000
shares of common stock reserved for issuance under our existing stock option
plans described in "Management--Stock Option Plans." We expect that registration
statement to become effective immediately upon filing. Shares issued upon the
exercise of stock options granted under the our stock option plans will be
eligible for resale in the public market from time to time subject to vesting
and, in the case of some options, the expiration of the lock-up agreements
referred to in the preceding paragraph.
Some of our stockholders, holding approximately 1,731,400 shares of common
stock or holding securities convertible into or exercisable or exchangeable for
shares of common stock, have the right, subject to a number of conditions and
limitations, to include their shares in registration statements relating to our
securities. By exercising their registration rights and causing a large number
of shares to be registered and sold in the public market, these holders may
cause the market price of the common stock to fall. In addition, any demand to
include these shares in our registration statements could have an adverse effect
on our ability to raise needed capital.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements and information relating
to Netgateway. We intend to identify forward-looking statements in this
prospectus by using words such as "believes," "intends," "expects," "may,"
"will," "should," "plan," "projected," "contemplates," "anticipates,"
"estimates," "predicts," "potential," "continue," or similar terminology. These
statements are based on our beliefs as well as assumptions we made using
information currently available to us. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. Because these statements reflect our
current views concerning future events, these statements involve risks,
uncertainties, and assumptions. Actual future results may differ significantly
from the results discussed in the forward-looking statements. Some, but not all,
of the factors that may cause such a difference include those which we discuss
in the Risk Factors section of this prospectus beginning on page 10.
22
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $25.6 million
from the sale of the common stock offered by us in this offering, assuming a
public offering price of $12.00 per share. If the underwriters exercise their
over-allotment option in full, we will receive net proceeds of approximately
$29.5 million. These estimates are after deducting estimated underwriting
discounts and commissions and other fees and expenses payable by us.
We intend to use approximately $3.2 million or 12.5%, of the net proceeds of
this offering to repay indebtedness incurred in connection with our May and June
1999 private placement of $2,880,000 principal amount of Series A 12% Senior
Notes due 2000 and 288,000 shares of common stock and $150,000 principal amount
of notes issued to settle a financial obligation in May 1999. The notes are due
on the earlier of April 30, 2000 or completion of this offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
We intend to use approximately $7.7 million, or 30.1%, of the estimated net
proceeds of this offering to expand our marketing efforts. With respect to our
marketing efforts conducted directly, we intend to begin to do the following:
- advertise on the Internet;
- advertise on television in selected markets;
- direct mail;
- targeted e-mail campaigns;
- advertise in technology, financial, and business publications having wide
readership; and
- expand our sales staff.
With respect to our marketing efforts conducted through resellers, we intend to
do the following:
- create a group within our sales staff trained to assist resellers in
marketing our products and services to their customers, members,
employees, and relationships;
- create branded promotional brochures and other marketing materials to
inform resellers and their constituencies as to our products and services,
and
- advertise in trade publications in strategic industries.
See "Risk Factors--Our Marketing Strategy Has Not Been Tested and May Not Result
in Success."
We intend to use approximately $7.7 million, or 30.1%, of the estimated net
proceeds of this offering for research and development and for the continued
enhancement of our ICC eCommerce transaction processing system. See
"Business--Research and Development."
We intend to use approximately $3.2 million, or 12.5%, of the estimated net
proceeds of this offering for the acquisition of capital equipment to purchase
or otherwise acquire computers, servers, communication hardware and software,
and networking equipment.
The balance of the net proceeds, estimated to be approximately $3.8 million,
or 14.9%, of the estimated net proceeds of this offering will be used for
general corporate and working capital purposes to fund the ongoing cash flow and
capital requirements associated with our growth, including the retention and
training of additional personnel. We may also use a portion of the net proceeds
allocated for general corporate and working capital purposes to acquire, or
invest in, businesses and technologies. From time to time we evaluate such
potential acquisitions and we anticipate continuing to make such evaluations. In
this regard, we are currently evaluating certain acquisition and investment
opportunities;
23
<PAGE>
however, we cannot assure you that we will identify suitable acquisition or
investment candidates or that we will, in fact, complete any acquisition or
investment.
Under the Securities Act, the rules and regulations under the Securities
Act, and the interpretations of the Commission, we may be required to offer
rescission to investors in our May and June 1999 private placement. If we are so
required and all of those investors determine to exercise such rescission
rights, we would be required to refund the entirety of the gross proceeds of
these private offerings to those investors, which gross proceeds totalled
$2,880,000. Those proceeds would be paid in part with the net proceeds of this
offering. See "Risk Factors--We May Be Required To Rescind Our May and June 1999
Private Placement."
We believe that the net proceeds from this offering, together with
anticipated revenues from operations, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 18 months. Our belief is based on our operating plan which in turn is
based on assumptions, which may prove to be incorrect. As a result, our
financial resources may not be sufficient to satisfy our capital requirements
for this period. In addition, we may need to raise significant additional funds
sooner in order to support our growth, develop new or enhanced services and
products, respond to competitive pressures, acquire or invest in complementary
or competitive businesses or technologies, or take advantage of unanticipated
opportunities. If our financial resources are insufficient and, in any case,
after this 18-month period, we will require additional financing in order to
meet our plans for expansion. We cannot be sure that this additional financing,
if needed, will be available on acceptable terms or at all. Furthermore, any
additional debt financing, if available, may involve restrictive covenants,
which may limit our operating flexibility with respect to business matters. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our existing stockholders will be reduced, our
stockholders may experience additional dilution in net book value per share, and
such equity securities may have rights, preferences, or privileges senior to
those of our existing stockholders. If adequate funds are not available on
acceptable terms, we may be unable to develop or enhance our services and
products, take advantage of future opportunities, repay debt obligations as they
become due, or respond to competitive pressures, any of which would have a
material adverse effect on our business, prospects, financial condition, and
results of operations. See "Risk Factors--We Cannot Predict Our Future Capital
Needs And May Not Be Able to Secure Additional Financing," "Use of Proceeds,"
"Dilution," and "Business--Business Strategy."
Although, based upon our contemplated operations, business plan, and current
economic and industry conditions, the above is our best estimate of the amount,
timing, and allocation of the expenditures of the net proceeds of this offering,
such estimated amounts are subject to reallocation within the listed categories
or to new categories in response to a number of unanticipated events. These may
include changes in our business plans, new government regulations, changing
industry conditions, and future revenues and expenditures.
24
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the OTC Bulletin Board since July 6,
1998. The following table sets forth, for the fiscal periods indicated, the
quarterly high and low sales prices for our common stock, as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter (from July 6, 1998)............................................................... $ 11 1/8 $ 6 3/8
Second Quarter.................................................................................. 9 3/4 2 1/4
Third Quarter................................................................................... 13 1/4 4 3/4
Fourth Quarter.................................................................................. 15 5/8 9 1/4
FISCAL YEAR ENDING JUNE 30, 2000
First Quarter (through July 13, 1999)........................................................... 11 15/16 11
</TABLE>
The last reported sale price of our common stock on the OTC Bulletin Board
on July 13, 1999 was $11.25 per share. As of July 14 , 1999, there were 338
holders of record of our common stock.
DIVIDEND POLICY
We have never paid or declared any cash dividends. We currently expect to
retain future earnings, if any, to finance the growth and development of our
business. Therefore, we do not anticipate paying any cash dividends on our
shares in the foreseeable future.
25
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1999:
- our actual short-term debt and capitalization,
- our pre-offering as adjusted short-term debt and capitalization, which
give effect to (1) our receipt of net proceeds of approximately $3,305,800
from our April 1999 private placement and our May and June 1999 private
placement, and (2) the issuance of $150,000 of promissory notes and 15,000
shares of common stock to settle a financial obligation in May 1999, and
- our post-offering as adjusted short-term debt and capitalization, which
give effect to (1) our receipt of proceeds of approximately $3,305,800
from our April 1999 private placement and our May and June 1999 private
placement, (2) the issuance of $150,000 of notes and 15,000 shares of
common stock to settle a financial obligation in May 1999, and (3) our
receipt of net proceeds of approximately $25.6 million from the sale of
the shares in this offering at the assumed public offering price of $12.00
per share and the initial application of the net proceeds of this offering
as described under the heading "Use of Proceeds."
The data below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes and other financial information included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------
PRE-OFFERING POST-OFFERING
AS ADJUSTED AS ADJUSTED
ACTUAL (1) (1)
------------- -------------- --------------
<S> <C> <C> <C>
Short-term debt.................................................. $ 499,299 $ 2,602,885 $ 237,500
Long-term debt................................................... --
Stockholders' equity
Common stock--$0.001 par value, authorized-- 40,000,000 shares;
issued and outstanding--9,358,000 shares, actual; 9,903,934
shares as adjusted; and 12,403,934 shares, as further
adjusted..................................................... 9,358 9,899 12,399
Additional paid-in capital....................................... 10,938,771 12,295,184 37,892,684
Deferred compensation............................................ (12,500) (12,500) (12,500)
Accumulated other comprehensive loss............................. (1,639) (1,639) (1,639)
Accumulated deficit.............................................. (10,726,137) (10,726,137) (11,703,191)
------------- -------------- --------------
Total stockholders' equity....................................... 207,853 1,564,807 26,187,753
------------- -------------- --------------
Total short-term debt and capitalization......................... $ 707,152 4,167,691 26,425,253
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
(1) The proforma amounts exclude the conversion of $37,500 of debentures into
15,000 shares of common stock, the issuance of 35,000 shares of common stock
valued at $105,000 and the cashless exercise of 2,570 warrants in April and
May 1999.
26
<PAGE>
DILUTION
As of March 31, 1999, our net tangible net book value (deficit) was
$(1,233,789) or approximately $(0.13) per share of common stock based on
9,358,000 shares of common stock outstanding. Our pre-offering pro forma net
tangible book value (deficit) was $(64,174) or approximately $(0.01) per share
of common stock based on 9,898,934 shares of common stock outstanding, giving
effect to our April 1999 private placement of 237,934 shares of common stock for
$713,800 and our May and June 1999 private placement of 288,000 shares of common
stock and $2,880,000 of promissory notes and the issuance of $150,000 of
promissory notes and 15,000 shares of common stock to settle a financial
obligation in May 1999. The pro forma net tangible book value per share
represents the amount of our total assets less the amount of our intangible
assets and our liabilities, divided by the number of shares of common stock
outstanding at March 31, 1999, giving effect to these private placements and
settlement of legal fees.
After giving effect to our receipt of estimated net proceeds of
approximately $25.6 million from our sale of 2,500,000 shares of common stock
offered in this offering at the assumed public offering price per share of
$12.00 and the initial application of those proceeds as described under the
heading "Use of Proceeds," our post-offering pro forma as adjusted net tangible
book value at March 31, 1999 would have been $24,780,311 or approximately $2.00
per share of common stock. This represents an increase in the pro forma as
adjusted net tangible book value of $2.01 per share to existing stockholders and
an immediate dilution in the pro forma as adjusted net tangible book value of
$10.00 per share, or 83%, to investors in this offering. The following table
illustrates the per share dilution:
<TABLE>
<CAPTION>
PER SHARE OF
COMMON
STOCK
--------------------
<S> <C> <C>
Assumed public offering price.................................................................. $ 12.00
Actual tangible book value at March 31, 1999................................................. $ (0.13)
Increase in net tangible book value, giving effect to our April 1999 as private placement,
our May and June 1999 private placement and the settlement................................. 0.12
---------
Pre-offering pro forma net tangible book value at March 31, 1999, giving effect to our April
and May 1999 private placement and our May and June 1999 private placement and the
settlement(1).............................................................................. (0.01)
Increase in net tangible book value.......................................................... 2.01
---------
Post-offering pro forma net tangible book value after this offering(1)......................... 2.00
---------
Dilution of net tangible book value to new investors........................................... $ 10.00
---------
---------
</TABLE>
The following table sets forth, as of the date of this prospectus:
- the number of shares of common stock purchased,
- the percentage of total shares of common stock purchased,
- the total consideration paid,
- the percentage of total consideration paid, and
- the average price per share of common stock paid by the investors in this
offering and our current stockholders.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................... 9,951,504 80.0% $ 12,402,583 29.0% $ 1.25
New investors................................... 2,500,000 20.0 30,000,000 71.0 12.00
------------- ----- ------------- ----- -----------
Total........................................... 12,451,504 100.0% $ 42,402,583 100.0% $ 3.40
------------- ----- ------------- ----- -----------
------------- ----- ------------- ----- -----------
</TABLE>
* The pro forma amounts exclude the conversion of $37,500 of debentures into
15,000 shares of our common stock, the issuance of 35,000 shares of common
stock valued at $105,000 and the cashless exercise of 2,570 warrants in
April and May 1999.
27
<PAGE>
SELECTED FINANCIAL DATA
The following selected statements of operations data for the period from our
inception on March 4, 1998 through June 30, 1998 and the selected balance sheet
data as of June 30, 1998 are derived from our consolidated financial statements
and related notes included elsewhere in this prospectus audited by KPMG LLP, our
independent auditors. The statement of operations data for the nine months ended
March 31, 1999 and the selected balance sheet data at March 31, 1999 are derived
from the audited consolidated financial statements included elsewhere in this
prospectus and include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
our financial position and results of operation. The results of operations for
any interim period are not necessarily to be expected for the entire year. The
selected statement of operations data for the period from our inception on March
4, 1998 through June 30, 1998 includes the results of operations of Digital
Genesis from June 2, 1998, its date of acquisition, and the pro forma selected
statement of operations data for such period includes the operations of Digital
Genesis and Spartan Multimedia, Inc. as if they were acquired by us on March 4,
1998. The selected statement of operations data for the nine months ended March
31, 1999 includes the results of operations of Spartan Multimedia, Inc. from
January 15, 1999, its date of acquisition, and the pro forma selected statement
of operations data for such period includes the operations of Spartan
Multimedia, Inc. as if it was acquired by us on July 1, 1998. The pre-offering
pro forma balance sheet data as of March 31, 1999 is adjusted to reflect
- the net proceeds of $3,305,800 from our April 1999 private placement and
our May and June 1999 private placement of securities and
- the issuance of $150,000 of notes and 15,000 shares of common stock to
settle a financial obligation in May 1999,
and the post-offering pro forma, as adjusted balance sheet data as of March 31,
1999 is adjusted to reflect the following:
- the net proceeds of $3,305,800 from our April 1999 private placement of
securities and our May and June 1999 private placement of securities,
- the issuance of $150,000 of notes and 15,000 shares of common stock to
settle a financial obligation in May 1999, and
- the receipt of estimated net proceeds of approximately $25.6 million from
the sale of our common stock at the assumed public offering price of
$12.00 per share and the initial application of these proceeds as
described under "Use of Proceeds."
28
<PAGE>
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 4, 1998 CUMULATIVE PERIOD
(INCEPTION) THROUGH NINE MONTHS ENDED FROM MARCH 4, 1998
JUNE 30, 1998 MARCH 31, 1999 (INCEPTION)
----------------------- ----------------------- THROUGH MARCH 31,
ACTUAL ACTUAL 1999(2)
---------- ---------- PRO FORMA ------------------
PRO FORMA -----------
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 2,800 $ 124,325 $ 113,959 $ 117,400 $ 116,759
Total operating expenses................. 4,555,459 4,690,167 7,523,868 7,827,762 12,079,327
Interest expense......................... 19,277 19,277 342,795 342,795 362,072
Net loss before extraordinary item....... (4,571,936) (4,606,747) (7,807,433 (1) (8,107,886)(1) (12,379,369)(1)
Loss before extraordinary item per
weighted average common share
outstanding (basic and diluted)........ (0.84) (0.81) (0.90 (1) (0.94)(1) (1.62)(1)
Weighted average common shares
outstanding (basic and diluted)........ 5,416,242 5,721,327 8,659,851 8,659,851 7,628,895
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------ POST-OFFERING
PRE-OFFERING PRO FORMA
JUNE 30, 1998 ACTUAL PRO FORMA --------------
------------- ----------- ----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......................................... $ 371,467 $ 304,216 3,569,755 26,048,855
Total assets............................................ 871,552 1,826,033 5,091,572 27,349,134
Working capital (deficit)............................... (1,959,776) (1,314,964) (2,010) 24,842,474
Long-term debt.......................................... 367,892 -- -- --
Stockholders' equity (deficit).......................... (1,827,583) 207,853 1,564,807 26,187,753
</TABLE>
- ------------------------
(1) Before extraordinary gain of $1,653,232 relating to extinguishment of
indebtedness of $0.19, $0.19, and $0.22 per weighted-average common shares
outstanding during the nine months ended March 31, 1999 actual, pro forma
and the cumulative period from March 4, 1998 (inception) through March 31,
1999, respectively.
(2) The cumulative period statement of operations data is included in
accordance with generally accepted accounting principles since we are a
development stage company.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THIS FORWARD-LOOKING INFORMATION.
FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
IN GENERAL
We provide turn-key electronic commerce services designed to enable clients
to extend their business to the Internet for a wide variety of purposes,
including the advertising and sale of products or services by retailers and the
conduct of commercial transactions between business enterprises.
As at March 31, 1999, we had a working capital deficiency of $1,313,964 and
stockholders' equity of $207,853. We generated revenues of $2,800 during the
period from our inception on March 4, 1998 through June 30, 1998, and revenues
of $113,959 for the nine months ended March 31, 1999. We have incurred net
losses since inception and expect to continue to generate operating losses for
the foreseeable future. We may never achieve profitability. In addition, during
the period from our inception on March 4, 1998 through June 30, 1998, and the
nine months ended March 31, 1999, we incurred negative cash flows from
operations of $253,119 and $2,156,859, respectively.
We are in the early stage of operations and, as a result, the relationships
between revenue, cost of revenue, and operating expenses reflected in the
financial information included in this prospectus do not represent future
expected financial relationships. Much of the cost of revenue and operating
expenses reflected in our financial statements are relatively fixed costs. We
expect that these expenses will increase with the escalation of sales and
marketing activities and transaction volumes, but at a much slower rate of
growth than the corresponding revenue increase. Accordingly, we believe that, at
our current stage of operations period to period comparisons of results of
operations are not meaningful.
During the ninth months ended March 31, 1999, we estimate that approximately
95% of our revenues were attributable to Web site development and design and the
development of electronic storefronts, and 5% were attributable to transaction
processing. We anticipate that, over the next three years, as we implement our
operating and expansion plan approximately
- 20% of our revenues will be attributable to Web site development and
design and the development of electronic storefronts,
- 20% of our revenues will be attributable to Internet-based shopping mall
development and design,
- 50% of our revenues will be attributable to transaction processing, and
- the remainder will be attributable to data warehousing and transaction
reporting, our customer support services, advertising, and provision of
connectivity solutions.
During the nine months ended March 31, 1999, we expended our resources
principally in development of our technology. We anticipate that, over the next
three years, as we implement our operating and expansion plan approximately.
- 40% of our expenditures will be attributable to Web site development and
design and the development of electronic storefronts,
- 25% of our expenditures will be attributable to Internet-based shopping
mall development and design,
- 20% of our expenditures will be attributable to transaction processing,
and
29
<PAGE>
- the remainder will be attributable to data warehousing and transaction
reporting, our customer support services, advertising, and provision of
connectivity solutions.
Based on our operating and expansion plan, we anticipate that, over the next
three years,
- greater revenue growth as a percentage of revenues will be attributable to
transaction processing than to Web site development and design and
Internet-based shopping mall development and design, and
- as transaction volume through our ICC increases our gross margins and
operating margins will increase as the relatively fixed costs associated
with these activities is spread over such larger volume of transactions.
From our inception on March 1, 1998 until June 1998, our business plan was
to engage in the licensing and distribution of software support materials for
the governmental and educational markets. The principal licenses into which we
entered during this time period was related to the proprietary courseware of
Pro-Soft I-Net, a software and Internet training solutions provider. As a result
of changes in the software market and the related training and support materials
market, we determined to change our business plan to the development of
technology to enable businesses and other organizations to engage in electronic
commerce. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Liquidity and Capital Resources" and "Related Party
Transactions."
Our strategic focus is on the business-to-business Internet commerce market,
and we believe that our success will depend in large part on our ability
- to develop products and technologies that can enable businesses to
transact business-to-business Internet commerce efficiently and
effectively, and
- to identify and position ourselves as a significant player in the
business-to-business Internet commerce market.
Accordingly, we intend to continue to invest in product, technology, and
operating infrastructure development, as well as in the acquisition of companies
that offer development or technological resources.
Because we have a limited operating history, given planned investment
levels, our achieving profitability depends upon our ability to obtain
sufficient numbers of new customers and sufficient numbers of Internet commerce
transactions using our services. This can be accomplished by signing up
sufficient numbers of customers for services through our ICC and/or attaining a
significant volume of transactions through our ICC. Our revenues will also be
dependent on determining and obtaining sufficient levels of fees for the
services offered. In the event that we are unable to attain one or more of these
goals, we may continue to incur substantial operating losses for the foreseeable
future.
FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY
In view of the rapidly evolving nature of our business and its limited
operating history, we believe that period-to-period comparisons of our operating
results, including our gross profit and operating expenses as a percentage of
net sales, are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Risk Factors--Fluctuations In Our
Operating Results May Affect Our Stock Price."
We cannot predict the degree to which we will experience seasonality in our
business because of our limited operating history, and the fact that we cannot
identify which companies, if any, we will acquire in the foreseeable future.
RESULTS OF OPERATIONS
We have had no meaningful operating results to date, as we have focused on
the development of our ICC services.
30
<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses consist of payroll and related
expenses for executive, sales, marketing accounting, and administrative
personnel, recruiting, professional fees, research and development and other
general corporate expenses. We expect selling, general, and administrative
expenses to increase in absolute dollars as we expand our staff and incur
additional costs related to the growth of our business.
INTEREST EXPENSE
Interest expense of $342,795 was incurred during the nine months ended March
31, 1999, primarily related to amortization of debt issuance costs.
INCOME TAXES
We have not generated any taxable income to date and therefore have not paid
any federal income taxes since our inception. Utilization of our net operating
loss carry forwards, which begin to expire in 2013, may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 our cash was $135,594. Net cash used by operating
activities was $2,156,859 for the nine months ended March 31, 1999.
MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
Net cash used in operations was $253,119 from March 4, 1998 (inception)
through June 30, 1998, which resulted from net losses of $4,571,936 from
inception adjusted principally for non-cash expenses of $3,822,000 in
amortization and write-off of license fees and $371,680 of stock based
compensation. See "Related Party Transactions."
We were established as eClassroom and, shortly thereafter, acquired two
exclusive sublicenses to sell proprietary ProSoft I-Net Solutions courseware to
governmental and educational markets, respectively. To date, we have not been
successful at generating any revenue from these sublicenses. These licenses have
since been terminated and we believe that we have no further obligations to make
additional payments under such licenses. We wrote off $3,822,000 in the period
ended June 30, 1998, representing the carrying cost of such licenses. In May
1999, the sublicensors paid an additional $200,000 to ProSoft to terminate these
license agreements and to settle all obligations relating to them. See "Related
Party Transactions."
Net cash used in investing activities from March 4, 1998 (inception) through
June 30, 1998, was related to the purchase of $102,034 of fixed assets and
$75,000 of loans to customers. Net cash provided by financing activities March
4, 1998 (inception) through June 30, 1998 of $681,429 resulted from $649,000 of
private placements of common stock, $132,429 from the issuance of notes payable,
and the repayment of notes payable in the amount of $100,000.
NINE MONTHS ENDED MARCH 31, 1999
Net cash used in operations was $2,156,859 for the nine months ended March
31, 1999, which resulted principally from net losses of $6,154,201 for such
period adjusted for non-cash items of gain on extinguishment of indebtedness of
$1,653,232, common stock issued for services in the amount of $902,100,
compensation expense for contributed capital of $400,000, amortization of debt
issue costs of $332,425, options and warrants issued for services in the amount
of $1,902,390, the provision for doubtful accounts of $23,876, and the write-off
of an $800,000 note receivable. Accounts payable and accrued liabilities
increased by $961,944.
Net cash used in investing activities for the nine months ended March 31,
1999 was related to the purchase of equity securities in the amount of $100,733,
a loan to Admor of $800,000, and the purchase
31
<PAGE>
of $118,927 of fixed assets. Net cash provided by financing activities during
the nine months ended March 31, 1999 of $2,958,370 resulted from $2,164,800 of
private placements of common stock, $264,200 from the exercise of warrants,
$1,160,000 from the issuance of notes payable and convertible debentures,
$100,000 from the issuance of notes payable to related parties, and the
repayment of notes payable in the amount of $730,630.
In June 1998, we commenced an offering of 1,022,800 units, each consisting
of one share of common stock at $2.00 per share and one warrant, expiring on
October 9, 1998, to purchase one additional share of common stock at $4.00 per
share. By June 30, 1998, $146,000 had been received. During the three months
ended September 30, 1998, 949,800 units were issued for $1,899,600. In January
and February 1999, we received $1,000,000 from the sale of convertible
debentures at a conversion price of $2.50 per share. During March 1999, we sold
88,400 shares in a private placement for $3.00 per share and received gross
proceeds of $265,200.
In connection with the ProSoft licenses, we assumed notes issued by the
previous holders of those licenses in the amount of $3,300,000. In December
1998, the remaining balance of $1.8 million was cancelled. See "Related Party
Transactions."
In March 1999, Keith D. Freadhoff, our Chairman of the Board of Directors
and Chief Executive Officer, loaned $100,000 to us on an interest-free basis.
Such loan was repaid in May 1999.
As of March 31, 1999, our principal sources of liquidity consisted of
$135,594 of cash. As of that date, our principal commitments consisted of
operating leases, and commitments for advertising and promotional arrangements.
Although we have no material commitments for capital expenditures, we anticipate
a substantial increase in our capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure, and personnel.
RECENT ACTIVITY
In April 1999, we sold 237,934 shares in a private placement for $3.00 per
share and received gross proceeds of $713,800.
In May and June 1999, we sold in a private placement a total of $2,880,000
principal amount of our 12% promissory notes due on the earlier of April 30,
2000 or completion of this offering. As part of this transaction, we issued to
the investors a total of 288,000 shares of our common stock. In May 1999, the
Company issued $150,000 of 12% notes due on the earlier of April 30, 2000 or
completion of this offering as settlement for a financial obligation.
Additionally, 15,000 shares of common stock were issued as part of the
settlement agreement. Pursuant to the Securities Act, the rules and regulations
under the Securities Act, and the interpretations of the Commission, we may be
required to offer rescission to investors in our May and June 1999 private
placement. If we are required to offer rescission of the private placement and
all of these investors determine to exercise these rescission rights, we would
be required to refund the entirety of the gross proceeds of this private
placement to these investors.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are unable
to distinguish between 20th century dates and 21st century dates. As a result,
many companies' software and computer systems may need to be upgraded or
replaced to comply with these "Year 2000" requirements. Our business is
dependent on the operation of numerous systems that could potentially be
impacted by Year 2000 related problems. Those systems include, among others:
- hardware and software systems used by us to process transactions and
deliver other services to our clients, including our proprietary software
systems, as well as hardware and software supplied by third parties;
- communications networks, such as the Internet and private intranets, on
which we depend to permit electronic commerce transactions by our clients;
- the internal systems of our clients and suppliers;
32
<PAGE>
- the hardware and software systems used internally by us in the management
of our business; and
- non-information technology systems and services used by us in our
business, such as telephone systems and building systems.
We have internally reviewed the proprietary software systems we use to
process transactions and deliver other services to our clients. Although we
believe that our internally developed applications and systems are designed to
be Year 2000 compliant, we utilize third-party equipment and software that may
not be Year 2000 compliant. Failure of third-party or currently owned equipment
or software to operate properly with regard to the Year 2000 could require us to
incur unanticipated expenses to remedy any problems, which could have a material
adverse effect on our business, prospects, financial condition, and results of
operations. We believe that our expenditures to upgrade our internal systems and
applications and replace non-compliant systems will not exceed $100,000 and will
not be material to our business, prospects, financial condition, and results of
operations. To date, we have incurred $20,000 in connection with our Year 2000
compliance activities. We have utilized, and intend to continue to utilize,
general working capital in order to fund these activities. We have not had to
defer any information technology projects as a result of these activities.
Furthermore, the success of our efforts may depend on the success of our
clients in dealing with their Year 2000 issues. Many of these organizations are
not Year 2000 compliant, and the impact of widespread client failure on our
systems is difficult to determine. Customer difficulties due to year 2000 issues
could interfere with electronic commerce transactions or information, which
might expose us to significant potential liability. If client failures result in
the failure of our systems, our business, prospects, financial condition, and
results of operations would be materially adversely affected. Furthermore, the
purchasing patterns of these customers or potential customers may be affected by
Year 2000 issues as companies expend significant resources to become Year 2000
compliant. The costs of becoming Year 2000 compliant for current or potential
customers may result in reduced funds being available to purchase and implement
our applications and services.
We have implemented a Year 2000 program to assess and monitor Year 2000
issues with all of our significant clients, suppliers, and other third parties.
We have appointed a single individual to head our Year 2000 program. The
following significant parties, which provide us with essential or critical
systems, have certified through Year 2000 compliance testing or vendor
certification that such systems are Year 2000 compliant: Exodus Communications,
PAJO, Dell Computers, Intel, PAL Employer Services, Inc., Verisign, Inc., and
Thawte, Inc. We have identified and have contacted the following significant
parties by letter or telephone: PaymentNet, Cardservice International,
Authorizenet, eCommerce Exchange, Clear Exchange, XOOM.com, Inc., Gateway
Computers, CB Richard Ellis, Reliant Innovations, Inc., Wireless One, Inc.,
Found.com, Inc., On Track Inc. (O.T.I. Cable Advertising), and Power
Enterprises, Inc. We intend to continue to contact these significant parties
until there is either a satisfactory determination that the significant party
has reasonably addressed any Year 2000 issues or, in the absence of such
determination, until one or more replacement parties are identified and engaged.
We have conducted a formal assessment of our Year 2000 exposure in order to
determine what steps beyond those identified by our internal review may be
advisable. We are presently developing a contingency plan for handling Year 2000
problems that are not detected and corrected prior to this occurrence and
anticipate completing this plan by October 1999. Our most likely worst case Year
2000 scenario is unknown at this time. Our failure to address any unforeseen
Year 2000 issue could materially adversely affect our business, prospects,
financial condition, and results of operations.
33
<PAGE>
BUSINESS
IN GENERAL
We provide turn-key electronic commerce services designed to enable clients
to extend their business to the Internet to conduct commercial transactions
between business enterprises. The HUB of our electronic commerce solution is our
proprietary ICC, which consists of the hardware, proprietary and licensed
software, and the related technical services necessary for our clients to
transact electronic commerce. We also design and build custom interfaces, or
SPOKES, to connect business clients to the ICC. Our ICC permits a continuum of
sophisticated and technologically complex, or scalable, solutions ranging from a
simple Internet storefront advertising their products and taking orders through
e-mail to a highly complex system of secure client extranets allowing vendors to
interact and transact business-to-business electronic commerce with one or more
specific customers.
INDUSTRY BACKGROUND
THE INTERNET
The Internet has grown rapidly in recent years, spurred by developments such
as
- inexpensive, readily available, and user-friendly Web browsers,
- a large and growing installed base of advanced personal computers,
- the adoption of faster and more cost efficient networks,
- the emergence of compelling Web-based content and commerce applications,
and
- the growing sophistication of the user base.
According to International Data Corp. ("IDC"), a leading research firm, the
number of Internet users was 98 million worldwide at the end of 1998 and will
continue to grow to 320 million by the end of 2002.
The broad acceptance of the Internet has led to the emergence of secure Web
sites accessible only within a given company, known as INTRANETS, and
specialized intranets also available to select outsiders, such as clients,
suppliers, or vendors, known as EXTRANETS, as new global communications and
commerce environments, representing a significant opportunity for enterprises to
interact in new, different, and highly efficient ways with customers, employees,
suppliers, and partners.
ELECTRONIC COMMERCE
The Internet presents opportunities to transform businesses and entire
industries as organizations exploit their potential to extend and enhance their
business activities and gain competitive advantage. Companies are using the
Internet to communicate and transact business on a one-to-one basis with
existing customers and to target and acquire new customers. At the same time,
companies are using the Internet to collaborate with their supply-chain partners
and manage distribution and other strategic relationships. The Internet has also
allowed businesses to identify new product and service offerings which extend
and complement their core markets.
A number of organizations have projected that the volume of business
transacted by means of electronic commerce will grow substantially from present
levels. The United States Department of Commerce has estimated that
business-to-business commerce by means of the Internet will be a $300 billion
dollar marketplace by the year 2002. IDC has estimated that the total value of
goods and services purchased over the Internet grew from $318 million in 1995 to
an annualized amount of $5.4 billion in December 1996, and that sales are
projected to increase to $95 billion in 2000 and to $400 billion by 2002. This
firm has also projected that by the year 2002, 78% of all Internet commerce
34
<PAGE>
will occur in the business-to-business sector. Currently, KPMG estimates that
business to business Internet commerce doubles approximately every 90 days.
ELECTRONIC COMMERCE SERVICES MARKET
IDC forecasts that the market for Internet and electronic commerce services
worldwide will grow from $4.6 billion in 1997 to $43.7 billion by 2002.
Forrester Research, another technology industry research firm, estimates that
the market for Internet and electronic commerce services will grow from $5.4
billion in 1998 to $32.7 billion by 2002. These projections represent a compound
annual growth rate of more than 55% over these periods.
As a result of the recent growth of electronic commerce and its acceptance
as a mainstream medium for commercial transactions, businesses are investing in
the strategic use of Internet solutions to transform their core business and
technology strategies. This, in turn, has created a significant and growing
demand for third-party Internet professional services and has resulted in a
proliferation of companies offering specialized solutions, such as connectivity,
transaction reporting, security, and Web site design to business customers. This
specialization has resulted in a fragmented market that often requires the
business customer to seek solutions from a number of different providers using
differing, or even contradictory, strategies, models, and designs.
The successful adoption of, and adaptation to, the Internet by companies and
the conduct of commerce by means of the Internet pose significant challenges,
including systems engineering, technical, commercial, strategic, and creative
design challenges and an understanding of how the Internet transforms
relationships between businesses and their internal organizations, customers,
and business partners. Companies facing technology investment decisions often
need outside technical expertise to recognize viable Internet tools, develop
feasible architectures, and implement strategies. Companies must also be able to
integrate new Internet applications with their existing systems. Finally, a
successful solution requires that the Internet application, particularly the
user interface, be engaging and easy to use.
We believe that few of the existing electronic commerce service providers
have the range of skills required to assist their clients in a coordinated
transformation of the way they use technology and implement Internet solutions.
Accordingly, we believe that organizations are increasingly searching for
professional services firms offering turn-key electronic commerce solutions,
including integrated strategy, technology and creative design, connectivity,
transaction processing, data warehousing, transaction reporting, help desk, and
consulting and training. Furthermore, we believe that organizations will
increasingly look to Internet solutions providers that can leverage industry and
client practices, increase predictability of success for Internet solutions, and
decrease risks associated with implementation by providing low-cost, scalable
solutions with minimal lead-time.
THE NETGATEWAY SOLUTION
IN GENERAL
We have structured the ICC to provide scalable, fully integrated, turn-key
solutions. We develop customized interfaces to connect our clients' Web sites,
whether created and maintained by us or others on behalf of the clients, with
the ICC and our electronic commerce servers. As a result of our HUB and SPOKE
structure, we can offer rapidly deployed, low cost electronic commerce services,
which incorporate the sales and other practices of our clients and their
industries, as well as maintain our clients' prior investment in creating and
maintaining a Web presence.
35
<PAGE>
[GRAPHIC DEPICTION OF HUB AND SPOKE STRUCTURE WITH CORRESPONDING LABELS]
THE ICC HUB
The ICC consists of hardware and proprietary and licensed software, as well
as related technical services, which are necessary in order to transact
electronic commerce. We have developed the ICC based upon an object-oriented,
modular strategy. As a result, we are able to reuse functional software
components of the ICC across different clients and industries, as well as allow
introduction of new capabilities and services without adversely effecting
existing systems.
The following features are designed to provide more complete electronic
commerce services by overcoming limitations in external systems.
- - INVENTORY MANAGEMENT
- - ORDER STATUS AND HISTORY
- - CUSTOMER SUPPORT FORUMS
- - PURCHASE ACTIVITY REPORTING
- - SECURE, WEB BROWSER BASED SYSTEM
ADMINISTRATION
- - REPORTING
- - UNIVERSAL CLIENT DIRECTORY MANAGEMENT
- - SALES AUTOMATION
- - CUSTOMER SURVEY SYSTEM
- - BUDGET REPORTING
- - CUSTOMER SELF-ADMINISTRATION
- - ORDER MANAGEMENT
- - SYSTEM STATUS MONITORING
- - PRODUCT CATALOG MANAGEMENT
THE INTERFACE SPOKE
We have the capability to rapidly design and deploy proprietary software
interfaces which permit client Web sites, networks, and enterprise resource
planning systems to connect with, receive relevant information from, and provide
relevant information to, the ICC. Data integration between the ICC and the buyer
or seller is managed in the SPOKE. Product catalogs, order information, order
status, customer data, etc. can be transferred between the HUB and the
buyer/seller by means of the SPOKE. Each interface or SPOKE is specific to a
client and industry and contains knowledge about specific products and services
as well as processes and business rules, including
- - CUSTOM PRICING
- - PURCHASING WORKFLOW
- - UNIQUE ORDER HEADER FOR EACH CUSTOMER
- - PRODUCT CONFIGURATION
- - GRAPHICAL INTERFACE
- - SPECIAL REPORTING NEEDS
- - PRODUCT VARIATION RULES
- - WORKFLOW WITH ROUTING AND APPROVALS
All spokes are developed according to a common methodology so that, as
clients in similar industries are added to the ICC, the cost and time of
development is reduced by duplicating previously created modules. We have
developed a substantial library of SPOKES which are available for future use.
Customization, or SPOKE development, for clients can include:
- - WEB SITE INTEGRATION
- - THIRD PARTY AND CUSTOMER DEVELOPED SYSTEMS
- - ORDER MANAGEMENT
- - ACCOUNTING
- - SHIPPING
- - ENTERPRISE RESOURCE PLANNING SYSTEMS
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ADVANTAGES
We believe that the following are significant advantages of our electronic
commerce solution over other currently available alternatives:
- Our customers do not invest in hardware, software, and staffing, but
rather connect to our existing Netgateway infrastructure, which we believe
is a highly economic method to obtain and maintain an electronic commerce
presence.
- Clients with existing Web sites can maintain their investment in the
creation of that presence while seamlessly adding electronic commerce
capabilities.
- Because our infrastructure permits scalable electronic commerce solutions,
we can offer incremental services to our clients through the activation of
additional proprietary software in response to client growth or commercial
requirements quickly and cost-effectively.
- Because our proprietary and other software resides only on our servers, we
can offer clients easy access to additional functionality on a test or
temporary basis in order to permit our clients to try new or additional
services with their respective customers on their Web sites, and can
provide real time updates, patches, and fixes to software with no
additional effort by the client.
BUSINESS STRATEGY
Key elements of our strategy are described below.
- IMPLEMENT COST EFFECTIVE SERVICES WITH BROAD APPEAL. We have designed our
operations and business model to focus upon the electronic commerce
services of highest value to our clients. These are services which require
high levels of investment of resources or technical expertise by clients
in the event that these clients were to decide to provide these services
themselves. By offering these services to a number of clients
simultaneously and by creating and utilizing reusable software modules, we
are able to spread the relatively fixed costs associated with the
creation, purchase, or customization of the software, processes,
procedures, or computer hardware over a larger volume of electronic
commerce transactions, permitting us to offer these services to our
clients on a highly cost effective basis.
- LEVERAGE RELATIONSHIPS WITH RESELLERS TO MAXIMIZE GROWTH. We have embraced
a channel strategy for distribution of our Internet storefront services.
We have found that this particular service offering matches well with any
organization that has existing business relationships whereby adding an
electronic commerce solution will strengthen the relationship. Examples of
our resellers include Internet portal companies, telecommunications
companies, Internet service providers, cable companies, overnight delivery
companies, banks, and computer hardware manufactures. See
"Business--Clients and Strategic Relationships."
- PROVIDE EASY ACCESS TO SCALABLE ELECTRONIC COMMERCE FUNCTIONALITY. We have
designed the ICC and our hardware and software infrastructure to permit
scalable electronic commerce solutions and can offer incremental services
to our clients through the activation of additional proprietary software
which provide additional services and added functionality in response to
client growth or commercial requirements quickly.
- OFFER ADDITIONAL FUNCTIONALITY OF ICC SERVICES. Our HUB and SPOKE approach
constantly generates new features for our ICC clients. For example, as the
SPOKE features become dominant in a particular industry, that feature is
integrated into the HUB to become a new standard feature of the ICC,
benefitting all ICC users in that industry.
- USE OF TECHNOLOGY TO CREATE ELECTRONIC COMMERCE HUBS. We have improved the
attractiveness of our services by creating electronic commerce HUBS in the
form of (1) private label Internet-based
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"shopping malls", where electronic commerce sites sponsored by a common
reseller or of similar product offerings are grouped together for
convenient retail use by the public, or (2) secure client extranets.
- INCORPORATE CLIENT AND INDUSTRY PRACTICES AND MAINTAIN CLIENTS' PRIOR
INVESTMENT. We have structured the ICC and our hardware and software
infrastructure, and have developed proprietary software, to permit the
easy interconnection of client Web sites, whether prepared and maintained
by us or others on behalf of our clients, with our electronic commerce
servers. As a result, we can offer electronic commerce services which
incorporate the sales and other practices of our clients and their
industries, as well as maintain the clients' prior investment in creating
and maintaining a Web presence.
- SEEK STRATEGIC ACQUISITIONS AND INVESTMENTS. We intend to seek strategic
acquisitions of, and investments in, businesses and technologies which we
believe will enhance the functionality of our services, operations, and
competitive position. In June 1999, we consummated the acquisition of the
technology of Shopping Planet, an electronic commerce applications
developer, which we believe will enhance our functionality. In exchange
for their technology, we agreed to the following:
- we issued to Shopping Planet 35,000 shares of our common stock; and
- leased the technology, including the right to enhancements, back to
Shopping Planet on a non-transferable basis for nominal consideration.
As a condition to this acquisition, we entered into an employment
agreement with the head developer of the Shopping Planet technology.
See "Risk Factors" and "Use of Proceeds."
SERVICES OFFERED
We offer our electronic commerce services which range, in general, from
simple Internet storefronts to highly complex systems. We currently offer the
following specific services to our clients:
- WEB SITE DEVELOPMENT AND DESIGN; DEVELOPMENT OF ELECTRONIC STOREFRONTS. We
believe that a professionally designed Web site is critical to the success
of business customers desiring to transact electronic commerce. We offer
Web site development, design, and maintenance solutions to our business
customers, including the development and design of the graphical
interfaces and applications necessary to fully integrate each customer's
Web site with its order and payment processing, order confirmation, and
fulfillment centers. Our proprietary software for Web site and electronic
storefront development features its own template system, multiple product
search engines, multiple price sets and catalogues, and support for
multiple currencies. Following this offering, we intend to further develop
and enhance this solution and to aggressively market these services
through our channel marketing strategy.
- INTERNET-BASED "SHOPPING MALL" DEVELOPMENT AND DESIGN. We believe that the
use of Internet-based shopping malls is critical to create an effective
electronic commerce marketplace. Through the creation and use of private
labeled Internet malls, users of our services can take advantage of both
the pre-existing relationships and marketing efforts of the reseller
sponsoring the private labeled mall, thereby increasing traffic to, and
exposure of, their site. In addition, we have developed and feature a
proprietary electronic commerce search engine that searches within each
Internet mall, as well as across all Internet malls served by our ICC. We
believe the use of malls and the availability of our robust electronic
commerce search engine adds substantial value to individual stores and
resellers alike. For our customers not otherwise affiliated with any mall,
we provide access to our own mall as a value-added service.
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- TRANSACTION PROCESSING. We offer solutions which capture and transact
customer orders according to the business rules and specific "back office"
needs of the particular client. Our electronic commerce system solution
allows us to receive and process orders and payments, provide order
confirmation and reporting, and organize order fulfillment. We also have
the ability to provide support for electronic commerce transactions using
checks, credit cards, electronic funds transfers, purchase orders, and
other forms of payment. We are currently providing this capability in
conjunction with certain third-party vendors, including Payment Net in San
Jose, California, Authorized Net in Salt Lake City, Utah, Clear Commerce
in Austin, Texas, eCommerce Exchange in Laguna Hills, California and Card
Services International in Agoura Hills, California. Following this
offering, we plan to pursue our own secured transaction clearing solutions
as well as a strategic alliance or acquisition of a secured
transaction-processing center.
- DATA WAREHOUSING AND TRANSACTION REPORTING. We anticipate that, as our
business continues to grow, we will compile large amounts of transactional
and other data with respect to our clients and their businesses, markets,
customers, and electronic commerce transactions. We have the capability to
automatically generate reports relating to order confirmation, inventory
tracking, fulfillment, transaction details, customer data, market
research, and other sophisticated management reports based on the
transactions facilitated through our hardware and software infrastructure.
Following this offering, we plan to further develop these capabilities.
- CUSTOMER SUPPORT SERVICES. We provide our clients with 24 hour per day and
seven day per week customer service and support through our customer
support staff of six individuals.
- ADVERTISING. We have signed an agreement with 24/7, Inc. to manage
national banner advertising in our Internet-based shopping malls. We share
advertising revenues with the respective mall owner on whose Web site the
advertisement resides.
- CONNECTIVITY SOLUTIONS. In order for business customers to effectively
engage in electronic commerce, they must be connected to the Internet. We
assist our business customers in structuring and obtaining high-speed
Internet connectivity solutions to improve their business-to-business
communication by means of the Internet. We provide these connectivity
solutions to our business customers in conjunction with third party
Internet access providers. Our connectivity solutions also include the
ability to host clients' Web sites and provide clients with security
measures necessary for secure transmissions over the Internet. We support
our hosted Web sites by a connectivity enhancing, high-performance,
high-bandwidth server system.
SALES AND MARKETING
IN GENERAL
We sell and market our services by means of a combination of direct sales
and authorized resellers. We maintain a direct sales force of six full-time
employees. We anticipate increasing our sales force substantially following this
offering, including creating a group within our sales force trained to assist
resellers in marketing our products and services. If a client requiring these
more sophisticated services is provided by a Netgateway reseller, we ordinarily
pay a finders fee to the reseller.
For entry level ICC services, such as simple Internet storefronts, we have
developed, and are continuing to develop, a series of channel partners to
distribute these services. Potential resellers include telecommunication
companies, value-added resellers, cable companies, Internet portals, and
Internet service providers. Reseller pricing has generally been dependent upon
volume and commitments from the reseller. We will "private label" the Internet
storefront service and establish private branded Internet-based shopping malls
for resellers in order to provide the resellers with the means to drive traffic
to these storefronts. The storefronts and mall will have a customized "look and
feel" of the reseller. For purposes of branded equity, such as XOOM.com's
Internet-based shopping
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mall located at WWW.XOOMMEMBERSTORES.COM, all sites will have the
"STORESONLINE.COM" logo as well as "POWERED BY NETGATEWAY" designation. We will
establish and maintain the mall for the reseller as long as the reseller drives
traffic to the mall by means of their marketing and advertising efforts.
PACKAGED SERVICES
While clients can select ICC services and particular features individually,
we generally market our services through the use of packaged services. Below is
a table which summarizes the features of each of our service packages followed
by a detailed description of each package.
<TABLE>
<CAPTION>
PACKAGE THREE
BUSINESS TO
PACKAGE ONE PACKAGE TWO BUSINESS
INTRODUCTORY STORESONLINE.COM ELECTRONIC
FEATURES PACKAGE PACKAGE COMMERCE
- ---------------------------------------------- --------------- ------------------- -----------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
Web Account Access............................ - - -
Static Webpages............................... - - -
- ---------------------------------------------------------------------------
24/7 E-Mail support........................... - - -
Custom Templates.............................. - - -
- ---------------------------------------------------------------------------
WYSIWYG....................................... - - n/a
24/7 Phone Technical Support.................. - -
- ---------------------------------------------------------------------------
Shopping Cart................................. - -
Real-Time Credit Card Transactions............ - -
- ---------------------------------------------------------------------------
Multiple Price-Sets........................... - -
Custom Shipping Rules......................... - -
- ---------------------------------------------------------------------------
Order Status and Tracking..................... - -
Store Statistical Reporting................... - -
- ---------------------------------------------------------------------------
Unique Domain Name/Virtual Hosting............ - -
Custom Forms.................................. - -
- ---------------------------------------------------------------------------
Import and Export Data........................ - -
Search and Browse Functionality............... - -
- ---------------------------------------------------------------------------
E-Mail Confirmation to Customers.............. - -
Featured Products and Sale Items.............. - -
- ---------------------------------------------------------------------------
Printable Coupons............................. - -
Unlimited Products and Categories............. - -
- ---------------------------------------------------------------------------
Inventory Tracking............................ - -
Integration with Existing Web Site............ - -
- ---------------------------------------------------------------------------
Custom Price Discount Methods................. - -
Multimedia Support............................ -
- ---------------------------------------------------------------------------
Unique Catalog Per Customer................... -
Assigned Access Rights........................ -
- ---------------------------------------------------------------------------
Multiple Order Methods........................ -
Integration with External System.............. -
</TABLE>
SERVICE PACKAGE ONE -- INTRODUCTORY PACKAGE
Clients can design a professional three page Web site, choosing from a
selection of over 25 templates. This entry level service is available through
our resellers as an introduction to electronic commerce, and the sites are
static in nature. While we do not offer free help desk support or credit card
processing with this package, e-mail based customer support is available.
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SERVICE PACKAGE TWO--STORESONLINE.COM PACKAGE
This package is sold by means of authorized Netgateway resellers and permits
clients to have a fully functional electronic commerce store quickly and easily.
This service requires no investment in hardware or software and clients can
quickly and dynamically generate sales.
SERVICE PACKAGE THREE--BUSINESS TO BUSINESS ELECTRONIC COMMERCE
For businesses that need more robust electronic commerce services for
business to business applications, the Netgateway ICC offers additional highly
customized features, including those described under the heading "Business--The
Netgateway Solution--The ICC Hub," designed to meet the requirements of our
clients in an extranet setting. These features are sold directly by our sales
professionals as each business to business opportunity involves different uses
of these features.
CLIENTS AND STRATEGIC RELATIONSHIPS
We view our clients as both the sponsor or owner of the electronic commerce
site in question and our resellers. We are currently processing electronic
commerce transactions for over 550 clients. The clients are geographically
dispersed and represent a mix of businesses.
We require each client using our services to enter into a standard
subscription agreement. Each subscription agreement provides that the client
pays us both monthly subscription fees for the services requested and specified
fees per transaction. These contracts are terminable by the client upon 30 days
prior written notice. In addition, we enter into agreements with its resellers.
These agreements vary significantly by reseller based on the levels of service
the reseller will distribute and other factors.
The following are descriptions of a number of the contracts into which we
have recently entered:
XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS:
XMCM), an electronic commerce Web portal with over 7.8 million members. Under
the terms of the agreement:
- we are the sole provider of a private labeled version of XOOM.com's
products and services which permit its members to create and maintain
storefronts on the Web through XOOM.com;
- we developed XOOM.com's Internet-based shopping mall located at
WWW.XOOMMEMBERSTORES.COM;
- we are the sole provider of electronic commerce processing services to
XOOM.com's electronic commerce customers; and
- we will utilize XOOM.com as a Netgateway reseller to provide electronic
commerce solutions and services to its member companies.
CB RICHARD ELLIS. In March 1999, we entered into an electronic commerce
services agreement with CB Richard Ellis (NYSE: CBG), one of the world's largest
building management and real estate services companies with over 12,000
properties under management and over $1 billion in revenue during 1998. Under
this agreement, we have been engaged to develop, manage, and service CB Richard
Ellis' Internet-based shopping mall and client extranet. This Web site is
designed to permit CB Richard Ellis personnel to conduct all of their corporate
materials purchasing, including computers and building and maintenance supplies,
and all global facilities management by means of the Internet. In addition, CB
Richard Ellis will offer to the tenants in the buildings they manage volume
purchasing services on the Internet for a variety of office products and
supplies.
GATEWAY. In March 1999, we entered into an agreement with Gateway Inc.
(NYSE: GTW), a manufacturer of personal and business computers and service
provider. Under the terms of this
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agreement, we will offer our Internet storefront services package, including Web
site design, hosting, and transaction processing services, to Gateway customers.
WIRELESS ONE. In June 1999, we entered into a reseller and mall agreement
with Wireless One, Inc. under which we will design and develop an Internet-based
shopping mall, to be branded with the Wireless One name, brand, and image, and
will offer our storefront creation and maintenance services to Wireless One's
subscribers. Under this agreement, we will be responsible for marketing support,
including development of mall content, training of Wireless One sales people,
development of Wireless One branded collateral material and periodic
distribution and updating of advertising spots to promote their services.
Wireless One will promote this mall with a total of 1,000 30-second spots every
month jointly developed by us and Wireless One in all systems in which it is
able to provide advertising.
RELIANT INNOVATIONS. In June 1999, we entered into an electronic services
agreement with Reliant Innovations under which we will develop an electronic
commerce site that will enable Reliant Innovations to sell computer products to
clients who are members of specific associations with which Reliant Innovations
has formed a partnership.
CABLECOMMERCE. In June 1999, we formed CableCommerce, a new operating
division which will focus on providing electronic commerce services and
solutions to cable television operators.
OTHER RESELLERS. We have also recently entered into reseller agreements,
under which the reseller offers our services to their customers, with FedPage
(WWW.FEDPAGE.COM), a division of Federal Business Council, Inc., the industry
leader in the production of on site federal technology shows, Ayrix
Technologies, OKC Webshopper, Country Wide Net, Hill Country Network, Encom
Industries, Epicycle Business Solutions, Integrated Systems Solutions, and Looks
Creative Designing Arts.
Initial customer service and support for our customers will be provided
through our customer support staff of 17 individuals that provides telephone
customer service and support 24 hours a day, 365 days a year. We can also
provide customers with access to information and customer support services by
means of the Internet.
RESEARCH AND DEVELOPMENT
Since June 1998, we have conducted extensive research and development with
respect to our technology. During the nine months ended March 31, 1999, we
invested approximately $276,000 during this period in the research and
development of our technology. Our research and development efforts have:
- emphasized the development of advanced technology and new services and the
enhancement and refinement of existing services in response to rapidly
changing client specifications and industry needs, and
- included introducing support for evolving communications methodologies and
protocols, software methodologies and protocols, and computer hardware
technologies, as well as improving functionality, flexibility, ease of use
and enhancing the quality of documentation, training materials, and
technical support tools.
We intend to conduct additional research and development to, among other things,
further our strategy of developing cost effective services with broad appeal, to
provide easy access to scalable electronic commerce services, and to offer
additional functionality of our ICC services. At June 30, 1999, our research and
development activities utilized 22 computer programmers and technicians. We
intend to utilize a portion of the net proceeds of this offering to add
additional programmers and technicians to our research and development team. See
"Use of Proceeds" and "Business--Employees."
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COMPETITION
The electronic commerce services market is intensely competitive and
characterized by rapidly evolving technologies. We currently face substantial
competition in all of our product and service lines. We expect such competition
to continue and to increase in the future, as new competitors enter the Internet
market and existing competitors expand their product and service offerings. Our
target market is rapidly evolving and is subject to continuous technological
change. As a result, our competitors may be better positioned to address these
developments or may react more favorably to these changes, which could have a
material adverse effect on our business, prospects, financial condition, and
results of operations. We compete on the basis of a number of factors, including
the attractiveness of the electronic commerce services offered, the breadth and
quality of these services, creative design, engineering expertise, pricing,
technological innovation, and understanding clients' strategies and needs.
A number of these factors are beyond our control. Existing or future competitors
may develop or offer electronic commerce services that provide significant
technological, creative, performance, price, or other advantages over the
services offered by us.
Our current and potential competitors include:
- Internet integrators and Web presence providers, such as IBM, iXL, Organic
Online, Proxicom, and USW;
- large information technology consulting service providers, such as
Andersen Consulting, Cambridge Technology Partners, and EDS;
- Internet commerce providers, such as Yahoo! Stores;
- software development companies, such as Microsoft, Broadvision, Open
Market, and InterShop;
- telecommunications companies, such as AT&T and MCI;
- application service providers, such as US Internetworking and the recently
announced EDS/SAP relationships, and
- Internet and online service providers, such as America Online, Lycos, and
Earthlink.
Although most of these types of competitors to date have not offered a full
range of Internet professional services, many are currently offering these
services or have announced their intention to do so. These competitors at any
time could elect to focus additional resources in our target markets, which
could materially adversely affect our business, prospects, financial condition,
and results of operations. Many of our current and potential competitors have
longer operating histories, larger customer bases, longer relationships with
clients, and significantly greater financial, technical, marketing, and public
relations resources than we do. Competitors that have established relationships
with large companies, but have limited expertise in providing Internet
solutions, may nonetheless be able to successfully use their client
relationships to enter our target market or prevent our penetration into their
client accounts.
Additionally, in pursuing acquisition opportunities, we may compete with
other companies with similar growth strategies, certain of which competitors may
be larger and have greater financial and other resources than we have.
Competition for these acquisition targets likely could also result in increased
prices of acquisition targets and a diminished pool of companies available for
acquisition.
There are relatively low barriers to entry into our business. We have
limited proprietary technology that would preclude or inhibit competitors from
entering the electronic commerce services market. Therefore, we must rely on the
skill of our personnel and the quality of our client service. The costs to
develop and provide electronic commerce services are low. Therefore, we expect
that we will continually face additional competition from new entrants into the
market in the future, and we are
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subject to the risk that our employees may leave us and start competing
businesses. The emergence of these enterprises could have a material adverse
effect on our business, prospects, financial condition, and results of
operations.
INTELLECTUAL PROPERTY
Our success is dependent upon our proprietary technology and other
intellectual property and on our ability to protect our proprietary technology
and other intellectual property rights. In addition, we must conduct our
operations without infringing on the proprietary rights of third parties. We
also intend to rely upon unpatented trade secrets and the know-how and expertise
of our employees. To protect our proprietary technology and other intellectual
property, we rely primarily on a combination of the protections provided by
applicable copyright, trademark, and trade secret laws as well as on
confidentiality procedures and licensing arrangements. We have applications
pending with the United States Patent and Trademark Office for NETGATEWAY,
NETGATEWAY ICC, NETGATEWAY INTERNET COMMERCE CENTER, NETGATEWAY "WHERE BUSINESS
DOES BUSINESS ON THE INTERNET," STORESONLINE, STORESONLINE.COM, NETGATEWAY
KNOWLEDGE AND COMMERCE OF THE DIGITAL AGE, NETGATEWAY, THE POWER OF ORGANIZED
INTERNET COMMERCE, and two NETGATEWAY logos. Although we believe that we have
taken appropriate steps to protect our unpatented proprietary rights, including
requiring that our employees and third parties who are granted access to our
proprietary technology enter into confidentiality agreements with us, there can
be no assurance that these measures will be sufficient to protect our rights
against third parties. Others may independently develop or otherwise acquire
unpatented technologies or products similar or superior to ours.
We license from third parties certain software and Internet tools that we
include in our services and products. If any of these licenses were terminated,
we could be required to seek licenses for similar software and Internet tools
from other third parties or develop these tools internally. We may not be able
to obtain such licenses or develop such tools in a timely fashion, on acceptable
terms, or at all. Companies participating in the software and Internet
technology industries are frequently involved in disputes relating to
intellectual property. We may in the future be required to defend our
intellectual property rights against infringement, duplication, discovery, and
misappropriation by third parties or to defend against third-party claims of
infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
costs to, and a diversion of effort by, us. An adverse determination could
subject us to significant liabilities to third parties, require us to seek
licenses from, or pay royalties to, third parties, or require us to develop
appropriate alternative technology. Some or all of these licenses may not be
available to us on acceptable terms or at all, and we may be unable to develop
alternate technology at an acceptable price or at all. Any of these events could
have a material adverse effect on our business, prospects, financial condition,
and results of operations.
EMPLOYEES
As of the date of this prospectus, we had 68 full-time employees: 15 engaged
in sales and marketing, 31 engaged in the development of our electronic commerce
solutions, six in customer support, and 16 in general administration and
finance. We intend to hire additional key personnel in the near future.
FACILITIES
Our headquarters are located at 300 Oceangate, Suite 500, Long Beach,
California 90802. These premises, which occupy 9,100 square feet, are subject to
a lease between Netgateway and an unaffiliated third party. The lease expires on
July 9, 2001 and our monthly payments under this lease
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are currently approximately $10,000. We believe that, in the event alternative
or larger offices are required, such space is available at competitive rates.
To house and support the ICC, Netgateway maintains its equipment in Exodus'
state-of-the-art data center, which provides a 24 hour per day, seven day per
week accessible operating environment with multiple redundant high-speed
connections to the Internet backbone. This data center features raised floors,
HVAC temperature control systems, and seismically braced racks. All systems are
connected to high capacity uninterruptable power supplies, which are in turn
backed by a high output diesel generator. Main power is provided to the facility
through connectivity to two separate power grids. Non-stop connectivity is
provided through multiple fiber egresses using different bandwidth providers.
Facility security includes 24 hour per day, seven day per week keycard access,
video monitors, motion sensors, and staff members on-site.
GOVERNMENTAL REGULATION
We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to, or commence
on, the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing, and
characteristics and quality of products and services. In 1998, the United States
Congress established the Advisory Committee on Electronic Commerce which is
charged with investigating, and making recommendations to Congress regarding,
the taxation of sales by means of the Internet. The adoption of any such laws or
regulations upon the recommendation of this Advisory Committee or otherwise may
decrease the growth of the Internet, which could in turn decrease the demand for
our products or services, our cost of doing business or otherwise have an
adverse effect on our business, prospects, financial condition, or results of
operations. Moreover, the applicability to the Internet of existing laws
governing issues, such as property ownership, libel, and personal privacy is
uncertain. Future federal or state legislation or regulation could have a
material adverse effect on our business, prospects, financial condition, and
results of operations.
LEGAL MATTERS
We are not a party to any material litigation or legal proceeding relating
to our products and services or otherwise. Except as described below, we are not
aware of any material legal proceedings threatened against us.
In January 1999, we entered into a binding letter of intent to acquire the
assets and technology of iShopper, an Internet-based shopping mall. The purchase
price in the letter of intent was (1) $50,000, (2) 50,000 shares of our common
stock upon closing, and (3) up to an additional 100,000 shares of our common
stock based upon meeting designated financial milestones. The letter of intent
included a number of conditions to our obligation to consummate the acquisition,
including:
- our satisfaction with our due diligence review of iShopper; and
- that iShopper's technology permitted the portability of the stores in
their mall to our technology.
On June 1999, we terminated this letter of intent because these conditions were
not satisfied. iShopper has contacted us contesting this termination and
alleging bad faith. We are currently affording iShopper the opportunity to
demonstrate that these conditions can be met.
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MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Netgateway, their ages, and their
positions held with Netgateway are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ----------------------------------------------
<S> <C> <C>
Keith D. Freadhoff..................... 40 Chairman of the Board and Chief Executive
Officer
Donald M. Corliss, Jr. ................ 49 President and Director
David Bassett-Parkins.................. 38 Chief Financial Officer, Chief Operating
Officer, and Director
Hanh Ngo............................... 28 Executive Vice President--Operations
Craig Gatarz........................... 37 General Counsel
Van Andrews............................ Director
Scott Beebe............................ 47 Director
William Brock.......................... 49 Director
Ronald Spire........................... 49 Director
</TABLE>
The following is certain summary information with respect to the directors,
director-nominee, and executive officers of Netgateway.
KEITH D. FREADHOFF, has served as Chairman of the Board of Directors and the
Chief Executive Officer of Netgateway since our inception. From November 1994 to
November 1997, Mr. Freadhoff was the co-founder, Chairman of the Board of
Directors, and Chief Executive Officer of Prosoft I-Net Solutions, a public
company engaged in development and provision of software and Internet training
solutions. From November 1993 to November 1994, Mr. Freadhoff has served as the
Executive Director of Career Planning Center, a community based organization
serving disadvantage populations with job training and social services. From
1993 to 1994, he also served as President of the Focus Institute, a California
based Microsoft Authorized Training and Education Center. From 1991 to 1992, Mr.
Freadhoff served as a Vice President of Frojen Advertising, an advertising and
marketing firm. From 1987 to 1991, Mr. Freadhoff founded and served as President
of Oasis Corporate Education and Training, a customized training company that
developed courseware for manufacturing, financial, service, and public
organizations. Mr. Freadhoff completed graduate level work at the University of
Southern California and earned his undergraduate degree at the University of
Nebraska.
DONALD M. CORLISS, JR., has served as the President and a Director of
Netgateway since March 1998. From 1993 to June 1998, Mr. Corliss was an
independent investor and owned, developed, and served in senior management
positions with several business and development ventures. From July 1993 through
June 1998, Mr. Corliss served as a vice president and a director of Westover
Hills Development, Inc., a real estate development company. From August 1993
through June 1998, Mr. Corliss served as a vice president and a director of the
general partner of Brentwood Development, a residential real estate development
company, and was charged with management of the development projects undertaken
by this company. From August 1994 through March 1998, Mr. Corliss served as a
consultant and was a founder of Ice Specialty Entertainment, a developer of ice
arena complexes, and was charged with the structuring and negotiation of the
business and projects undertaken by this company. From June 1995 to date, Mr.
Corliss served as a director and secretary of SHH Properties, Inc., a real
estate investment company. From 1996 to June 1998, Mr. Corliss served as a vice
president and a director of, Brentwood Development III, Inc., a real estate
development company, which was one of two corporate general partners of
Inglehave Farm L.P. From 1997 through May 1998, Mr. Corliss served as a vice
president and a director of Executive Property Management Services, Inc. a
provider of executive management services relating to real estate development.
As
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co-founder in many of these projects, responsibilities included the operation,
management, structuring, and implementation of business strategies and plans, as
well as the development and implementation of the general business and
accounting systems necessary for such business operations. From 1977 to 1993,
Mr. Corliss was engaged in private law practice. Mr. Corliss earned a LLM in
Taxation from New York University, his Juris Doctorate degree from the
University of Santa Clara, and a Bachelor of Arts degree from the University of
California at Santa Barbara. Of the ventures of Mr. Corliss, two real estate
development ventures, Westover Hills Development, Inc. and Inglehame Farms L.P.
sought protection from creditors pursuant to Chapter 11 of the United States
Bankruptcy Code in 1997 and 1998, respectively. Westover has since emerged from
Chapter 11 and has commenced operations.
DAVID BASSETT-PARKINS, has served as Chief Financial Officer, Chief
Operating Officer, and a Director of Netgateway since our inception in March
1998. From February 1992 to May 1998, Mr. Bassett-Parkins held various senior
management positions at Wedbush Morgan Securities, a privately held regional
securities firm, including Vice President of Management Information Systems,
Vice President of Customer Services, and Vice President of Client Banking
Services. From 1988 to February 1992, Mr. Bassett-Parkins served as a Director
of Automation for ISD, a privately held Interior Architecture firm based in
Chicago. From 1985 to 1988, Mr. Bassett-Parkins was managing partner for
Architectural CADD Systems, a privately held software developer and reseller.
Mr. Bassett-Parkins holds a B.S. in Management from California State Polytechnic
University, Pomona and an Executive Education Certificate from University of
California at Los Angeles.
HANH NGO, has served as Executive Vice President--Operations of Netgateway
since June 1998. Prior to joining Netgateway, Ms. Ngo held the position in
Financial Planning and Analysis as a Financial Analyst for Nissan Motor
Corporation from June 1997 to June 1998. From March 1992 to June 1997, Ms. Ngo
worked in various capacities at Wedbush Morgan Securities, a privately held
regional securities firm, including as a business analyst for the vice president
and as a client banking officer and licensed stockbroker. Ms. Ngo holds a M.B.A.
in Finance from California State University, Northridge, and a B.A. in Economics
from University of California, Irvine.
CRAIG GATARZ, has served as General Counsel of Netgateway since April 1999.
From 1987 until April 1999, Mr. Gatarz was an attorney at Jones, Day, Reavis &
Pogue, a law firm, and specialized in corporate law, particularly corporate
restructurings and asset-based lending transactions. Mr. Gatarz received his law
degree in 1987 from the University of Virginia School of Law and is admitted to
practice in New York, New Jersey, and California. Mr. Gatarz serves on the board
of directors of BBMG Entertainment, Inc., a California-based film production
company.
VAN ANDREWS has served as a Director of Netgateway since July 1999. From
September 1998 to date, Mr. Andrews has served as Senior Vice President of
Gateway Business, the business division of Gateway, Inc., where he is
responsible for leading Gateway's initiatives in the business, education,
government, and channel sectors. From to August 1998, Mr. Andrews
served as President of Admor Memory. From to , Mr.
Andrews served as Vice President and General Manager of Toshiba's Computer
Systems Division, where he oversaw the marketing, sales, service, support,
finances, operations and business planning in the United States, Mexico, and
Latin America. Prior to , Mr. Andrews held various senior sales
positions with Panasonic Office Automation Group and Epson America. Mr. Andrews
received his bachelor's degree in business administration from Indiana State
University.
SCOTT BEEBE, has served as a Director of Netgateway since June 1998. From
April 1987 through June 1998, Mr. Beebe served as the managing partner of Steps,
an investment and consulting firm specializing in high tech growth companies.
Mr. Beebe was a registered representative in the securities industry from 1982
through 1998. Mr. Beebe graduated from the University of California at Berkeley
in 1973.
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<PAGE>
WILLIAM BROCK has served as a Director of Netgateway since July 1999. Since
May 1999, Mr. Brock has served as the President and Chief Operating Officer of
Marketplace Technologies, Inc., a corporate finance electronic commerce company.
From September 1996 to April 1999, Mr. Brock served as vice president and Head
of the Structured Note Group in the Fixed Income Division of Salomon Smith
Barney. From December 1994 to August 1996, Mr. Brock served as Managing Director
of Blizzard Capital Markets, a leveraged buyout company. From 1987 to November
1994, Mr. Brock served as Vice President and Co-Head of Medium Term Notes at
Goldman, Sachs & Co. From 1980 to 1987, Mr. Brock served as Vice President,
Short Term Debt at The First Boston Corporation. Since April 1996, Mr. Brock has
served as a Director and owner of Middleton's, a mill working company.
RONALD SPIRE has served as a Director of Netgateway from September 1998 to
December 1998 and since April 1999. Since September 1989 Mr. Spire has been
retired. From June 1984 to September 1989, Mr. Spire was the co-founder and an
executive of PCI Group, Inc., a subcontractor for aerospace manufacturers. From
December 1981 to June 1984 Mr. Spire was a partner with Wolfgang Puck in Chinois
on Main, Inc. and other restaurants in the Los Angeles area. Mr. Spire earned
his Juris Doctorate degree from Southwestern University School of Law, and his
Bachelor or Arts degree from the University of California at Los Angeles.
ELECTION OF OFFICERS
Officers are elected annually by the board of directors and hold office at
the discretion of the board of directors. There are no family relationships
among our directors and executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
In September 1998, the board of directors created a compensation committee,
which will, upon the closing of the offering, be comprised of Messrs. Freadhoff,
Beebe, and Spire. The compensation committee has (1) full power and authority to
interpret the provisions of, and supervise the administration of, our stock
option plans and (2) the authority to review all of our compensation matters.
In April 1999, the board of directors created an audit committee, which is
currently comprised of Messrs. Corliss, Andrews and Brock. The audit committee
is responsible for reviewing the results of the audit engagement with the
independent auditors; reviewing the adequacy, scope, and results of the internal
accounting controls and procedures; reviewing the degree of independence of the
auditors; reviewing the auditors' fees; and recommending the engagement of
auditors to the full board of directors.
EXECUTIVE COMPENSATION
None of our executive officers received cash compensation during the period
from our inception on March 4, 1998 to June 30, 1998 or for the six months ended
December 31, 1998. In December 1998, Messrs. Freadhoff, Corliss, and
Bassett-Parkins and Ms. Ngo were granted stock options exercisable for 400,000
shares, 400,000 shares, 400,000 shares, and 266,667 shares of common stock,
respectively, under our 1998 stock option plan for senior executives.
For a description of the current compensation arrangements for our executive
officers, please see "Management--Employment Agreements."
DIRECTOR COMPENSATION
To date, directors have received no compensation for their services other
than reimbursement of expenses relating to attending meetings of the board of
directors.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee during the period from our
inception on March 4, 1998 through September 29, 1998. On December 15, 1998 the
compensation committee determined to accrue salary retroactively for the
executive officers of Netgateway commencing July 1, 1998. The executive officers
of Netgateway have since waived this salary. There were no interlocking
relationships between us and other entities that might affect the determination
of the compensation of our directors and executive officers.
EMPLOYMENT AGREEMENTS
The table below is a summary of the provisions of the employment agreements
of our executive officers.
<TABLE>
<CAPTION>
CONTRACT
COMMENCEMENT CONTRACT
NAME DATE TERMINATION DATE PER ANNUM SALARY BONUS ARRANGEMENTS
- --------------------------------- -------------- ----------------- ------------------ ---------------------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff, January 1, December 31, 2001 $185,000 through $57,500 payable in July
Chairman of the Board of 1999 June 30, 1999 1999
Directors and Chief $201,500 Eligible for bonus of up to
Executive Officer thereafter $28,750 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors
Donald M. Corliss, Jr., January 1, December 31, 2001 $185,000 through $55,000 payable in July
President and Director 1999 June 30, 1999 1999
$192,500 Eligible for bonus for each
thereafter of the three month periods
ended September 30, 1999
and December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors
David Bassett-Parkins, January 1, December 31, 2001 $175,000 $50,000 payable in July
Chief Operating Officer, Chief 1999 1999
Financial Officer, and Director Eligible for bonus of up to
$25,000 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors
Hanh Ngo, January 1, December 31, 2001 $135,000 $25,000 payable in July
Executive Vice President-- 1999 1999
Operations Eligible for bonus of up to
$12,500 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors
Craig Gatarz, April 5, 1999 April 5, 2002 $120,000 through As determined by the board
General Counsel December 31, 1999 of directors.
$150,000
thereafter
</TABLE>
In the event of a change in control of Netgateway, all options previously
granted to these individuals which remain unvested will automatically vest
immediately. Upon a termination of the employment of any of these individuals
following a change in control for any reason other than the
49
<PAGE>
relevant officer's death or disability or for cause we are required to pay to
such individual in the case of Messrs. Freadhoff, Corliss, and Bassett-Parkins,
a lump sum severance payment equal to three times the sum of (1) his then
current annual salary and (2) his highest bonus in the three year period
preceding the change in control, and in the case of Ms. Ngo or Mr. Gatarz, a
lump sum severance payment equal to two times the sum of (1) her or his then
current annual salary and (2) her or his highest bonus in the two year period
preceding the change in control. If this severance payment results in the
imposition of an excise tax on the relevant individual, we are required to gross
up this individual for such excess tax and any income taxes arising as a result
of the gross up payment. In addition, if the relevant individual's employment is
terminated by us without cause or by the relevant individual with good reason
then we are required to pay the relevant individual a lump sum severance payment
equal to his or her current annual salary for the remainder of the employment
period. The relevant individual may terminate his or her employment at any time
upon at least 30 days written notice to us. Upon the termination of such
agreement, the relevant individual is subject to non-compete, non-disclosure,
and non-solicitation provisions for one year.
STOCK OPTION PLANS
1998 STOCK OPTION PLAN FOR SENIOR EXECUTIVES
In December 1998, the board of directors adopted, subject to approval by our
stockholders, the 1998 stock option plan for senior executives. This plan
provides for the grant of options to purchase up to 5,000,000 shares of common
stock to senior executives of Netgateway. Options may be either "incentive stock
options" or non-qualified stock options under Federal tax laws.
This plan will be administered by the compensation committee of the board of
directors, a majority of the members of which consist of "non-employee
directors" of the board of directors. The committee will determine, among other
things, the individuals who shall receive options, the time period during which
the options may be partially or fully vested and exercisable, the number of
shares of common stock issuable upon the exercise of each option, and the option
exercise price.
The exercise price per share of common stock subject to an incentive option
may not be less than the fair market value per share of common stock on the date
the option is granted. The per share exercise price of the common stock subject
to a non-qualified option may be established by the committee, but shall not be
less than 50% of the fair market value per share of common stock on the date the
option is granted. The aggregate fair market value of common stock for which any
person may be granted incentive stock options which first become exercisable in
any calendar year may not exceed $100,000 on the date of grant.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution or, if permitted, pursuant to a qualified
domestic relations order and, during the lifetime of the optionee, the option
will be exercisable only by the optionee. In the event of termination of
employment by reason of death, disability, or by us for cause (as defined in
each optionee's employment agreement), the optionee will have no more than 365
days after such termination during which the optionee shall be entitled to
exercise the vested options, unless otherwise determined by the board of
directors. Upon termination of employment by us without cause or by the optionee
for good reason (as defined in the optionee's employment agreement), the
optionee's options remain exercisable to the extent the options were exercisable
on the date of such termination until the expiration date of the options
pursuant to the option agreement.
We may grant options under this plan within ten years from the effective
date of the plan. The effective date of this plan is December 31, 1998. Holders
of incentive stock options granted under this plan cannot exercise these options
more than ten years from the date of grant. Options granted under this plan
generally provide for the payment of the exercise price in cash and may provide
for the payment of the exercise price by delivery to us of shares of common
stock already owned by the
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<PAGE>
optionee having a fair market value equal to the exercise price of the options
being exercised, or by a combination of these methods. Therefore, if it is
provided in an optionee's option agreement, the optionee may be able to tender
shares of common stock to purchase additional shares of common stock and may
theoretically exercise all of his stock options with no additional investment
other than the purchase of his original shares.
Any unexercised options that expire or that terminate upon an optionee's
ceasing to be employed by us become available again for issuance under this
plan.
On the date of this prospectus, options exercisable for an aggregate of
2,596,667 shares of common stock have been granted pursuant to this plan at a
weighted average exercise price of $4.14 per share.
1998 STOCK COMPENSATION PROGRAM
In July 1998, the board of directors adopted the 1998 stock compensation
program. This program provides for the grant of options to purchase up to
1,000,000 shares of common stock to officers, employees, directors, and
independent contractors and agents of Netgateway. Options may be either
"incentive stock options" or non-qualified stock options under Federal tax laws.
This program will be administered by the board of directors, or, if options
are being granted to one or more of our executive officers by a committee of the
board a majority of the members of which shall consist of "non-employee
directors" of the board of directors. The board of directors or the committee,
as the case may be, will determine, among other things, the individuals who
shall receive options, the time period during which the options may be partially
or fully vested and exercisable, the number of shares of common stock issuable
upon the exercise of each option, and the option exercise price.
The exercise price per share of common stock subject to an option may not be
less than the fair market value per share of common stock on the date the option
is granted. The aggregate fair market value of common stock for which any person
may be granted incentive stock options which first become exercisable in any
calendar year may not exceed $100,000 on the date of grant.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution or, if permitted, pursuant to a qualified
domestic relations order and, during the lifetime of the optionee, the option
will be exercisable only by the optionee. In the event of termination of
employment for reasons other than the death or disability of the optionee, the
option shall terminate immediately, provided, however, that the board of
directors may, in its sole discretion, allow the option to be exercised, to the
extent exercisable on the date of termination of employment or service, at any
time within 60 days from the date of termination of employment or service. In
the event of termination of employment by reason of the death or disability of
the optionee, the option may be exercised, to the extent exercisable on the date
of death or disability, within one year from such date.
We may grant options under this program within ten years from the effective
date of the plan. The effective date of this program is July 31, 1998. Holders
of incentive stock options granted under this program cannot exercise these
options more than ten years from the date of grant. Options granted under this
program generally provide for the payment of the exercise price in cash and may
provide for the payment of the exercise price by delivery to us of shares of
common stock already owned by the optionee having a fair market value equal to
the exercise price of the options being exercised, or by a combination of these
methods. Therefore, if that is provided in an optionee's option agreement, the
optionee may be able to tender shares of common stock to purchase additional
shares of common stock and may theoretically exercise all of his stock options
with no additional investment other than the purchase of his original shares.
Any unexercised options that expire or that terminate upon an optionee's
ceasing to be employed by us become available again for issuance under this
program.
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<PAGE>
Although this program permits us to grant, in addition to incentive stock
options and non-qualified stock options,
- rights to purchase shares of our common stock to employees,
- restricted shares of our common stock,
- stock appreciation rights, and
- performance shares of common stock,
we have not issued any other type of compensation under this program other than
non-qualified stock options and have agreed not to do so in the future.
On date of this prospectus, options exercisable for an aggregate of 998,300
shares of common stock have been granted pursuant to this plan at a weighted
average exercise price of $3.43 per share.
DIRECTORS' LIMITATION OF LIABILITY
Our certificate of incorporation and/or by-laws include provisions to (1)
indemnify the directors and officers to the fullest extent permitted by the
Delaware General Corporation Law including circumstances under which
indemnification is otherwise discretionary and (2) eliminate the personal
liability of directors and officers for monetary damages resulting from breaches
of their fiduciary duty, except for liability for breaches of the duty of
loyalty, acts, or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware General Corporation Law or for any transaction from which the director
derived an improper personal benefit. We believe that these provisions are
necessary to attract and retain qualified persons as directors and officers.
We have applied for directors and officers liability insurance in an amount
of not less than $2 million.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to our directors, officers, and controlling persons pursuant to
the foregoing provisions or otherwise, we have been advised that, in the opinion
of the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of this prospectus,
- each person who is known by us to be the owner of record or beneficial
owner of more than 5% of the outstanding common stock,
- each of our directors and executive officers, and
- all of our directors and executive officers as a group,
the number of shares of common stock beneficially owned by each such person and
such group and the percentage of the outstanding shares owned by each such
person and such group.
Except as otherwise noted below, the address of each of the persons in the
table is c/o Netgateway, Inc., 300 Oceangate, 5(th) Floor, Long Beach,
California 90802.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-----------------------------------------------------------------------------
NUMBER OF WARRANTS
OR OPTIONS GRANTED UNDER
OUR STOCK OPTION PLANS
INCLUDED IN NUMBER OF PERCENT PRIOR PERCENT AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES SHARES TO OFFERING OFFERING
- --------------------------------------------- ----------------- ------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff........................... 1,925,000(1) 250,000 18.8% 15.1%
Donald M. Corliss, Jr........................ 352,000 200,000 3.5 2.8
David Bassett-Parkins........................ 385,000 200,000 3.8 3.0
Hanh Ngo..................................... 238,333 133,333 2.4 1.9
Craig Gatarz................................. 2,955 2,955 * *
Van Andrews.................................. 50,000 50,000 * *
Gateway Business
9401 Jeronimo
Irvine, California 92618
Scott Beebe.................................. 900,000 0 9.1 7.3
1845 Baywood
Salt Lake City, Utah 84117
William Brock................................ 50,000 50,000
Marketplace Technologies, Inc.
125 Cambridge Park Drive
Cambridge, Massachusetts 02140
Ronald Spire................................. 100,000 0 1.0 *
10880 Wilshire Boulevard
Suite 1050
Los Angeles, California 90024
Michael Khaled............................... 700,000 100,000 7.0 5.6
42690 Rio Nedo #E
Temecula, California 92590
Donald Danks................................. 699,999 100,000 7.0 5.6
2333 East Coast Highway
Suite D
Corona Del Mar, California 92625
Michael Vanderhoff........................... 602,500 100,000 6.1 4.8
6512 North State Road 32
Peoa, Utah 84061
All directors and executive officers of
Netgateway as a group (six persons)........ 4,003,288(1) 886,288 36.9 30.0
<CAPTION>
OPTIONS
GRANTED
UNDER OUR
STOCK OPTION
PLANS
NOT INCLUDED
IN NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES
- --------------------------------------------- ------------
<S> <C>
Keith D. Freadhoff........................... 476,000
Donald M. Corliss, Jr........................ 464,000
David Bassett-Parkins........................ 449,000
Hanh Ngo..................................... 333,334
Craig Gatarz................................. 158,866
Van Andrews.................................. 100,000
Gateway Business
9401 Jeronimo
Irvine, California 92618
Scott Beebe.................................. 0
1845 Baywood
Salt Lake City, Utah 84117
William Brock................................ 100,000
Marketplace Technologies, Inc.
125 Cambridge Park Drive
Cambridge, Massachusetts 02140
Ronald Spire................................. 0
10880 Wilshire Boulevard
Suite 1050
Los Angeles, California 90024
Michael Khaled............................... 0
42690 Rio Nedo #E
Temecula, California 92590
Donald Danks................................. 0
2333 East Coast Highway
Suite D
Corona Del Mar, California 92625
Michael Vanderhoff........................... 0
6512 North State Road 32
Peoa, Utah 84061
All directors and executive officers of
Netgateway as a group (six persons)........ 2,072,200
</TABLE>
- ------------------------
* Less than one percent.
(1) Includes 750,000 shares of common stock currently held by the Individual
Trusts, of which Mr. Freadhoff is trustee and over which Mr. Freadhoff has
beneficial ownership. However, see "Risk Factors--As Our Chairman and Chief
Executive Has Pledged His Stock, We May Experience A Change Of Control" and
"Related Party Transactions."
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<PAGE>
As used in the table above and elsewhere in this prospectus, the term
BENEFICIAL OWNERSHIP with respect to a security consists of sole or shared
voting power, including the power to vote or direct the vote, and/or sole or
shared investment power, including the power to dispose or direct the
disposition, with respect to the security through any contract, arrangement,
understanding, relationship, or otherwise, including a right to acquire such
power(s) during the next 60 days following the date of this prospectus. Except
as otherwise indicated, the stockholders listed in the table have sole voting
and investment powers with respect to the shares indicated. Because the table
above provides information with respect to the securities of Netgateway
beneficially owned by the persons indicated, we have segregated from this
information the information relating to securities of Netgateway owned, but not
beneficially owned, by the persons indicated according to this definition. At
the date of this prospectus, these securities consist of shares of common stock
issuable upon the exercise of options granted under our stock option plans
described in "Management--Stock Option Plans." Except for 50,000 of the stock
options of Mr. Brock which are listed in the table under the "Number of Warrants
or Options Granted Under Our Stock Option Plans Included in Number of Shares,"
none of these stock options is exercisable within 60 days following the date of
this prospectus. In addition, we have excluded from the beneficial ownership of
Messrs. Corliss and Bassett-Parkins and Ms. Ngo the shares of common stock
currently in the Individual Trusts, as described under "Related Party
Transactions."
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<PAGE>
RELATED PARTY TRANSACTIONS
In July 1998 and August 1998, we loaned $600,000 and an additional $200,000,
respectively, to Admor Memory Corp., a California-based computer memory maker,
during our then pending acquisition of Admor, which acquisition was not
consummated. This loan is due and payable on December 31, 1999 and accrues
interest at the rate of 9.5% per annum until October 1999 and 10% thereafter per
annum. In August 1998, we agreed to subordinate this obligation to a credit
facility obtained by Admor and to receive payment of this obligation from the
net income and the proceeds of equity sales of Admor. Subsequently, Admor
defaulted on this credit facility and entered receivership. We have reduced the
value of this loan in our financial statements to $0 effective December 31,
1998. Keith D. Freadhoff, our Chairman of the Board of Directors and Chief
Executive Officer, and Scott Beebe, one of our Directors, beneficially own less
than 1% and 2.89%, respectively, of the outstanding capital stock of Admor.
Donald Danks, the beneficial owner of 699,000 shares of our common stock, and
owned approximately 1.6% of the outstanding common stock of Admor. Such
individuals did not directly or indirectly receive any of the proceeds of these
loans.
From our inception on March 1, 1998 until June 1998, our business plan was
to engage in the licensing and distribution of software support materials for
the governmental and educational markets. In June 1998, we determined to change
our business model to the development of technology to enable businesses and
other organizations to engage in electronic commerce. In connection with the
implementation of our initial business plan, we entered into sublicensing
agreements related to proprietary courseware of ProSoft, an Internet training
solutions provider based in Austin, Texas. ProSoft entered into a courseware
reproduction and licensing agreement with Steps granting this firm the exclusive
right to sell courseware to the Federal government. This licensing obligation
was personally guaranteed by Scott Beebe. ProSoft also entered into a courseware
reproduction and licensing agreement with Training Resources International,
granting an exclusive right to sell courseware in the education market. This
licensing obligation was personally guaranteed by Michael Khaled, one of our
significant stockholders. We, with the consent of ProSoft, entered into
exclusive sublicense agreements with each of Steps and Training Resources. In
consideration of the sublicense from Training Resources, we agreed to assume the
minimum royalty payments required under their master license, totaling
$1,600,000. In consideration of the sublicense from Steps, we
- assumed the minimum royalty payments required under their master license,
totaling $1,500,000,
- assumed Steps' $200,000 obligation to Vision Holdings, Inc., which had
advanced funds to Steps in connection with its master license, and
- issued 1,000,000 shares of common stock to Steps.
Of this aggregate obligation of $3,300,000, we paid approximately $1,500,000.
Due to a lack of revenue derived from these licenses, we terminated the licenses
and, in December 1998, entered into a settlement agreement with such corporation
pursuant to which we have been released from all further obligation with respect
to the remaining amounts payable. Steps is substantially owned by Scott Beebe,
one of our Directors and significant stockholders. Training Resources is owned
by Michael Khaled, another of our significant stockholders. Mr. Freadhoff was a
founder of ProSoft and ProSoft's Chief Executive Officer and a director until
his resignation in November 1997. Mr. Freadhoff beneficially owns approximately
3.32% of the outstanding common stock of ProSoft. Donald M. Corliss, Jr., our
President and a Director, and Scott Beebe, one of our Directors' each
beneficially owns less than 1%, of the outstanding common stock of ProSoft.
Donald Danks, the beneficial owner of 699,000 shares of our common stock, was an
officer, director, and significant stockholder of ProSoft until early 1998.
During the period from March 4, 1998 through June 30, 1998, Mr. Freadhoff
loaned us $132,429, $100,000 of which was converted into a capital contribution
in June 1998. The remaining balance of
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<PAGE>
$32,429 is not interest bearing and is repayable upon demand. During the nine
months ended March 31, 1999, $30,630 was repaid.
During the period from March 4, 1998 through June 30, 1998, Michael Khaled,
Donald Danks, and Lynn Turnbow, stockholders of Netgateway, paid on our behalf
to ProSoft pursuant to its master licenses $200,000, $100,000, and $100,000,
respectively, in exchange for 600,000 shares of common stock.
In May 1999, Mr. Freadhoff loaned us $100,000, which loan is non-interest
bearing. This loan was repaid with a portion of the proceeds of our May 1999
private offering.
In November 1998, we issued warrants exercisable for an aggregate of 300,000
shares of common stock, 50,000 shares of common stock to each of Messrs.
Freadhoff, Beebe, Danks, and Vanderhoff, and 100,000 shares of common stock to
Michael Khaled, a significant stockholder of Netgateway. The warrants were
issued in order to reimburse Messrs. Freadhoff, Beebe, Danks, and Vanderhoff for
voluntarily transferring to Mr. Khaled an equal number shares of common stock in
order to settle a dispute between Netgateway and Mr. Khaled. These warrants are
exercisable at $1.00 per share and expire in November 2000.
In December 1998, Messrs. Freadhoff, Beebe, Danks, and Vanderhoff,
contributed to a trust (the "Master Trust") 450,000, 100,000, 100,000, and
100,000 shares of common stock, respectively. The trustee of the Master Trust is
Mr. Freadhoff and these individuals are the beneficiaries of this trust. This
trust sold 350,000 of these shares to each of two trusts the trustee of which is
Mr. Freadhoff and the beneficiary of one of which is Donald M. Corliss, Jr., our
President and one of our Directors and the beneficiary of one of which is David
Bassett-Parkins, our Chief Financial Officer and Chief Operating Officer, and
one of our Directors, in exchange for a promissory note from each of these
trusts in the principal amount of $350,000. Each of these individuals has
delivered to their respective trust a promissory note in the principal amount of
$350,000. The Master Trust sold the remaining 50,000 of these shares to a trust
the trustee of which is Mr. Freadhoff and the beneficiary of which is Hanh Ngo,
our Executive Vice President--Operations, in exchange for a promissory note from
this trust in the principal amount of $50,000. Ms. Ngo has delivered to this
trust a promissory note in the principal amount of $350,000. The trusts (the
"Individual Trusts") of which Messrs. Corliss and Bassett-Parkins and Ms. Ngo
are beneficiaries are, by their terms, permitted to deliver the shares of common
stock to their beneficiaries in three equal installments for a purchase price of
$1.00 per share on or after January 1, 2000, 2001, and 2002 (subject to
acceleration in the event of a change of control), provided that the individual
beneficiary of the Individual Trust in question has not voluntarily terminated
their employment with us prior to these dates. These individuals will satisfy
the purchase price for their shares by means of the repayment of their
respective promissory note to the respective Individual Trust. In the event that
any of these beneficiaries should so terminate their employment with us prior to
these dates, the trustee of the respective Individual Trust will return these
shares in such Individual Trust to the Master Trust in satisfaction of the
promissory note from this Individual Trust to the Master Trust. The Master Trust
will then deliver these shares to its beneficiaries in proportion to their
contributions of shares of common stock to the Master Trust.
During April and May 1999, Netgateway conducted its May 1999 private
offering. Cruttenden Roth acted as one of the placement agents of that offering
and received compensation for their services in the form of $47,000 in cash and
warrants exercisable for an aggregate of 23,500 shares of common stock for a
period of four years commencing one year after the initial closing of that
offering at the exercise price of $10.00 per share.
Our bylaws provide, and we have agreed with Cruttenden Roth Incorporated, as
representative of the several underwriters, that all future transactions between
us and any of our officers, directors, and 5% stockholders will be on terms no
less favorable to us than can be obtained from unaffiliated third parties and
will be approved by a majority of our independent and disinterested directors.
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<PAGE>
DESCRIPTION OF SECURITIES
The following description of our capital stock and certain provisions of our
certificate of incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of our certificate of incorporation and bylaws, which
have been filed as exhibits to our registration statement of which this
prospectus is a part.
IN GENERAL
We are authorized by our certificate of incorporation to issue an aggregate
of 40,000,000 shares of common stock, par value $.001 per share, and 5,000,000
shares of preferred stock, par value $.001 per share. As of March 31, 1999,
giving effect to our spring 1999 private placements, 9,795,834 shares of common
stock were outstanding and held of record by approximately 240 stockholders and
no shares of preferred stock were outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half of our outstanding shares of common stock, subject to the rights
of the holders of preferred stock, can elect all of our directors, if they
choose to do so. In this event, the holders of the remaining shares of common
stock would not be able to elect any directors. Subject to the prior rights of
any class or series of preferred stock which may from time to time be
outstanding, if any, holders of common stock are entitled to receive ratably,
dividends when, as, and if declared by the board of directors out of funds
legally available for that purpose and, upon our liquidation, dissolution, or
winding up, are entitled to share ratably in all assets remaining after payment
of liabilities and payment of accrued dividends and liquidation preferences on
the preferred stock, if any. Holders of common stock have no preemptive rights
and have no rights to convert their common stock into any other securities. The
outstanding common stock is validly authorized and issued, fully-paid, and
nonassessable. In the event we were to elect to sell additional shares of common
stock following this offering, investors in this offering would have no right to
purchase additional shares. As a result, their percentage equity interest in us
would be diluted.
The shares of our common stock offered in this offering will be, when issued
and paid for, fully paid and not liable for further call and assessment. Except
as otherwise permitted by Delaware law, and subject to the rights of the holders
of preferred stock, all stockholder action is taken by the vote of a majority of
the outstanding shares of common stock voted as a single class present at a
meeting of stockholders at which a quorum consisting of a majority of the
outstanding shares of common stock is present in person or proxy.
PREFERRED STOCK
We may issue preferred stock in one or more series and having the rights,
privileges, and limitations, including voting rights, conversion privileges, and
redemption rights, as may, from time to time, be determined by the board of
directors. Preferred stock may be issued in the future in connection with
acquisitions, financings, or other matters as the board of directors deems
appropriate. In the event that we determine to issue any shares of preferred
stock, a certificate of designation containing the rights, privileges, and
limitations of this series of preferred stock shall be filed with the Secretary
of the State of the State of Delaware. The effect of this preferred stock is
that our board of directors alone, and subject to Federal securities laws and
Delaware law, may be able to authorize the issuance of preferred stock which
could have the effect of delaying, deferring, or preventing a change in control
of Netgateway without further action by the stockholders, and may adversely
affect the voting and other rights of the holders of the common stock. The
issuance of preferred stock with voting and
57
<PAGE>
conversion rights may also adversely affect the voting power of the holders of
common stock, including the loss of voting control to others.
REGULATION OF THE INTRODUCTION OF BUSINESS AT ANNUAL MEETINGS OF STOCKHOLDERS
Our by-laws include provisions which regulate the submission by persons
other than the board of directors of matters to a vote of stockholders.
Generally, at an annual meeting of the stockholders, the only business conducted
must be brought before the annual meeting either by, or at the direction of, the
board of directors or by any of our stockholders who is a stockholder of record
at the time of giving of notice for such meeting, who shall be entitled to vote
at such annual meeting, and who complies with the notice procedures set forth in
the by-laws. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must be given timely notice thereof in writing to
our Secretary. To be timely, a stockholder's notice must be delivered or mailed
to, and received at, our principal executive offices not less than 60 days nor
more than 90 days prior to the annual meeting, regardless of any postponement,
deferrals, or adjournments of that meeting to a later date; provided, however,
that in the event that less than 70 days' notice or prior public disclosure of
the date of the annual meeting is given or made to stockholders, notice by the
stockholder to be timely must be received no later than the close of business on
the 10(th) day following the day on which notice of the date of the annual
meeting was mailed or public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting the following:
- a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting this business at the
annual meeting,
- the name and address, as they appear on our books, of the stockholder
proposing this business,
- the class and number of our shares which are beneficially owned by the
stockholder, and
- any material interest of the stockholder in the business he wishes to
bring before the annual meeting.
Notwithstanding anything in the by-laws to the contrary, no business shall
be conducted at the stockholder meeting, except in accordance with the
procedures set forth in the by-laws. The chairman of the meeting, as determined
in accordance with the by-laws, shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and, in accordance with the provisions of these by-laws, and if he should so
determine, he shall so declare to the meeting and any business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing, a stockholder shall also comply with all applicable requirements of
the Exchange Act with respect to the above.
QUOTATION ON NASDAQ NATIONAL MARKET
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol "NGWY." Our common stock currently trades on the OTC
Bulletin Board under this symbol.
TRANSFER AGENT
The transfer agent and registrar for our common stock is Colonial Stock
Transfer Co., 455 East 400 South, Suite 100, Salt Lake City, Utah 84111.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 12,456,504 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option, and no exercise of outstanding options or warrants, no conversion of any
outstanding convertible securities, and no exchange of any outstanding
exchangeable securities. Of these shares, 2,950,000 shares, including the
2,500,000 shares offered in this offering, will be freely tradeable without
further registration under the Securities Act. All of our officers and directors
and certain of our current stockholders holding an aggregate of
shares of our common stock have agreed not to sell, or otherwise dispose of, any
of our securities for a period of at least six months from the date of this
offering without the underwriters' prior written consent.
Of the presently outstanding 9,956,504 shares of common stock, 9,443,404 are
"restricted securities" within the meaning of Rule 144 under the Securities Act
and, if held for at least one year, would be eligible for sale in the public
market in reliance upon, and in accordance with, the provisions of Rule 144
following the expiration of such one-year period. In general, under Rule 144 as
currently in effect, a person or persons whose shares are aggregated, including
a person who may be deemed to be an "affiliate" of ours as that term is defined
under the Securities Act, would be entitled to sell within any three month
period a number of shares beneficially owned for at least one year that does not
exceed the greater of (1) 1% of the then outstanding shares of common stock, or
(2) the average weekly trading volume in the common stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice, and the availability of
current public information about us. However, a person who is not deemed to have
been an affiliate of us during the 90 days preceding a sale by such person and
who has beneficially owned such shares of common stock for at least two years
may sell such shares without regard to the volume, manner of sale, or notice
requirements of Rule 144.
Following this offering, we cannot predict the effect, if any, that sales of
shares of common stock pursuant to Rule 144 or otherwise, or the availability of
such shares for sale, will have on the market price prevailing from time to
time. Nevertheless, sales by the current stockholders of a substantial number of
shares of common stock in the public market could materially adversely affect
prevailing market prices for the common stock. In addition, the availability for
sale of a substantial number of shares of common stock acquired through the
exercise of the representative's warrants or the outstanding options under our
existing stock option plans or outstanding warrants or convertible securities
could materially adversely affect prevailing market prices for our common stock.
See "Risk Factors--Future Sales of Common Stock By Our Existing Stockholders
Could Adversely Affect Our Stock Price."
Some of our stockholders, holding in the aggregate approximately 1,731,400
shares of common stock or holding securities convertible into or exercisable or
exchangeable for shares of common stock, have the right, subject to a number of
conditions and limitations, to include their shares in registration statements
relating to our securities. Stockholders holding an aggregate of of these
shares of common stock have waived these rights with respect to this offering.
By exercising their registration rights and causing a large number of shares to
be registered and sold in the public market, these holders may cause the market
price of the common stock to fall.
Up to 250,000 additional shares of common stock may be purchased by the
underwriters during the period commencing on the first anniversary of the date
of this prospectus and terminating on the fifth anniversary of the date of this
prospectus through the exercise of the representative's warrants. Any and all
securities purchased upon the exercise of the representative's warrants may be
freely tradeable, provided that we satisfy certain securities registration and
qualification requirements in accordance with the terms of the representative's
warrants. See "Underwriting."
59
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement,
we have agreed to sell to each of the underwriters named below, and each of the
underwriters, for which Cruttenden Roth is acting as representative, has
severally, and not jointly, agreed to purchase the number of shares offered
hereby set forth opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated.....................................................
Total............................................................................ 2,500,000
</TABLE>
A copy of the underwriting agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part. The underwriting
agreement provides that the obligation of the underwriters to purchase the
shares is subject to some conditions. The underwriters shall be obligated to
purchase all of the shares (other than those covered by the underwriters'
over-allotment option described below), if any are purchased.
The representative has advised us that the underwriters propose initially to
offer the shares of common stock to the public at the public offering price set
forth on the cover page of this prospectus and that they may allow certain
dealers who are members of the NASD, and some foreign dealers, concessions not
in excess of $ per share, of which amount a sum not in excess of
$ per share may in turn be reallowed by such dealers to other
dealers who are members of the NASD and to some foreign dealers. After the
commencement of this offering, the offering price, the concession to selected
dealers, and the reallowance to other dealers may be changed by the
representative.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the underwriters may be required to make in respect.
We have agreed to pay to the representative an expense allowance, on a
non-accountable basis, equal to % of the gross proceeds derived from the sale
of 2,500,000 shares offered in this offering, or 2,875,000 shares if the
underwriters' over-allotment option is exercised in full. We paid an advance on
this allowance in the amount of $25,000. We have also agreed to pay some of the
representative's expenses in connection with this offering, including expenses
in connection with qualifying the shares offered hereby for sale under the laws
of such states as the representative may designate and the placement of
tombstone advertisements.
In connection with this offering, we have granted the representative the
right, for the three-year period commencing on the closing date of this
offering, to appoint an observer to attend all meetings of our board of
directors. This designee has the right to notice of all meetings of the board of
directors and to receive reimbursement for all out-of-pocket expenses incurred
in attending these meetings. In addition, such designee will be entitled to
indemnification to the same extent as our directors.
The representative has advised us that the underwriters do not intend to
confirm sales of the shares of common stock offered hereby to any account over
which they exercise discretionary authority.
We and our officers, directors, and certain of our current stockholders,
have agreed not to offer, assign, issue, sell, hypothecate, or otherwise dispose
of any shares of our common stock, our securities convertible into, or
exercisable or exchangeable for, shares of our common stock, or shares of our
common stock received upon conversion, exercise, or exchange of such securities,
to the public without the prior written consent of Cruttenden Roth for a period
of at least six months after the date of this prospectus. Cruttenden Roth may
grant or withhold its consent in its sole discretion based upon its judgment as
to whether any such proposed sales or transfers of our common stock would have
an adverse effect on the market price of our publicly traded shares.
60
<PAGE>
Prior to this offering, the common stock traded on the OTC Bulletin Board.
We have applied to have the common stock quoted on the Nasdaq National Market.
The public offering price for the shares has been determined by arms-length
negotiations between us and the representative principally on the basis of the
market price for our common stock prior to the date of this prospectus. The
factors considered in such negotiations were prevailing market conditions, our
history and prospects, and the history and prospects of the industry in which we
compete, an assessment of our management, our capital structure, and such other
factors deemed relevant.
We have also granted to the underwriters an option, exercisable during the
45-day period commencing on the date of this prospectus, to purchase at the
public offering price per share, less underwriting discounts and commissions, up
to an aggregate of 375,000 shares of common stock. To the extent this option is
exercised, the underwriters will become obligated, subject to some conditions,
to purchase additional shares of common stock. The underwriters may exercise
such right of purchase only for the purpose of covering over-allotments, if any,
made in connection with the sale of shares. Purchases of shares of common stock
upon exercise of the over-allotment option will result in the realization of
additional compensation by the underwriters.
In connection with this offering, we have agreed to sell to the
representative, individually and not as representative of the several
underwriters, at the price of $.001 per warrant, the representative's warrants
to purchase an aggregate of 250,000 shares of common stock. The representative's
warrants are exercisable for a period of four years commencing one year after
the date of this prospectus at an exercise price per share equal to $ . The
representative's warrants may not be sold, transferred, assigned, pledged, or
hypothecated for a period of 12 months from the date of the prospectus, except
to members of the selling group and to officers and partners of the
representative and members of the selling group. The representative's warrants
contain anti-dilution provisions providing for adjustments of the exercise price
and number of shares issuable on exercise of the representatives' warrants, upon
the occurrence of specified events, including stock dividends, stock splits, and
recapitalizations. The holders of the representative's warrants have no voting,
dividend, or other rights as stockholders of Netgateway with respect to shares
of common stock underlying the representative's warrants, unless the
representative's warrants shall have been exercised.
A new registration statement or post-effective amendment to the registration
statement will be required to be filed and declared effective under the
Securities Act before distribution to the public of the representative's
warrants and the underlying shares. We have agreed, on one occasion during the
period beginning one year after the date of this prospectus and ending five
years after the date of this prospectus, if requested by the holders of a
majority of the representative's warrants or shares of common stock issued upon
their exercise, to make all necessary filings to permit a public offering of the
representative's warrants and underlying shares and to use our best efforts to
cause such filing to become effective under the Securities Act and to remain
effective for at least 12 months, at our sole expense. In addition, we have
agreed to give advance notice to holders of the representative's warrants and
the underlying shares of common stock of our intention to file a registration
statement, and in such case, holders of the representative's warrants and the
underlying shares shall have the right to require us to include such shares of
common stock in such registration statement at our expense (subject to specified
limitations).
During and after this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with this offering. The underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the common stock sold in this
offering for their account may be reclaimed by the syndicate if such shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain, or otherwise affect the market price of the
common stock, which may be higher than the price that might otherwise prevail in
the open market. Neither we nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect
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<PAGE>
that the transactions described above may have on the price of the common stock.
In addition, neither we nor the underwriters make any representation that the
underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of common stock offered hereby will be passed upon for us by Brock
Silverstein LLC, New York, New York. Certain legal matters in connection with
the offering will be passed upon for the underwriters by Greenberg Traurig, New
York, New York. Brock Silverstein LLC renders legal services to Cruttenden Roth
in connection with matters other than this offering. Robert Steven Brown, a
member of Brock Silverstein LLC, owns beneficially and of record an aggregate of
5,000 shares of common stock.
EXPERTS
The consolidated financial statements of Netgateway, Inc. and subsidiaries
as of June 30, 1998 and March 31, 1999 and for the period from March 4, 1998
(inception) to June 30, 1998 and the nine months ended March 31, 1999 have been
included herein and in the Form S-1 in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Infobahn Technologies LLC dba
Digital Genesis as of December 31, 1997 and 1996 and for the years ended
December 31, 1997 and 1996 have been included herein and in the Form S-1 in
reliance upon the report of Wright Ford Young & Co., independent certified
public accountants, appearing elsewhere herein upon the authority of said firm
as experts in accounting and auditing.
The consolidated financial statements of Spartan Multimedia, Inc. as of
August 31, 1998 and for the year ended August 31, 1998 have been included herein
and in the Form S-1 in reliance upon the report of Allan Hogenson, Chartered
Accountant, appearing elsewhere herein upon the authority of said individual as
expert in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including the exhibits, schedules, and amendments to this
registration statement, under the Securities Act with respect to the shares of
common stock to be sold in this offering. This prospectus does not contain all
the information set forth in the registration statement. For further information
with respect to us and the shares of our common stock to be sold in this
offering, we make reference to the registration statement. Although this
prospectus contains all material information regarding us, statements contained
in this prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete, and in each instance we make
reference to the copy of such contract, agreement, or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference.
You may read and copy all or any portion of the registration statement or
any other information which we file at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our Securities and Exchange Commission filings,
including the registration statement, are also available to you on the
Securities and Exchange Commission's Web site (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance with this Act,
will file periodic reports, proxy and information statements, and other
information with the Securities and Exchange Commission.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NETGATEWAY, INC. AND SUBSIDIARIES PRO FORMA STATEMENTS
Unaudited Pro Forma Consolidated Statement of Operations for the period March 4,
1998 (Inception) through June 30, 1998........................................... F-3
Unaudited Pro Forma Consolidated Statement of Operations for the nine months ended
March 31, 1999................................................................... F-4
Notes to Unaudited Pro Forma Consolidated Statement of Operations.................. F-5
NETGATEWAY, INC. AND SUBSIDIARIES
Independent Auditor's Report for Netgateway, Inc................................... F-6
Consolidated Balance Sheets as of March 31, 1999 and June 30, 1998................. F-7
Consolidated Statements of Operations for the nine months ended March 31, 1999, the
period March 4, 1998 (Inception) through June 30, 1998 and the cumulative period
March 4, 1998 (Inception) through March 31, 1999................................. F-8
Consolidated Statements of Changes in Shareholders' Deficit for the period March 4,
1998 (Inception) through March 31, 1999.......................................... F-9
Consolidated Statements of Cash Flows for the nine months ended March 31, 1999, the
period March 4, 1998 (Inception) through June 30, 1998 and the cumulative period
March 4, 1998 (Inception) through March 31, 1999................................. F-10
Notes to Consolidated Financial Statements......................................... F-11
INFOBAHN TECHNOLOGIES, LLC DBA DIGITAL GENESIS
Independent Auditor's Report for Infobahn Technologies, LLC dba Digital Genesis.... F-25
Balance Sheets as of December 31, 1997 and 1996.................................... F-26
Statements of Operations for the Years Ended December 31, 1997 and 1996............ F-27
Statements of Members' Equity for the Years Ended December 31, 1997 and 1996....... F-28
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996............ F-29
Notes to Financial Statements...................................................... F-30
Unaudited Balance Sheets as of March 31, 1998 and December 31, 1997................ F-31
Unaudited Statements of Earnings and Members' Equity for the three months ended
March 31, 1998 and 1999.......................................................... F-32
Unaudited Statements of Cash Flows for the three months ended March 31, 1998 and
1997............................................................................. F-33
Notes to Unaudited Financial Statements............................................ F-34
SPARTAN MULTIMEDIA, INC.
Auditor's Report for Spartan Multimedia, Inc....................................... F-36
Balance Sheet as of August 31, 1998................................................ F-37
Statement of Earnings and Retained Earnings for the Year Ended August 31, 1998..... F-38
Statement of Changes in Financial Position for the Year Ended August 31, 1998...... F-39
Notes to Financial Statements...................................................... F-40
Unaudited Balance Sheets as of November 30, 1998 and August 31, 1998............... F-41
Unaudited Statements of Earnings and Retained Earnings for the three months ended
November 30, 1998 and for the period September 19, 1997 (Inception) through
November 30, 1997................................................................ F-42
Unaudited Statements of Changes in Financial Position for the three months ended
November 30, 1998 and for the period September 19, 1997 (Inception) through
November 30, 1997................................................................ F-43
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma consolidated data present the Unaudited
Pro Forma Consolidated Statement of Operations of the Company for the nine
months ended March 31, 1999, and the period since inception (March 4, 1998) to
June 30, 1998 after giving effect to the acquisitions of Spartan Multimedia and
Infobahn Technologies (dba Digital Genesis) as if they had been consummated at
the beginning of the respective periods presented. The Company's fiscal year
ends on June 30.
The pro forma data are based on the historical consolidated statements of
the Company, Spartan Multimedia and Infobahn Technologies, giving effect to the
acquisitions using the purchase method of accounting and the assumptions and
adjustments outlined in the accompanying Notes to Unaudited Pro Forma
Consolidated Financial Statements.
The following unaudited pro forma consolidated financial data do not give
effect to anticipated expenses related to the acquisition and do not reflect
certain cost savings that management of the Company believes may be realized
following the acquisition. These savings are expected to be realized primarily
through integration of operations.
The pro forma data are provided for comparative purposes only. They do not
purport to be indicative of the results that actually would have occurred if the
acquisitions had been consummated on the dates indicated or that may be obtained
in the future. The unaudited pro forma consolidated financial data should be
read in conjunction with the Notes thereto, the audited Consolidated Financial
Statements of the Company and the Notes thereto and the audited Financial
Statements of Infobahn Technologies and Spartan Multimedia, and the Notes
thereto, all included in this registration statement.
F-2
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------- PRO FORMA
DIGITAL SPARTAN -------------------------------------
NETGATEWAY GENESIS MULTIMEDIA ADJUSTMENTS REFS. TOTAL
------------- ---------- ----------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Service revenue........................ $ 2,800 115,651 5,874 124,325
Operating expenses:
License fees......................... 3,822,000 -- -- 3,822,000
Depreciation and amortization........ 12,249 228 -- 74,718 1,2 87,195
Selling, general and
administrative..................... 721,210 62,030 19,360 -- 802,600
--
------------- ---------- ----------- ----------- -----------
Total operating expenses......... 4,555,459 62,258 19,360 74,718 4,711,795
--
------------- ---------- ----------- ----------- -----------
Income (loss) from operations.... (4,552,659) 53,393 (13,486) (74,718) (4,587,470)
Interest expense....................... 19,277 -- -- -- 19,277
--
------------- ---------- ----------- ----------- -----------
Net income (loss)................ $ (4,571,936) 53,393 (13,486) (74,718) (4,606,747)
--
--
------------- ---------- ----------- ----------- -----------
------------- ---------- ----------- ----------- -----------
Basic and diluted loss per share....... $ (0.84) -- -- -- (0.81)
--
--
------------- ---------- ----------- ----------- -----------
------------- ---------- ----------- ----------- -----------
Weighted average common shares
outstanding -- basic and diluted..... 5,416,242 -- -- 400,000 3 5,721,327
--
--
------------- ---------- ----------- ----------- -----------
------------- ---------- ----------- ----------- -----------
</TABLE>
F-3
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA
SPARTAN -------------------------------------
NETGATEWAY MULTIMEDIA ADJUSTMENTS REFS TOTAL
------------- ----------- ----------- --- -----------
<S> <C> <C> <C> <C> <C>
Service revenue..................................... $ 113,959 3,441 117,400
Operating expenses:
Depreciation and amortization..................... 125,987 -- 101,912 1 353,886
Selling, general and administrative............... 7,397,881 75,995 7,473,876
------------- ----------- ----------- -----------
Total operating expenses.................... 7,523,868 75,995 101,912 7,827,762
------------- ----------- ----------- -----------
Loss from operations........................ (7,409,909) (72,554) (101,912) (7,710,362)
Loss on sale of equity securities................... 54,729 -- -- 54,729
Interest expense.................................... 342,795 -- -- 342,795
------------- ----------- ----------- -----------
Loss before extraordinary item.............. (7,807,433) (72,554) (101,912) (8,107,886)
Extraordinary gain on extinguishment
of debt........................................... 1,653,232 -- -- 1,653,232
------------- ----------- ----------- -----------
Net loss.................................... $ (6,154,201) (72,554) (101,912) (6,454,654)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Basic and diluted extraordinary gain
per share......................................... .19 -- -- .19
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Basic and diluted loss per share.................... $ (0.71) -- -- (0.75)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Weighted average common shares outstanding - basic
and diluted....................................... 8,659,851 -- -- 8,659,851
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
F-4
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998 AND
FOR THE NINE MONTHS ENDED MARCH 31, 1999
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated statements of operations have been
prepared to reflect the acquisition of substantially all of the assets and
liabilities of Infobahn Technologies (d/b/a Digital Genesis) and all outstanding
capital stock of Spartan Multimedia in exchange for 400,000 shares of the
Company's Common Stock valued at $400,000 and 371,429 shares of common stock of
Storesonline.com, a wholly-owned subsidiary of the Company valued at $1,021,430,
which was convertible into the Company's common stock on a one-to-one basis,
respectively, as if the transactions were effective at the beginning of the
respective periods. The transactions are accounted for under the purchase
method. To give effect to this assumption, the following adjustments were made:
1. The acquisition of Spartan Multimedia resulted in acquired technology and
trade secrets of $1,019,120, which is being amortized on a straight line
basis over a five year useful life. Additional amortization of $67,941 for
the period from March 4, 1998 (inception) to June 30, 1998 and $101,912 for
the period from July 1, 1998 until the actual acquisition date of January
15, 1999 are shown.
2. The acquisition of Infobahn Technologies resulted in an intangible asset
representing the value of acquired technology of $120,000 and goodwill
valued at $235,193, which are being amortized on a straight line basis over
useful lives of seven years and ten years, respectively. Additional
amortization of $6,777 for the period since March 4, 1998 (inception) to the
acquisition date of June 2, 1998 is shown. The impact on income taxes would
be minor due to historical losses of NetGateway.
3. The Company issued 400,000 shares of common stock valued at $400,000 to
acquire Infobahn Technologies.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Netgateway, Inc.:
We have audited the accompanying consolidated balance sheets of Netgateway,
Inc. and subsidiaries (a development stage enterprise) as of March 31, 1999 and
June 30, 1998, and the related consolidated statements of operations, changes in
shareholders' equity (deficit) and cash flows for the nine months ended March
31, 1999, the period March 4, 1998 (inception) through June 30, 1998 and the
cumulative period March 4, 1998 (inception) through March 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Netgateway,
Inc. and subsidiaries as of March 31, 1999 and June 30, 1998 and the results of
its operations and its cash flows for the nine months ended March 31, 1999, the
period March 4, 1998 (inception) through June 30, 1998 and the cumulative period
March 4, 1998 (inception) through March 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company's planned principal operations have commenced,
however, minimal revenues have been generated. Additionally, the Company
continues to incur net losses and has continuing financial needs. These matters
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Los Angeles, California
July 2, 1999
F-6
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
-------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 135,594 254,597
Accounts receivable............................................................... 16,350 21,305
Short-term notes receivable, net.................................................. -- 50,000
Debt issue costs.................................................................. 152,172 --
Other current assets.............................................................. 100 45,565
-------------- -----------
Total current assets.......................................................... 304,216 371,467
Property and equipment, net (note 4)................................................ 222,976 143,384
Intangible assets, net (note 5)..................................................... 1,289,470 351,804
Other assets........................................................................ 9,371 4,897
-------------- -----------
$ 1,826,033 871,552
-------------- -----------
-------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................................. $ 454,082 106,242
Accrued liabilities............................................................... 624,799 172,842
Deferred revenue.................................................................. 40,000 --
Convertible debentures (note 8)................................................... 237,500 --
Current portion of notes payable to related parties (note 8)...................... 101,799 2,052,159
Current portion of notes payable (note 8)......................................... 160,000 --
-------------- -----------
Total current liabilities..................................................... 1,618,180 2,331,243
Notes payable to related parties, less current portion (note 8)..................... -- 367,892
-------------- -----------
Total liabilities............................................................. 1,618,180 2,699,135
-------------- -----------
Shareholders' equity (deficit) (notes 9 and 10):
Common stock, par value $.001 per share. Authorized 25,000,000 shares; issued and
outstanding 9,358,000 and 7,510,000 at March 31, 1999 and June 30, 1998,
respectively.................................................................... 9,358 7,510
Additional paid-in capital........................................................ 10,938,771 2,849,163
Deferred compensation............................................................. (12,500) (112,320)
Accumulated other comprehensive loss.............................................. (1,639) --
Deficit accumulated during development stage...................................... (10,726,137) (4,571,936)
-------------- -----------
Total shareholders' equity (deficit).......................................... 207,853 (1,827,583)
Commitments and subsequent events (notes 11, 12 and 13).............................
-------------- -----------
Total liabilities and shareholders' equity (deficit).......................... $ 1,826,033 871,552
-------------- -----------
-------------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD CUMULATIVE
MARCH 4, 1998 PERIOD FROM
NINE MONTHS (INCEPTION) MARCH 4, 1998
ENDED THROUGH (INCEPTION)
MARCH 31, JUNE 30, THROUGH
1999 1998 MARCH 31, 1999
------------- ------------- --------------
<S> <C> <C> <C>
Service revenue.................................................... $ 113,959 2,800 116,759
Operating expenses:
License fees (note 7)............................................ -- 3,822,000 3,822,000
Depreciation and amortization.................................... 125,987 12,249 138,236
Selling, general and administrative.............................. 7,397,881 721,210 8,119,091
------------- ------------- --------------
Total operating expenses..................................... 7,523,868 4,555,459 12,079,327
------------- ------------- --------------
Loss from operations......................................... (7,409,909) (4,552,659) (11,962,568)
Loss on sale of equity securities.................................. 54,729 -- 54,729
Interest expense................................................... 342,795 19,277 362,072
------------- ------------- --------------
Loss before extraordinary item............................... (7,807,433) (4,571,936) (12,379,369)
Extraordinary gain on extinguishment of debt....................... 1,653,232 -- 1,653,232
------------- ------------- --------------
Net loss..................................................... $ (6,154,201) (4,571,936) (10,726,137)
------------- ------------- --------------
------------- ------------- --------------
Basic and diluted extraordinary gain per share..................... $ 0.19 -- 0.22
------------- ------------- --------------
------------- ------------- --------------
Basic and diluted loss per share................................... $ (0.71) (0.84) (1.41)
------------- ------------- --------------
------------- ------------- --------------
Weighted average common shares outstanding--basic and diluted...... $ 8,659,851 5,416,242 7,628,895
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PRICE ---------------------- PAID-IN
DATE PER SHARE SHARES AMOUNT CAPITAL
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sale of common stock for cash.............................. 3/98 $.07 - .33 754,545 $ 755 199,245
Common stock issued for services........................... 3/98 0.22 1,445,455 1,445 316,555
Common stock issued in exchange for shareholder's payment
of Company debt.......................................... 3/98 0.50 400,000 400 199,600
Common stock issued to acquire license..................... 3/98 0.22 1,000,000 1,000 219,000
Common stock issued for services........................... 4/98 0.22 100,000 100 21,900
Deferred compensation on stock issued for services......... 4/98 -- -- --
Amortization of deferred compensation...................... 4/98 - 6/98 -- -- --
Common stock issued to acquire license..................... 4/98 0.22 1,900,000 1,900 416,100
Common stock issued for services........................... 5/98 0.22 200,000 200 43,800
Common stock issued in exchange for shareholder's payment
of Company debt.......................................... 5/98 1.00 200,000 200 199,800
Sale of common stock for cash.............................. 5/98 - 6/98 1.00 303,000 303 302,697
Conversion of debt to capital contribution................. 6/98 -- -- 100,000
Adjustment resulting from reverse acquisition.............. 6/98 450,000 450 (310)
Shares issued in business acquisition...................... 6/98 1.00 400,000 400 399,600
Conversion of debt to common stock, including interest..... 6/98 1.00 184,000 184 185,349
Stock issued for deferred compensation..................... 6/98 1.00 100,000 100 99,900
Sale of common stock for cash.............................. 6/98 2.00 73,000 73 145,927
Comprehensive loss:
Net loss................................................. -- -- --
Total comprehesive loss....................................
--------- ----------- -----------
Balance at June 30, 1998................................... 7,510,000 7,510 2,849,163
Sale of common stock for cash.............................. 7/98 - 9/98 2.00 949,800 950 1,898,650
Exercise of warrants....................................... 7/98 - 9/98 2.00 132,100 132 264,068
10/98 -
Warrants granted for services.............................. 3/99 2.00 - 2.50 -- -- 1,612,950
Stock compensation paid by shareholders.................... -- -- 400,000
Amortization of deferred compensation...................... -- -- --
Forfeited stock............................................ (48,000) (48) (10,512)
Capital contributed upon extinguishment of debt............ 12/98 -- -- 200,000
Subsidiary convertible common stock issued in business
acquisition.............................................. 1/99 2.50 - 3.00 -- -- 1,021,429
Options issued for legal services.......................... 7/98 - 3/99 -- -- 289,440
Warrants granted for debt issue costs...................... 2/99 2.50 -- -- 409,597
Shares issued for debenture conversion..................... 3/99 2.50 305,000 305 762,195
10/98 -
Shares issued for services................................. 3/99 2.00 - 3.00 390,700 390 901,710
Shares issued for debt issue costs......................... 3/99 2.50 30,000 30 74,970
Sale of common stock for cash.............................. 3/99 3.00 88,400 89 265,111
Comprehensive loss:
Net loss................................................. -- -- --
Foreign currency translation adjustment.................. -- -- --
Total comprehensive loss...................................
--------- ----------- -----------
Balance at March 31, 1999.................................. 9,358,000 $ 9,358 10,938,771
--------- ----------- -----------
--------- ----------- -----------
<CAPTION>
DEFICIT
ACCUMULATED
DURING ACCUMULATED OTHER
DEFERRED COMPREHENSIVE DEVELOPMENT COMPREHENSIVE
COMPENSATION LOSS STAGE LOSS
------------- -------------- ----------- -----------------
<S> <C>
Sale of common stock for cash.............................. -- -- --
Common stock issued for services........................... -- -- --
Common stock issued in exchange for shareholder's payment
of Company debt.......................................... -- -- --
Common stock issued to acquire license..................... -- -- --
Common stock issued for services........................... -- -- --
Deferred compensation on stock issued for services......... (14,080) -- --
Amortization of deferred compensation...................... 1,760 -- --
Common stock issued to acquire license..................... -- -- --
Common stock issued for services........................... -- -- --
Common stock issued in exchange for shareholder's payment
of Company debt.......................................... -- -- --
Sale of common stock for cash.............................. -- -- --
Conversion of debt to capital contribution................. -- -- --
Adjustment resulting from reverse acquisition.............. -- -- --
Shares issued in business acquisition...................... -- -- --
Conversion of debt to common stock, including interest..... -- -- --
Stock issued for deferred compensation..................... (100,000) -- --
Sale of common stock for cash.............................. -- -- --
Comprehensive loss:
Net loss................................................. -- (4,571,936) (4,571,936) --
--------------
Total comprehesive loss.................................... (4,571,936)
------------- -------------- ----------- ------
Balance at June 30, 1998................................... (112,320) (4,571,936) --
Sale of common stock for cash.............................. -- -- --
Exercise of warrants....................................... -- -- --
Warrants granted for services.............................. -- -- --
Stock compensation paid by shareholders.................... -- -- --
Amortization of deferred compensation...................... 89,260 -- --
Forfeited stock............................................ 10,560 -- --
Capital contributed upon extinguishment of debt............ -- -- --
Subsidiary convertible common stock issued in business
acquisition.............................................. -- -- --
Options issued for legal services.......................... -- -- --
Warrants granted for debt issue costs...................... -- -- --
Shares issued for debenture conversion..................... -- -- --
Shares issued for services................................. -- -- --
Shares issued for debt issue costs......................... -- -- --
Sale of common stock for cash.............................. -- -- --
Comprehensive loss:
Net loss................................................. -- (6,154,201) (6,154,201) --
Foreign currency translation adjustment.................. -- (1,639) -- (1,639)
--------------
Total comprehensive loss................................... (6,155,840)
------------- -------------- ----------- ------
Balance at March 31, 1999.................................. (12,500) (10,726,137) (1,639)
------------- ----------- ------
------------- ----------- ------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIT)
------------
Sale of common stock for cash.............................. 200,000
Common stock issued for services........................... 318,000
Common stock issued in exchange for shareholder's payment
of Company debt.......................................... 200,000
Common stock issued to acquire license..................... 220,000
Common stock issued for services........................... 22,000
Deferred compensation on stock issued for services......... (14,080)
Amortization of deferred compensation...................... 1,760
Common stock issued to acquire license..................... 418,000
Common stock issued for services........................... 44,000
Common stock issued in exchange for shareholder's payment
of Company debt.......................................... 200,000
Sale of common stock for cash.............................. 303,000
Conversion of debt to capital contribution................. 100,000
Adjustment resulting from reverse acquisition.............. 140
Shares issued in business acquisition...................... 400,000
Conversion of debt to common stock, including interest..... 185,533
Stock issued for deferred compensation..................... --
Sale of common stock for cash.............................. 146,000
Comprehensive loss:
Net loss................................................. (4,571,936)
Total comprehesive loss....................................
------------
Balance at June 30, 1998................................... (1,827,583)
Sale of common stock for cash.............................. 1,899,600
Exercise of warrants....................................... 264,200
Warrants granted for services.............................. 1,612,950
Stock compensation paid by shareholders.................... 400,000
Amortization of deferred compensation...................... 89,260
Forfeited stock............................................ --
Capital contributed upon extinguishment of debt............ 200,000
Subsidiary convertible common stock issued in business
acquisition.............................................. 1,021,429
Options issued for legal services.......................... 289,440
Warrants granted for debt issue costs...................... 409,597
Shares issued for debenture conversion..................... 762,500
Shares issued for services................................. 902,100
Shares issued for debt issue costs......................... 75,000
Sale of common stock for cash.............................. 265,200
Comprehensive loss:
Net loss................................................. (6,154,201)
Foreign currency translation adjustment.................. (1,639)
Total comprehensive loss...................................
------------
Balance at March 31, 1999.................................. 207,853
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
NET GATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
MARCH 4, 1998 MARCH 4, 1998
NINE MONTHS (INCEPTION) (INCEPTION)
ENDED MARCH THROUGH JUNE THROUGH
31, 1999 30, 1998 MARCH 31, 1999
-------------- ------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (6,154,201) (4,571,936) (10,726,137)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 125,986 12,249 138,235
Common stock issued for services.......................... 902,100 371,680 1,273,780
Amortization and write-off of license fees................ -- 3,822,000 3,822,000
Loss on sale of equity securities......................... 54,729 -- 54,729
Amortization of deferred compensation..................... 89,260 -- 89,260
Gain on extinguishment of debt............................ (1,653,232) -- (1,653,232)
Compensation expense for contributed capital.............. 400,000 -- 400,000
Interest expense for debt converted to equity............. 35,488 19,277 54,765
Interest expense on warrants issued as debt issue costs... 332,425 -- 332,425
Options and warrants issued for services.................. 1,902,390 -- 1,902,390
Provision for doubtful accounts........................... 23,876 25,000 48,876
Write-off of note receivable.............................. 800,000 -- 800,000
Changes in assets and liabilities:
Accounts receivable..................................... (18,921) (2,000) (20,921)
Other assets............................................ 41,297 (45,422) (4,125)
Accounts payable and accrued expenses................... 961,944 116,033 1,077,977
-------------- ------------- ------------------
Net cash used in operating activities................. (2,156,859) (253,119) (2,409,978)
-------------- ------------- ------------------
Cash flows from investing activities:
Cash assumed in business acquisition........................ 4,781 3,321 8,102
Loan for notes receivable................................... (800,000) (75,000) (875,000)
Repayment of notes receivable............................... 50,000 -- 50,000
Purchase of equity securities............................... (100,733) -- (100,733)
Proceeds from sale of equity securities..................... 46,004 -- 46,004
Purchase of property and equipment.......................... (118,927) (102,034) (220,961)
-------------- ------------- ------------------
Net cash used in investing activities................. (918,875) (173,713) (1,092,588)
-------------- ------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 2,164,800 649,000 2,813,800
Proceeds from exercise of warrants.......................... 264,200 -- 264,200
Proceeds from issuance of notes payable to related
parties................................................... 100,000 132,429 232,429
Proceeds from issuance of notes payable and convertible
debentures................................................ 1,160,000 -- 1,160,000
Repayment of notes payable to related parties............... (730,630) (100,000) (830,630)
-------------- ------------- ------------------
Net cash provided by financing activities............. 2,958,370 681,429 3,639,799
-------------- ------------- ------------------
Net increase (decrease) in cash....................... (117,364) 254,597 137,233
Cash at beginning of period................................... 254,597 -- --
Effect of exchange rate changes on cash balances.............. (1,639) -- (1,639)
-------------- ------------- ------------------
Cash at end of period......................................... $ 135,594 254,597 135,594
-------------- ------------- ------------------
-------------- ------------- ------------------
Supplemental schedule of noncash activities:
Issuance of common stock for business acquisition........... $ -- 400,000 400,000
Issuance of convertible stock in business acquisition....... 1,021,429 -- 1,021,429
Accrued asset purchases..................................... -- 27,743 27,743
Conversion of debt to common stock.......................... 762,500 284,000 1,046,500
Common stock issued in exchange for shareholders' payment of
Company debt.............................................. -- 400,000 400,000
Capital contributed upon extinguishment of debt............. 200,000 -- 200,000
Warrants issued for debt issue costs........................ 409,597 -- 409,597
Stock issued for debt issue costs........................... 75,000 -- 75,000
-------------- ------------- ------------------
-------------- ------------- ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Netgateway, Inc. and subsidiary ("Netgateway" or the "Company"), was formed on
March 4, 1998 as a Nevada corporation. Netgateway is an internet commerce and
connectivity company which provides turn-key solutions designed to enable
companies of any size to extend their business to the internet for a wide
variety of purposes, including the advertising and sale of products or services
by retailers and the conduct of commercial transactions between business
enterprises.
The Company is a development stage enterprise as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7. The Company is devoting
substantially all of its present efforts to developing technology. Planned
principal operations have commenced, but have not produced significant revenue.
Only minimal service and consulting revenues were generated through March 31,
1999.
On June 2, 1998, Video Calling Card, Inc. ("VCC"), a Nevada public shell
corporation, acquired 100 percent of the outstanding common stock of Netgateway
in exchange for 5,900,000 shares of common stock of VCC. Immediately prior to
the acquisition, VCC had 450,000 shares of common stock outstanding and
Netgateway had 590,000 shares of common stock outstanding. Since the
shareholders of Netgateway received the majority voting interests in the
combined company, Netgateway is the acquiring enterprise for financial reporting
purposes. The transaction was recorded as a reverse acquisition using the
purchase method of accounting whereby equity of Netgateway was adjusted for the
fair value of the acquired tangible net assets of VCC. The historical financial
statements of Netgateway since March 4, 1998 (inception) have been adjusted
retroactively to reflect the equivalent number of shares received in the
business combination prior to the reverse acquisition. The 450,000 shares of
common stock issued in the reverse acquisition have been included in the
weighted-average common shares outstanding since the date of acquisition, June
2, 1998.
Also on June 2, 1998, the Company acquired certain assets and liabilities of
Infobahn Technologies, LLC (d/b/a Digital Genesis), a California limited
liability company, in exchange for 400,000 shares of common stock of the Company
valued at $400,000. The consideration was allocated based on the relative fair
values of the tangible and intangible assets and liabilities acquired, including
acquired technology of $120,000, with the excess consideration of $235,193
recorded as goodwill. The operations of Digital Genesis are included in the
consolidated statements of operations of the Company since the date of
acquisition, June 2, 1998. Unaudited pro forma consolidated results of
operations for the period from March 4, 1998 (inception) through June 30, 1998
are summarized below to reflect the acquisition of Digital Genesis as if it had
occurred on March 4, 1998 (inception):
<TABLE>
<S> <C>
Revenue......................................................... $ 13,300
----------
----------
Net loss........................................................ (4,585,131)
----------
----------
Loss per share.................................................. (.85)
----------
----------
</TABLE>
In January 1999, the Company acquired 100% of the outstanding stock of Spartan
Multimedia, Inc., a Canadian corporation, in exchange for 185,715 shares of
common stock of StoresOnline.com, LTD, a wholly-owned Canadian subsidiary valued
at $464,286. The shares are convertible on a one-to-one basis into common stock
of the Company. The issuance of an additional 185,714 shares was contingent upon
F-11
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS (CONTINUED)
the attainment of certain performance standards in future periods. In April
1999, the Board of Directors approved the issuance of the contingent shares and
waived the performance standards. Accordingly, the consideration increased to
$1,021,429. The acquisition of Spartan Multimedia, Inc. was recorded using the
purchase method of accounting. The consideration was allocated based on the
relative fair values of the tangible and intangible assets and liabilities
acquired. The operations of Spartan Multimedia, Inc. are included in the
consolidated statement of operations of the Company from January 15, 1999
through March 31, 1999. Unaudited pro forma consolidated results of operations
are summarized below to reflect the acquisition of Spartan Multimedia, Inc. as
if it had occurred on July 1, 1998:
<TABLE>
<S> <C>
Revenue......................................................... $ 147,182
----------
----------
Net loss........................................................ (6,233,432)
----------
----------
Loss per share.................................................. (.72)
----------
----------
</TABLE>
(2) LIQUIDITY
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. As of
the date of this report, the Company's planned principal operations have
commenced, however, minimal revenues have been generated. The Company has relied
upon private placements of its stock and issuances of debt to generate funds to
meet its operating needs and plans to continue pursuing financing in this manner
during the next year. However, there are no assurances that such financing will
be available when and as needed to satisfy current obligations. As such,
substantial doubt exists as to whether the Company will continue as a going
concern.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(B) REVENUE RECOGNITION
Revenue generated from consulting services is recognized as services are
provided. Web-site development revenues are recognized upon completion
of each project. Services billed in advance are recorded as deferred
revenue and recognized when revenue is earned.
F-12
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their
estimated useful lives as follows:
<TABLE>
<S> <C>
Acquired 5 to 7
technology years
Goodwill 10 years
</TABLE>
(D) PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of computer and
office equipment. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets ranging
from 3 to 5 years.
(E) RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development costs are expensed as incurred.
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(G) IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future undiscounted operating cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
(H) FINANCIAL INSTRUMENTS
The carrying values of cash, accounts receivable, notes receivable,
accounts payable, accrued liabilities and current portion of notes
payable at March 31, 1999 and June 30, 1998 approximated fair value due
to the short maturity of those instruments. The fair value of the
F-13
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
notes payable to related parties could not be estimated due to the nature
of the borrowings. All financial instruments are held for purposes other
than trading.
(I) ACCOUNTING FOR STOCK OPTIONS
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations,
in accounting for its fixed plan employee stock options. As such,
compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. Compensation expense related to stock options granted to
non-employees is accounted for under Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
whereby compensation expense is recognized over the vesting period based
on the fair value of the options on the date of grant.
(J) COMPREHENSIVE INCOME
SFAS 130, "Reporting Comprehensive Income" (SFAS No. 130) establishes
standards for reporting and displaying comprehensive income (loss) and
its components in a full set of general-purpose financial statements.
This statement requires that an enterprise classify items of other
comprehensive income (loss) by their nature in a financial statement and
display the accumulated balance of other comprehensive income (loss)
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. The Company has
components of other comprehensive income (loss), which are classified in
the statement of shareholders' equity (deficit).
(K) BUSINESS SEGMENTS AND RELATED INFORMATION
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131) establishes standards for the way
public business enterprises are to report information about operating
segments in annual financial statements and requires enterprises to
report selected information about operating segments in interim
financial reports issued to shareholders. Is also establishes standards
for related disclosure about products and services, geographic areas and
major customers. It replaces the "industry segment" concept of SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," with a
"management approach" concept as the basis for identifying reportable
segments. The Company has only one operating segment. The Company formed
its wholly-owned Canadian subsidiary, StoresOnline.com, in January 1999.
Prior to that time, the Company only had operations in the United States
All revenues during the nine-months ended March 31, 1999 and the period
March 4, 1998 (inception) through June 30, 1998 were generated in the
United States. Substantially all of the Company's long-lived assets were
located in the United States at March 31, 1999 and June 30, 1998
F-14
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(L) INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with
Financial Accounting Standards Board Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115
requires investments to be classified based on management's intent in
one of the three categories: held-to-maturity securities,
available-for-sale securities and trading securities. Held-to-maturity
securities are recorded at amortized cost. Available-for-sale securities
are recorded at fair value with unrealized gains and losses reported as
a separate component of shareholders' equity and comprehensive income
(loss). Trading securities are recorded at market value with unrealized
gains and losses reported in operations. The Company's investment
securities have been classified as available-for-sale.
(M) FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's Canadian subsidiary,
StoresOnline.com, have been translated into U.S. dollars from its
functional currency in the accompanying consolidated financial
statements in accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation." Balance sheet accounts
of StoresOnline.com are translated at year-end exchange rates while
income and expenses are translated at weighted-average exchange rates
for the year. Translation gains or losses that related to
StoresOnline.com's net assets are shown as a separate component of
shareholders' equity (deficit) and comprehensive income (loss). There
were no gains or losses resulting from realized foreign currency
transactions (transactions denominated in a currency other than the
entities' functional currency) during the nine-months ended March 31,
1999 and the period March 4, 1998 (inception) through June 30, 1998.
(N) LOSS PER SHARE
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings (loss)
per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity. Diluted earnings (loss) per share
is computed similarly to fully diluted earnings (loss) per share
pursuant to Accounting Principles Board (APB) Opinion No. 15. There were
3,608,596 options and 1,468,300 warrants to purchase shares of common
stock that were outstanding during the nine months ended March 31, 1999
which were not included in the computation of diluted loss per share
because the impact would have been antidilutive. There were 200,000
options and 73,000 warrants to purchase shares of common stock that were
outstanding during the period March 4, 1998 (inception) through June 30,
1998 which were not included in the computation of diluted loss per
share because the impact would have been antidilutive.
F-15
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(O) COSTS OF START-UP ACTIVITIES
Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities," the Company expenses all the costs of
start-up activities as incurred.
(P) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities at the balance sheet date and the
reporting of revenues and expenses during the reporting periods to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(4) PROPERTY AND EQUIPMENT
Property and equipment balances at March 31, 1999 and June 30, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Computers and office equipment $ 276,369 152,244
Less accumulated depreciation (53,393) (8,860)
---------- ----------
222,976 143,384
---------- ----------
----------
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets balances at March 31, 1999 and June 30, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Acquired technology $ 1,139,119 120,000
Goodwill 235,193 235,193
------------ ----------
1,374,312 355,193
Less accumulated amortization (84,842) (3,389)
------------ ----------
$ 1,289,470 351,804
------------ ----------
----------
</TABLE>
(6) NOTES RECEIVABLE
During the period March 4, 1998 (inception) through June 30, 1998, the Company
issued a $50,000 note receivable to a customer which was repaid during the nine
months ended March 31, 1999. In July 1998 and August 1998, the Company advanced
$800,000 to an entity with which the Company was in merger discussions. Certain
Company officers and directors were minor shareholders of the potential merger
entity. The merger was not consummated and the advance was deemed uncollectible
in December 1998 and written-off.
F-16
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LICENSE AGREEMENTS
In March 1998, the Company entered into a sublicense agreement related to
proprietary courseware with Training Resources International (TRI), which is
wholly-owned by Michael Khaled, a stockholder of the Company, in exchange for
the assumption of TRI's obligation of $1,600,000 to the original licensor,
ProSoft I-Net Solutions, Inc. (ProSoft). Michael Khaled personally guaranteed
the repayment of the Company's obligation under the sublicense agreement with
TRI to ProSoft. TRI entered into the original license agreement with ProSoft in
January 1998.
In April 1998, the Company entered into a sublicense agreement related to
proprietary courseware with S.T.E.P.S., Inc. (Steps), whose primary stockholder
is Scott Beebe, a stockholder and director of the Company, in exchange for (1)
the assumption of Steps' remaining obligation of $1,500,000 to the original
licensor, ProSoft, (2) the assumption of Step's obligation of $200,000 to Vision
Holdings Inc. (Vision), an unrelated entity, which had advanced funds to Steps,
and (3) the issuance of 1,000,000 shares of common stock valued at $220,000 to
Steps. Scott Beebe personally guaranteed the repayment of the Company's
obligation under the sublicense agreement with Steps to ProSoft. Additionally,
the Company acquired supplies, books and other materials related to the licensed
technology from Vision in exchange for $84,000. The Company had previously
entered into a separate loan agreement for $100,000 with Vision. The Company's
chief executive officer, Keith Freadhoff, was the chief executive officer at
ProSoft when the original license agreement with Steps was entered into. Don
Danks is a stockholder of the Company and was an officer of ProSoft at the time
the original license agreements were entered into.
In April 1998, the Company converted the $300,000 obligation to Vision into
1,900,000 shares of common stock, valued at $418,000. As a result, license fees
of $418,000 were recorded for the incremental increase of the stock exchanged
for the note payable cancellation.
In June 1998, the Company changed its business plan and began focusing on
developing technology to enable businesses and other organizations to conduct
commerce over the internet. Therefore, the Company determined that the license
fees would not ultimately be recoverable. Accordingly, the costs of acquiring
the sub-license agreements and related supplies are included as license fees
expense in the accompanying consolidated statements of operations.
(8) CONVERTIBLE DEBENTURES AND NOTES PAYABLE
During January 1999 and February 1999, the Company issued $1,000,000 of
convertible debentures bearing interest at the 90-day Treasury Bill rate plus 4
percent and issued 274,350 detachable stock purchase warrants valued at
$405,395. The debentures are convertible into the Company's common stock at
$2.50 per share at the Company's option. The debentures are due in December
1999. As of March 31, 1999, $762,500 of the debentures had been converted into
305,000 shares of common stock. The convertible debentures are secured by the
Company's accounts receivable and intellectual property.
In March 1999, Keith Freadhoff, the chief executive officer of the Company,
loaned the Company $100,000 which is due within 10 days of the close of bridge
financing. In March 1999, the Company issued $160,000 of non-interest bearing
notes payable to third parties, which are due within 10 days of the close of
bridge financing.
F-17
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) CONVERTIBLE DEBENTURES AND NOTES PAYABLE (CONTINUED)
Notes payable and notes payable to related parties at March 31, 1999 and June
30, 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- -------------
<S> <C> <C>
Non-interest bearing notes payable, due within 10 days of the close of bridge
financing............................................................................ $ 160,000 --
Non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under license
agreements, maturing through October 15, 1998........................................ -- 1,100,000
Non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under license
agreements, payable in quarterly principal and interest installments of $200,000 and
maturing through December 31, 1999................................................... -- 1,287,622
Non-interest bearing note payable to an officer and shareholder, due within 10 days of
the close of bridge financing........................................................ 101,799 32,429
---------- -------------
261,799 2,420,051
Less current portion................................................................... 261,799 (2,052,159)
---------- -------------
$ -- 367,892
---------- -------------
---------- -------------
</TABLE>
During the period from March 4, 1998 (inception) through June 30, 1998, an
officer and shareholder loaned the Company $132,429 of which $100,000 was
converted into a capital contribution in June 1998. The remaining balance of
$32,429 at June 30, 1998, was repaid during the nine months ended March 31,
1999.
The non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under
license agreements due December 31, 1999, is net of imputed interest of $112,378
at June 30, 1998.
In August 1998, the notes payable agreements to ProSoft I-Net Solutions, Inc.
(ProSoft) aggregating $2,387,622 were amended whereby the scheduled principal
payments of $2,100,000 and $400,000 due in fiscal years 1999 and 2000, were
changed to $1,800,000 and $700,000, respectively. During the nine months ended
March 31, 1999, the Company repaid $700,000 of the notes payable to ProSoft. In
December 1998, ProSoft released the Company of its remaining obligation under
the notes payable agreements. As of December 1998, the Company recognized
$35,488 of imputed interest as interest expense. The remaining imputed interest
balance was expensed upon extinguishment of the debt in December 1998.
Additionally, Michael Khaled and Scott Beebe, who personally guaranteed
repayment of the Company's obligations to ProSoft, paid ProSoft $200,000 in the
aggregate to terminate their individual personal guarantees of the notes payable
which was recorded as a capital contribution upon extinguishment of debt.
Accordingly, the Company recognized $1,653,232 as gain on extinguishment of debt
during the nine months ended March 31, 1999.
(9) STOCKHOLDERS' EQUITY
During the period March 4, 1998 (inception) through June 30, 1998, the Company
issued 1,645,455 shares of common stock valued at $362,000 to certain officers
and employees in exchange for compensation. The shares vested immediately upon
grant. In April 1998, the Company granted 100,000 shares of common stock under a
consulting agreement in exchange for services valued at $22,000.
F-18
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
Compensation expense of $7,920 was recognized for the value of the shares which
vested immediately upon grant. Under the agreement, the Company may repurchase
up to 64,000 shares of the common stock issued to the consultant. The shares
eligible for repurchase vest ratably over a 24 month period upon performance of
services under the consulting agreement. Deferred compensation of $14,080 was
recorded in the accompanying consolidated statement of changes in shareholders'
deficit to reflect the unearned compensation. During the period March 4, 1998
(inception) through June 30, 1998, 8,000 of the shares eligible for repurchase
vested resulting in $1,760 of compensation. During the nine months ended March
31, 1999, 8,000 of the shares eligible for repurchase vested and the consulting
agreement was subsequently canceled. As a result, $1,760 of additional
compensation was recorded and the 48,000 remaining unvested common shares were
forfeited.
In June 1998, the Company issued 100,000 shares of common stock to an employee
in exchange for services valued at $100,000. Half of the shares vested on July
1, 1998 with the remaining shares vesting ratably over a 12 month period.
Accordingly, deferred compensation of $100,000 was recorded at June 30, 1998.
During the nine months ended March 31, 1999, 87,500 shares vested resulting in
compensation of $87,500.
During the period March 4, 1998 (inception) through June 30, 1998, Michael
Khaled, Don Danks and Lynn Turnbow, shareholders of the Company, paid, on behalf
of the Company, $400,000 of the scheduled payments under the $3,000,000 notes
payable to ProSoft in exchange for 600,000 shares of common stock valued at
$400,000.
In March 1998, an officer and shareholder of the Company, Keith Freadhoff,
loaned the Company $100,000. In June 1998, the note was contributed to capital.
In June 1998, $184,000 of notes payable to third parties was converted into
184,000 shares of common stock valued at $185,333, including $1,533 of accrued
interest.
During the period March 4, 1998 (inception) through June 30, 1998, the Company
sold 1,057,545 shares of common stock for $503,000 in cash. In June 1998, the
Company sold 73,000 units in exchange for $146,000. In July 1998 through
September 1998, the Company sold 949,800 units in exchange for $1,899,600. Each
unit consisted of one share of common stock and one warrant to purchase an
equivalent number of shares of common stock at an exercise price of $4.00. The
warrants were exercisable at any time prior to September 1, 1998. The estimated
fair value of the warrants on the date of the grant was estimated to be $.02
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0%; risk-free interest rate of 5.16%; volatility of 100%; and
an expected life of two months. The warrants were subsequently repriced to $2.00
per share and the exercise date was extended to October 1, 1998. The estimated
fair value of the warrants on the date of repricing remained consistent with the
fair value on date of grant. In October 1998, 132,100 warrants were exercised to
purchase 132,100 shares of common stock generating proceeds of $264,200.
During the nine months ended March 31, 1999, the Company issued warrants as
consideration for various consulting fees and debt issue costs associated with
the convertible debentures. The warrants were exercisable within two years from
the dates of issuance. The fair value of the warrants on the dates of issuance
was estimated to be $1,602,547 using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0%; risk-free interest rate of 5%;
volatility of 100% and an expected life of 2 years. Accordingly, compensation
expense of $1,192,950, debt issuance costs of
F-19
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
$77,172 and interest expense of $332,425 was recorded in the accompanying
consolidated financial statements.
During the nine months ended March 31, 1999, the Company issued 390,700 shares
of common stock valued at $902,100 as payment of consulting services. During
March 1999, the Company issued 30,000 shares of common stock valued at $75,000
as payment of debt issuance costs associated with the issuance of $160,000 of
notes payable.
In November 1998, the Company entered into a settlement agreement with Michael
Khaled, a shareholder of the Company, whereby four shareholders of the Company
contributed 200,000 shares of common stock valued at $400,000 to Mr. Khaled.
Additionally, the Company granted warrants to purchase 100,000 shares of common
stock to Mr. Khaled and warrants to purchase 200,000 shares of common stock to
the four shareholders who contributed their stock. The fair value of the
warrants on the issuance date was estimated to be $420,000 using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected
life of 2 years. Accordingly, compensation expense of $820,000 was recognized in
the accompanying consolidated financial statements.
In March 1999, the Company sold 88,400 shares of common stock in exchange for
cash of $265,200.
(10) STOCK OPTIONS
In June 1998, the Board of Directors approved, for future grants, 500,000
options to acquire an equivalent number of shares of common stock at an exercise
price of $1 per share to certain senior management. No options were granted as
of June 30, 1998.
In June 1998, the Board of Directors granted 100,000 options to acquire an
equivalent number of shares of common stock at an exercise price of $6 per share
as consideration for legal fees and recorded compensation for the fair value of
the options aggregating $65,600. The options vest ratably as services are
provided and expire on April 30, 2005. As of June 30, 1998, only a minimal
amount of legal services had been provided under the agreement. During the nine
months ended March 31, 1999, under the anti-dilution clause of the agreement,
the number of options increased to 240,000 and the exercise price was decreased
to $2.50 per share. As a result, additional compensation of $223,840 was
recorded. The fair value of the options on the date of repricing was estimated
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an
expected life of 1.5 years.
In June 1998, the Company granted a consultant 100,000 options to purchase an
equivalent number of shares of common stock at an exercise price of $3.50 per
share as compensation for services. The options vest upon the consultant
achieving certain sales goals related to the sale of training courses under the
ProSoft license agreement by June 1999. The options expire on June 1, 2003. As
of June 30, 1998, no options had been earned under the agreement. The fair value
of the options on the date of the grant was estimated to be $.59 per share using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%; risk-free interest rate of 5.50%; volatility of 100%; and an
expected life of 5 years. Subsequent to June 30, 1998, these options were
canceled.
F-20
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) STOCK OPTIONS (CONTINUED)
In July 1998, the Board of Directors adopted the 1998 Stock Compensation Program
("Program") which consists of an Incentive Stock Option Plan, Non-Qualified
Stock Option Plan, Restricted Share Plan, Employee Stock Purchase Plan,
Non-Employee Director Stock Option Plan, Stock Appreciation Rights Plan and
Other Stock Rights Plan. An aggregate of 1,000,000 shares were reserved for
issuance under the Program. During the nine months ended March 31, 1999, the
Company granted 921,929 options under the Program at exercise prices ranging
from $2.17 to $5.34 per share. The weighted-average fair value of options
granted during the nine months ended March 31, 1999 under the Program was $2.04
per share. As of March 31, 1999, 78,071 options were available for future
grants. The Company applies APB Opinion No. 25 in accounting for stock options
granted to employees. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below for the nine months ended March 31, 1999:
<TABLE>
<S> <C>
Net loss -- as reported................................. $(6,154,201)
Net loss -- pro forma................................... (6,445,160)
----------
----------
</TABLE>
In December 1998, the Board of Directors adopted the 1998 Stock Option Plan for
Senior Executives. An aggregate of 5,000,000 shares were reserved for issuance
under the Plan. As of March 31, 1999, 2,446,667 options had been granted under
the Plan at an exercise price of $4.87 per share. Because the grant price is
greater than the market prices of the Company's common stock on the date of
grant, there was no intrinsic value on the date of grant. The shares begin
vesting on January 1, 2000. Accordingly, compensation expense related to these
stock option grants during the nine months ended March 31, 1999 is the same
under APB 25 and SFAS 123. The weighted-average fair value of the options
granted under the Plan during the nine months ended March 31, 1999 was $1.76 per
share. As of March 31, 1999, there were 2,553,333 options available for future
grants under the Plan.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
<S> <C> <C>
Balance at March 4, 1998........................................... -- $ --
Granted............................................................ 200,000 4.75
----------
Balance at June 30, 1998........................................... 200,000 4.75
Granted............................................................ 3,508,596 3.70
Canceled........................................................... (100,000) 3.50
----------
Balance at March 31, 1999.......................................... 3,608,596 3.77
---------- -----
---------- -----
</TABLE>
F-21
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCK OPTIONS (CONTINUED)
The following table summarizes information about shares under option at
March 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$2.46 to 3.71 1,568,636 9.73 years $ 2.60 60,374 $ 2.49
3.78 to 6.06 1,899,960 9.53 years 4.82 192,855 5.04
----------- -----------
3,468,596 3.81 253,229 4.43
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
(11) INCOME TAXES
Income tax expense for the period March 4, 1998 (inception) through June 30,
1998 and the nine months ended March 31, 1999 represents the California state
minimum franchise tax of $800 and is included in selling, general and
administrative expenses in the accompanying consolidated statement of
operations.
Income tax expense attributable to loss from operations during the nine
months ended March 31, 1999 and the period March 4, 1998 (inception) through
June 30, 1998, differed from the amounts computed by applying the U.S. federal
income tax rate of 34 percent to loss from operations as a result of the
following:
<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
Computed "expected" tax benefit...................................................... $ (2,092,428) (1,554,458)
Decrease (increase) in income taxes resulting from:
State and local income tax benefit, net of federal effect............................ (365,667) (278,196)
Change in the valuation allowance for deferred tax assets............................ 2,441,570 1,859,974
Other................................................................................ 17,325 (26,520)
------------- -----------
Income tax expense............................................................. $ 800 800
------------- -----------
------------- -----------
</TABLE>
F-22
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
1999 and June 30, 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................... $ 1,309,022 199,036
License fees....................................................................... -- 1,470,280
Stock compensation expense......................................................... 1,496,668 179,872
Intangible assets, principally due to differences in amortization.................. 1,410,405 10,290
Accounts receivable principally due to allowance for doubtful accounts............. 21,550 --
Accrued expenses................................................................... 57,203 --
Property and equipment, principally due to differences in depreciation............. 6,696 496
------------- -----------
Total gross deferred tax assets................................................ 4,301,544 1,859,974
Less valuation allowance....................................................... (4,301,544) (1,859,974)
------------- -----------
Net deferred tax assets........................................................ $ -- --
------------- -----------
------------- -----------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
schedule reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In order to fully realize
the deferred tax assets, the Company will need to generate future taxable income
of approximately $10,753,000 prior to the expiration of the carryforward period
in 2014. Based on the projections for future taxable income over the periods
which the deferred tax assets are deductible, management believes it is more
likely than not that the Company will not realize the benefits of these
deductible differences. Such potential future benefits have been fully reserved,
and accordingly, there are no net deferred tax assets.
As of March 31, 1999, the Company had approximately $2,173,000 of net
operating loss carryforwards available for Federal and state income tax
purposes, respectively, which expire 2014. The ultimate realization of the net
operating loss carryforwards will be limited by Section 382 of the Internal
Revenue Code as a result of a change of control.
(12) LEASE COMMITMENTS
The Company has noncancelable operating leases for office space which expire
at various dates through July 2001. Minimum annual commitments under
noncancelable operates leases are $40,900 during the three months ended June 30,
1999, and $424,500, $237,000, $135,000 and $10,000 during the years ended June
30, 2000, 2001, 2002 and 2003, respectively. All other operating leases are
month-to-month arrangements.
Rent expense amounted to $58,161 and $18,367 during the nine months ended
March 31, 1999 and during the period March 4, 1998 (inception) through June 30,
1998, respectively.
F-23
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SUBSEQUENT EVENTS
During April and May 1999, the Company sold 237,934 shares of common stock
in exchange for $713,800. In April 1999, the Company issued 2,570 shares of
common stock upon the cashless exercise of 25,000 warrants at an exercise price
of $12.00 per share. The trading price of the Company's stock on date of
exercise was $13.38.
From April 1, 1999 through May 19, 1999, $37,500 of convertible debt was
converted into 15,000 shares of common stock.
In May 1999, the Company agreed to purchase from and lease back technology
to UnitNetImaging (Shopping Planet) in exchange for 35,000 shares of common
stock valued at $105,000.
In May 1999, the Company granted 3,000 warrants to purchase an equivalent
number of shares of common stock as payment for consulting services. In June
1999, the Company granted 125,000 warrants to purchase an equivalent number of
shares of common stock as payment of consulting services.
In June 1999, the Company issued a 12% Senior Note Payable of $150,000 and
15,000 shares of common stock valued at $45,000 as settlement of a legal fee
obligation. The Note is due the earlier of April 30, 2000 or upon the close of a
public sale of the Company's common stock.
In May and June 1999, the Company obtained bridge financing whereby 12%
Senior Notes Payable and 288,000 shares of common stock were issued generating
proceeds of $2,592,000, net of $288,000 of issuance costs. The Senior Notes are
due the earlier of April 30, 2000 or upon the close of a public sale of the
Company's common stock. The net proceeds from the bridge financing were
allocated to the Notes Payable and common stock based on their relative fair
values. Accordingly, $2,215,385 was recorded as notes payable, $598,154 to
equity, net of $66,462 of stock issuance costs, and $221,538 as short-term debt
issuance costs. The Company repaid $101,799 of notes payable to related parties
and $160,000 of notes payable, which were outstanding at March 31, 1999 with the
proceeds of the bridge financing.
From April to June 1999, the Company granted 118,231 and 150,000 stock
options, at exercise prices greater than the fair market value on grant date,
under the Stock Compensation Program and Stock Options Plan for Senior
Executives, respectively.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
April 20, 1999
To the Members of
Infobahn Technologies, LLC.
dba Digital Genesis:
We have audited the accompanying balance sheets of Infobahn Technologies,
LLC. dba Digital Genesis (a California Limited Liability Corporation) as of
December 31, 1997 and 1996, and the related statements of operations, members'
equity and cash flows for 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Infobahn Technologies, LLC
dba Digital Genesis as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ WRIGHT FORD YOUNG & CO.
--------------------------------------
WRIGHT FORD YOUNG & CO.
Irvine, California
F-25
<PAGE>
INFOBAHN TECHNOLOGIES, LLC.
DBA DIGITAL GENESIS
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................................................... $ 6,783 $ 3,649
Accounts receivable...................................................................... 75,174 21,296
---------- ---------
Total current assets................................................................. 81,957 24,945
---------- ---------
Equipment.................................................................................. 20,193 2,067
Less--accumulated depreciation............................................................. (1,432) (69)
---------- ---------
Net equipment........................................................................ 18,761 1,998
---------- ---------
Total assets......................................................................... $ 100,718 $ 26,943
---------- ---------
---------- ---------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 14,177 $ 10,319
Accrued expenses......................................................................... 2,874 1,585
---------- ---------
Total current liabilities............................................................ 17,051 11,904
Members' equity............................................................................ 83,667 15,039
---------- ---------
Total liabilities and members' equity................................................ $ 100,718 $ 26,943
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE>
INFOBAHN TECHNOLOGIES, LLC.
DBA DIGITAL GENESIS
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues.................................................................................. $ 507,891 $ 167,572
Selling, general and administrative expenses.............................................. 446,416 181,940
---------- ----------
Net income (loss)....................................................................... $ 61,475 $ (14,368)
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
INFOBAHN TECHNOLOGIES, LLC.
DBA DIGITAL GENESIS
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C>
Balance at December 31, 1995...................................................... $ --
Members' contributions.......................................................... 29,407
Net loss........................................................................ (14,368)
---------
Balance at December 31, 1996...................................................... 15,039
Members' contributions.......................................................... 7,153
Net income...................................................................... 61,475
---------
Balance at December 31, 1997...................................................... $ 83,667
---------
---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
DBA DIGITAL GENESIS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................................... $ 61,475 $ (14,368)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation........................................................................ 1,363 69
Increase in accounts receivable..................................................... (53,878) (21,296)
Increase in accounts payable........................................................ 3,858 10,319
Increase in accrued expenses........................................................ 1,289 1,585
---------- ----------
Net cash provided by (used in) operating activities............................. 14,107 (23,691)
---------- ----------
Cash flows from investing activities:
Purchase of equipment............................................................... (18,126) (2,067)
---------- ----------
Cash flows from financing activities:
Members' contributions.............................................................. 7,153 29,407
---------- ----------
Net increase in cash and equivalents...................................................... 3,134 3,649
Cash at beginning of year................................................................. 3,649 --
---------- ----------
Cash at end of year....................................................................... $ 6,738 $ 3,649
---------- ----------
---------- ----------
Supplemental disclosures of cash flow information:
Interest paid....................................................................... $ -- $ --
Income taxes paid................................................................... $ -- $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
DBA DIGITAL GENESIS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND SUBSEQUENT EVENT
Infobahn Technologies, LLC. dba Digital Genesis (the Company) is a
California corporation engaged primarily as an internet consulting company. The
Company essentially ceased operation in June 1998, when the Company sold all of
its net assets to Netgateway, a publicly traded company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue as the consulting services are provided to
the customer.
EQUIPMENT
Equipment is stated at cost. Depreciation on equipment is provided on the
straight-line method over the estimated useful lives of the assets, which is
five years.
INCOME TAXES
The Company is treated as a partnership for federal and state income tax
purposes. Consequently, income taxes are not payable by, or provided for, the
Company. Members are taxed individually on their respective shares of the
Company's earnings
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the report amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
3. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of trade receivables. The Company's customer base
consists primarily of technology based businesses. Significant customers as a
percentage of revenues is as follows:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Customer A...................................................................... 61% --
Customer B...................................................................... 13% 17%
Customer C...................................................................... 9% 13%
</TABLE>
F-30
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
(DBA DIGITAL GENESIS)
UNAUDITED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................................................... $ 4,057 6,783
Accounts receivable less allowance for doubtful accounts of $1,510 and $0 as of March 31,
1998 and December 31, 1997, respectively................................................ 14,908 75,174
Other current assets...................................................................... -- 3,450
--------- ---------
Total current assets.................................................................... 18,965 85,407
Property and equipment, net................................................................. 18,894 17,755
--------- ---------
$ 37,859 103,162
--------- ---------
--------- ---------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 1,962 19,387
Accrued expenses.......................................................................... 9,083 2,398
--------- ---------
Total current liabilities............................................................... 11,045 21,785
Members' equity............................................................................. 26,814 81,377
--------- ---------
$ 37,859 103,162
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited financial statements.
F-31
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
(DBA DIGITAL GENESIS)
UNAUDITED STATEMENTS OF EARNINGS AND MEMBERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Service revenue (note 2).................................................................... $ 41,820 79,553
Operating expenses:
Selling, general and administrative....................................................... 67,270 38,777
Depreciation.............................................................................. 1,113 207
---------- ---------
Total operating expenses................................................................ 68,383 38,984
---------- ---------
Net income (loss)....................................................................... (26,563) 40,569
Members' equity, beginning of period........................................................ 81,377 16,315
Member draws................................................................................ (28,000) (17,200)
Members' equity, end of period.............................................................. $ 26,814 39,684
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to unaudited financial statements.
F-32
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
(DBA DIGITAL GENESIS)
UNAUDITED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (Loss)......................................................................... $ (26,563) 40,569
Adjustments to reconcile net income(loss) to net cash provided by operating activities:
Depreciation............................................................................ 1,113 207
Changes in assets and liabilities:
Accounts receivable................................................................... 60,266 (33,889)
Other current assets.................................................................. 3,450 3,450
Accounts payable...................................................................... (17,425) 1,344
Accrued expenses...................................................................... 6,685 1,939
---------- ---------
Net cash provided by operating activities........................................... 27,526 13,620
---------- ---------
Cash flows from investing activities--purchase of property and equipment.................... (2,252) (69)
---------- ---------
Cash flows from financing activities--member draws.......................................... (28,000) (17,200)
---------- ---------
Decrease in cash.................................................................... (2,726) (3,649)
Cash, beginning of period................................................................... 6,783 3,649
---------- ---------
Cash, end of period......................................................................... $ 4,057 --
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to unaudited financial statements.
F-33
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
(DBA DIGITAL GENESIS)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF COMPANY
Infobahn Technologies, LLC dba Digital Genesis (Digital Genesis or the
Company) was formed in February 1996 as a California limited liability company.
The Company is primarily an internet consulting company, earning revenues from
consulting services, website design & development and web hosting. The Company
is also engaged in developing eCommerce applications.
REVENUE RECOGNITION
Revenue generated from consulting services is recognized as services are
performed.
INCOME TAXES
Digital Genesis is a limited liability company taxed for Federal purposes as
a partnership; therefore, the net earnings of the Company are included in the
taxable income of its owners. The Company may be subject to income taxes in
certain jurisdictions that impose unincorporated business or income taxes.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130) establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. The Company does not have
components of other comprehensive income. Therefore, comprehensive income is the
same as net income for the three months ended March 31, 1998 and 1997.
COSTS OF START-UP ACTIVITIES
Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the Costs of
Start-Up Activities", the Company expenses all of the costs of start-up
activities as incurred.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
F-34
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
(DBA DIGITAL GENESIS)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
2. CONCENTRATION OF CREDIT RISK
The Company primarily provided consulting services to technology based
businesses. The following customers comprised more than 10% of total revenues,
individually, during the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Customer A...................................................................... 17% 62%
Customer B...................................................................... 37% --
Customer C...................................................................... 21% 2%
</TABLE>
Additionally, four customers accounted for 62% of accounts receivable at
March 31, 1998 and two customers accounted for 70% of accounts receivable at
March 31, 1997.
SUBSEQUENT EVENTS
On June 2, 1998, Netgateway, Inc. acquired certain assets and liabilities of
the Company, in exchange for 400,000 shares of Netgateway, Inc. common stock.
F-35
<PAGE>
AUDITOR'S REPORT
To the Shareholders
of Spartan Multimedia Inc.
I have audited the balance sheet of Spartan Multimedia Inc. as at August 31,
1998 and the statement of earnings and retained earnings and changes in
financial position for the year then ended. These financial statements are the
responsibility of the company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform an audit to obtain
reasonable assurance 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.
In my opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at August 31, 1998 and the
results of its operations and the changes in its financial position for the year
then ended in accordance with generally accepted accounting principles in the
United States.
/s/ ALLAN HOGENSON
--------------------------------------
ALLAN HOGENSON
Chartered Accountant
Calgary, Alberta
April 19, 1999
F-36
<PAGE>
SPARTAN MULTIMEDIA INC.
BALANCE SHEET
AUGUST 31, 1998
(IN CANADIAN DOLLARS)
<TABLE>
<S> <C>
ASSETS
CURRENT
Cash............................................................................ $ 53,075
Accounts receivable (Note 2).................................................... 39,042
---------
92,117
CAPITAL (Note 3).................................................................. 10,714
---------
$ 102,831
---------
---------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities (Note 2)............................... $ 30,042
Due to shareholders (Note 2).................................................... 24,030
---------
54,072
---------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4)............................................................ 147,510
RETAINED EARNINGS (DEFICIT)....................................................... (98,751)
---------
48,759
---------
$ 102,831
---------
---------
</TABLE>
APPROVED ON BEHALF OF THE BOARD:
__/s/ David Rosenthal__, Director
David Rosenthal
__/s/ Jordi MacDonald__, Director
Jordi MacDonald
F-37
<PAGE>
SPARTAN MULTIMEDIA INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
FOR THE YEAR ENDED AUGUST 31, 1998
(IN CANADIAN DOLLARS)
<TABLE>
<S> <C>
REVENUE........................................................................... $ 13,188
---------
EXPENSES
Advertising and promotion....................................................... 39,547
Depreciation.................................................................... 1,335
Management fees................................................................. 53,674
Office.......................................................................... 4,299
Postage and delivery............................................................ 195
Professional fees............................................................... 2,651
Telephone....................................................................... 4,921
Travel.......................................................................... 5,317
---------
111,939
---------
NET EARNINGS (LOSS) and RETAINED EARNINGS
(DEFICIT), end of year............................................................ $ (98,751)
---------
---------
</TABLE>
F-38
<PAGE>
SPARTAN MULTIMEDIA INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED AUGUST 31, 1998
(IN CANADIAN DOLLARS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net earnings.................................................................... $ (98,751)
Item not affecting cash
Depreciation.................................................................. 1,335
---------
(97,416)
Net change in non-cash working capital balances................................. 15,030
---------
(82,386)
---------
FINANCING ACTIVITIES
Issuance of share capital....................................................... 147,510
---------
INVESTMENT ACTIVITIES
Purchase of capital assets...................................................... (12,049)
---------
INCREASE IN CASH.................................................................. 53,075
CASH, beginning of year........................................................... --
---------
CASH, end of year................................................................. $ 53,075
---------
---------
</TABLE>
F-39
<PAGE>
SPARTAN MULTIMEDIA INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
CAPITAL ASSETS
Capital assets are recorded at cost and are depreciated using the following
annual rates and methods:
Computer equipment 30% Declining balance
2. RELATED PARTY TRANSACTIONS
During the year, the company had business transactions with its
shareholders. The particulars of these transactions and balances owing from or
to these shareholders for the year ended August 31 were as follows:
<TABLE>
<S> <C>
Transactions during the year:
Management fees.................................................. $ 51,357
Computer equipment............................................... 9,000
Balances at end of year:
Accounts receivable (share subscriptions)........................ $ 37,500
Accounts payable (management fees)............................... 14,000
</TABLE>
Amounts due to shareholders are non-interest bearing and are not subject to
specified terms of repayment.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998
-------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
--------- ------------- -----------
<S> <C> <C> <C>
Computer equipment........................................ $ 12,049 $ 1,335 $ 10,714
</TABLE>
4. SHARE CAPITAL
AUTHORIZED
Unlimited number of common shares
ISSUED
<TABLE>
<S> <C>
1,666,668 common shares........................................... $ 147,510
---------
---------
</TABLE>
5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date,
F-40
<PAGE>
SPARTAN MULTIMEDIA INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1998
5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE (CONTINUED)
resulting in errors when information using year 2000 dates is processed. In
addition, similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year 2000
Issue may be experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may range from minor
errors to significant systems failure which could affect an entity's ability to
conduct normal business operations. It is not possible to be certain that all
aspects of the Year 2000 Issue affecting the entity, including those related to
the efforts of customers, suppliers, or other parties, will be fully resolved.
6. SUBSEQUENT EVENTS
Effective November 1, 1998, an agreement was entered into between the
shareholders of the company, Netgateway, Inc. and its wholly owned subsidiary,
Storesonline.com Ltd. (Storesonline). All of the shares of the company were
transferred to Storesonline on the effective date. The company will be
amalgamated with Storesonline upon closing.
F-41
<PAGE>
SPARTAN MULTIMEDIA INC.
UNAUDITED BALANCE SHEETS
NOVEMBER 30, 1998 AND AUGUST 31, 1998
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ----------
<S> <C> <C>
ASSETS
Current
Cash................................................................................. $ 12,245 53,075
Accounts receivable.................................................................. 695 39,042
------------ ----------
12,940 92,117
Capital................................................................................ 9,910 10,714
------------ ----------
$ 22,850 102,831
------------ ----------
------------ ----------
LIABILITIES
Current
Accounts payable and accrued liabilities............................................. $ 11,643 30,042
Due to shareholders.................................................................. 24,030 24,030
Due to Netgateway.................................................................... 3,079 --
------------ ----------
38,752 54,072
------------ ----------
SHAREHOLDERS EQUITY
Share Capital.......................................................................... 147,510 147,510
Retained Deficit....................................................................... (163,412) (98,751)
------------ ----------
(15,902) 48,759
------------ ----------
$ 22,850 102,831
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to unaudited financial statements.
F-42
<PAGE>
SPARTAN MULTIMEDIA INC.
UNAUDITED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED NOVEMBER 31, 1998 AND FOR THE
PERIOD SEPTEMBER 19, 1997 (INCEPTION) THROUGH NOVEMBER 30, 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Revenue...................................................................................... $ 1,808 --
Expenses
Advertising and promotion.................................................................. 16,947 --
Depreciation............................................................................... 804 --
Management Fees............................................................................ 39,067 --
Office..................................................................................... 2,274 --
Postage and Delivery....................................................................... 168 --
Professional Fees.......................................................................... 105 --
Telephone.................................................................................. 1,809 --
Travel..................................................................................... 5,295 --
---------- ---------
66,469 --
---------- ---------
Net Loss and Retained Deficit................................................................ $ (64,661) --
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to unaudited financial statements.
F-43
<PAGE>
SPARTAN MULTIMEDIA INC.
UNAUDITED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE THREE MONTHS ENDED NOVEMBER 31, 1998 AND FOR THE
PERIOD SEPTEMBER 19, 1997 (INCEPTION) THROUGH NOVEMBER 30, 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Operating activities
Net loss................................................................................. $ (64,661) --
Item not affecting cash
Depreciation........................................................................... 804 --
---------- ---------
(63,857) --
Net change in non-cash working capital balances.......................................... 23,027 --
---------- ---------
(40,830)
Financing activities....................................................................... -- --
Investment activities...................................................................... -- --
---------- ---------
Decrease in cash......................................................................... (40,830) --
Cash, beginning of period 53,075 --
---------- ---------
Cash, end of period $ 12,245 --
---------- ---------
---------- ---------
</TABLE>
F-44
<PAGE>
SPARTAN MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND 1997
(UNAUDITED)
1. INCORPORATION
The Company was incorporated under the Alberta Business Corporation Act on
September 19, 1997 and commenced operations in December of 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
CAPITAL ASSETS
Capital assets are recorded at cost and are depreciated using the following
annual rates and methods:
<TABLE>
<S> <C> <C>
Declining
Computer Equipment.......................... 30% Balance
</TABLE>
3. RELATED PARTY TRANSACTIONS
During the three months ended November 30,1998, the Company had business
transactions with its shareholders. The particulars of these transactions and
balances owing from or to these shareholders were as follows:
Transactions during the period:
<TABLE>
<S> <C>
Management Fees........................................... $31,026
</TABLE>
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
COST AMORTIZATION NET BOOK VALUE
--------- ------------- ---------------
<S> <C> <C> <C>
Computer equipment...................................................... $ 12,049 $ 2,139 $ 9,910
</TABLE>
5. SHARE CAPITAL
<TABLE>
<S> <C>
Authorized........................................................
Unlimited number of no par value common shares....................
Issued............................................................
1,666,668 common shares........................................... $ 147,510
---------
</TABLE>
6. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
F-45
<PAGE>
SPARTAN MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1998 AND 1997
(UNAUDITED)
7. COMMITMENTS
Effective November 1, 1998, an agreement was entered into between the
shareholders of the company, Netgateway, Inc. and its wholly owned subsidiary,
Storesonline.com Ltd (Storesonline). All of the shares of the company were
transferred to Storesonline on the effective date. The company will be
amalgamated with Storesonline upon closing.
F-46
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
NETGATEWAY
[LOGO]
UNTIL , 1999 ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by Netgateway in connection
with the issuance and distribution of the securities being offered hereby,
excluding the underwriters' discounts and commissions (items marked with an
asterisk (*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 12,909
Legal Fees and Expenses........................................... 225,000*
Blue Sky Fees (including counsel fees)............................ 40,000*
NASD Filing Fees.................................................. 30,000*
NASDR Fees........................................................ 5,144
Accounting Fees and Expenses...................................... 100,000
Transfer Agent and Registrar Fees................................. 10,000*
Printing and Engraving Expenses................................... 75,000*
Miscellaneous..................................................... 31,947*
---------
Total....................................................... $ 530,000*
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. Our Certificate of Incorporation includes the following
language:
"The personal liability of the Directors of the Corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of Subsection (b) of
Section 102 of the General Corporation Law of the State of Delaware as the same
may be amended and supplemented."
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware law to indemnify directors and officers with respect to
any matter in which the director or officer acted in good faith and in a manner
he reasonably believed to be not opposed to the best interests of Netgateway,
and, with respect to any criminal action, had reasonable cause to believe his
conduct was lawful.
Article VII, Section 7 of the by-laws of Netgateway provides as follows:
"The corporation shall indemnify its officers, directors, employees, and
agents to the extent permitted by the General Corporation Law of Delaware."
Article EIGHTH of the certificate of incorporation of Netgateway, as
amended, permits indemnification of, and advancement of expenses to, among
others, officers and directors of Netgateway. Such Article provides as follows:
"(a) Each person who was or is made a party or is threatened to be made
a party to or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation or any of its direct or
indirect subsidiaries or is or
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<PAGE>
was serving at the request of the Corporation as a director, officer,
employee, or agent of any other corporation or of a partnership, joint
venture, trust, or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee, or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights
than permitted prior thereto), against all expense, liability, and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith, and such indemnification shall
continue as to an indemnitee who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators; provided, however, that, except as provided
in paragraph (c) of this Article EIGHTH with respect to proceedings to
enforce rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the board of directors of the Corporation.
"(b) The right to indemnification conferred in paragraph (a) of this
Article EIGHTH shall include the right to be paid by the Corporation the
expenses incurred in defending any proceeding for which such right to
indemnification is applicable in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by
final judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication") that such indemnitee is not entitled to
be indemnified for such expenses under this Article EIGHTH or otherwise.
"(c) The rights to indemnification and to the advancement of expenses
conferred in paragraphs (a) and (b) of this Article EIGHTH shall be contract
rights. If a claim under paragraph (a) or (b) of this Article EIGHTH is not
paid in full by the Corporation within sixty days after a written claim has
been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by an indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) any suit by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon
a final adjudication that, the indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its board of
directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met
the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its board of directors, independent legal counsel, or its stockholders) that
the indemnitee has not met
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<PAGE>
such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any
suit brought by the indemnitee to enforce a right to indemnification or to
an advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden
of proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article EIGHTH or otherwise, shall be on
the Corporation.
"(d) The rights to indemnification and to the advancement of expenses
conferred in this Article EIGHTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, this
certificate of incorporation, by-law, agreement, vote of stockholders or
disinterested directors, or otherwise.
"(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, or agent of the Corporation or
another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation
would have the power to indemnify such person against such expense,
liability, or loss under the Delaware General Corporation Law.
"(f) The Corporation's obligation, if any, to indemnify any person who
was or is serving as a director, officer, employee, or agent of any direct
or indirect subsidiary of the Corporation or, at the request of the
Corporation, of any other corporation or of a partnership, joint venture,
trust, or other enterprise shall be reduced by any amount such person may
collect as indemnification from such other corporation, partnership, joint
venture, trust, or other enterprise.
"(g) Any repeal or modification of the foregoing provisions of this
Article EIGHTH shall not adversely affect any right or protection hereunder
of any person in respect of any act or omission occurring prior to the time
of such repeal or modification."
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Netgateway
pursuant to the foregoing provisions or otherwise, Netgateway has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1
to the Registration Statement for certain provisions regarding indemnification
of Netgateway, its officers and directors, the Underwriters, and any controlling
persons by the Underwriters against certain liabilities for information
furnished by the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the numbers
of shares of common stock sold by Netgateway, the number of options issued by
Netgateway, and the principal amount of debt instruments issued by Netgateway
since March 4, 1998 (inception), the consideration received by Netgateway for
such shares, options and debt instruments and information relating to the
section of the Securities Act or rule of the Securities and Exchange Commission
under which exemption from registration was claimed. None of these securities
was registered under the Securities Act. Except as otherwise indicated, no sales
of securities involved the use of an underwriters and no commissions were paid
in connection with the sale of any securities.
From Netgateway's inception on March 4, 1998 through June 2, 1998,
Netgateway issued to its founding stockholders a total of 2,800,000 shares of
common stock at a price of $.001 per share.
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<PAGE>
From Netgateway's inception on March 4, 1998 to June 30, 1998, Netgateway
issued 600,000 shares of common stock to several of its existing stockholders in
order to reimburse such stockholders for satisfying $400,000 of obligations of
Netgateway. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the shares was exempt by virtue of Section 4(2) of the Securities Act and the
rules promulgated thereunder. Each of these stockholders were "accredited
investors" as defined in Rule 501 under the Securities Act.
In April 1998, Netgateway issued 1,000,000 shares of common stock to
S.T.E.P.S., Inc., the primary stockholder of which is Scott Beebe, a Director of
Netgateway, in connection with the granting by Steps to Netgateway of a
sublicense relating to proprietary courseware. The certificates evidencing the
shares of common stock were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
In April 1998, Netgateway issued 1,900,000 shares of common stock to Vision
Holdings, Inc. as consideration of the cancellation of $300,000 of indebtedness
owed by Netgateway to Vision. The certificates evidencing the shares of common
stock were appropriately legended. In the opinion of Netgateway, the offer and
the sale of the shares was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
In April 1998, Netgateway issued 100,000 shares of common stock to Eric
Richardson in payment for legal consulting services. Of such shares of common
stock, 36,000 vested immediately and 64,000 vested upon performance of
consulting services by Mr. Richardson. An aggregate of 52,000 shares of common
stock were issued to Mr. Richardson pursuant to this arrangement. The
certificates evidencing the shares of common stock were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In June 1998, Netgateway issued 100,000 shares to Alex Chafetz, an employee
of Netgateway, in payment for services. The certificates evidencing the shares
of common stock were appropriately legended. In the opinion of Netgateway, the
offer and the sale of the shares was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
In June 1998, Netgateway issued 184,000 shares of common stock to
unaffiliated third party creditors of Netgateway as consideration of the
cancellation of $185,333 of indebtedness owed by Netgateway to such creditors.
The certificates evidencing the shares of common stock were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the shares was
exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On June 2, 1998, Netgateway issued 400,000 shares of common stock (including
contingent issuances) in connection with the acquisition of Digital Genesis. The
certificates evidencing the shares of common stock were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In June 1998, Netgateway closed a private offering of 687,000 shares of its
common stock. The shares were sold at the price of $1.00 per share, resulting in
gross proceeds of $687,000. Each of the investors agreed to acquire the shares
for investment purposes only and not with a view to distribution. The
certificates evidencing the shares of common stock were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. Of the investors in the offering 16 were "accredited investors" as
defined in Rule 501 under the Securities Act and 11 were not accredited
investors.
In connection with the Legal Fees Services Option Agreement, dated as of
June 3, 1998 with Nida & Maloney P.C., Netgateway issued to such firm options to
purchase 100,000 shares of common
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<PAGE>
stock (subsequently adjusted through certain antidilution provisions to be
240,000 shares of common stock) at a strike price of $2.50 per share. In the
opinion of Netgateway, the offer and the sale of the shares was exempt by virtue
of Section 4(2) of the Securities Act and the rules promulgated thereunder.
During the period from July 1998 through March 1999, Netgateway granted to
its employees stock options exercisable for an aggregate of 1,317,559 shares of
common stock at prices ranging from $2.17 to $5.34 per share.
In July 1998, Netgateway closed a private offering of 1,022,800 units, each
unit consisting of one share of common stock and one common stock purchase
warrant entitling the holder to acquire one share of common stock at a price of
$4.00 per share (subsequently repriced to $2.00 per share). The units were sold
at $2.00 per unit. These warrants were exercisable through September 30, 1998,
but were extended through October 30, 1998. Warrants exercisable for an
aggregate of 132,100 shares were exercised prior to expiration of the warrants.
The certificates evidencing the securities underlying the units were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the units (and the securities constituting the units) was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder. Of the
investors in the offering 75 were "accredited investors" as defined in Rule 501
under the Securities Act and 22 were not accredited investors.
In connection with the Consulting and Advisory Agreement, dated October 20,
1998, with Burchmont Equities Group, Inc., Netgateway issued 100,000 shares of
common stock the Burchmont Equities Group, Inc. in payment for advisory
services. The shares will vest upon the happening of all of the following
events: (1) Netgateway becomes listed on the Nasdaq SmallCap Market, (2)
Netgateway files a Registration Statement on Form S-1 for its existing shares
including these shares, and (3) Netgateway files a Form 10 and becomes a 12(g)
reporting company.
On October 20, 1998, Netgateway issued warrants exercisable for an aggregate
of 225,000 shares of common stock to Dean Dumont and 75,000 shares of common
stock to Maylene Burchmont in payment of consulting services. The certificates
evidencing the warrants and any securities underlying the warrants were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the units (and the securities constituting the units) was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On October 21, 1998, Netgateway issued warrants exercisable for an aggregate
of 300,000 shares of common stock to Howard Effron in payment of consulting
services. The certificates evidencing the warrants and any securities underlying
the warrants were appropriately legended. In the opinion of Netgateway, the
offer and the sale of the units (and the securities constituting the units) was
exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In connection with a Consulting and Advisory Agreement with Richard Berns,
on October 21, 1998 Netgateway issued 25,000 shares of common stock in payment
of advisory services. The certificates evidencing the securities underlying the
units were appropriately legended. In the opinion of Netgateway, the offer and
the sale of the units (and the securities constituting the units) was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In payment for merger and acquisition advisory services related to the
acquisition of Spartan Multimedia, in November 1998, Netgateway issued 10,000
shares of common stock to the Chaffetz Family Trust. The certificates evidencing
the securities underlying the units were appropriately legended. In the opinion
of Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
On November 20, 1998, Netgateway issued warrants exercisable for an
aggregate of (i) 50,000 shares to each of Keith D. Freadhoff, Scott Beebe,
Donald D. Danks, and Michael Vanderhoff and
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<PAGE>
(ii) 100,000 shares to Michael Khaled. The certificates evidencing the warrants
and any securities underlying the warrants were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
On November 20, 1998, Netgateway issued warrants exercisable for an
aggregate of 100,000 shares to Ronald Spire in payment for consulting services.
The certificates evidencing the warrants and any securities underlying the
warrants were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the units (and the securities constituting the units) was exempt
by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In connection with the Consulting and Advisory Agreement, dated November 1,
1998, with North Coast Securities Corp., Netgateway issued 10,000 shares of
common stock to North Coast Securities Corp. in payment for for advisory
services. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the units (and the securities constituting the units) was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
In connection with a Consulting and Advisory Agreement with Gerold Czuchna,
on December 14, 1998, Netgateway issued 5,000 shares of common stock in payment
of advisory services. The certificates evidencing the securities underlying the
units were appropriately legended. In the opinion of Netgateway, the offer and
the sale of the units (and the securities constituting the units) was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In connection with the Consulting Agreement, dated as of December 24, 1998,
between Netgateway, Inc. and Glashow Associates LLC, Netgateway issued 170,000
shares of common stock and warrants exercisable for an aggregate of 150,000
shares to such firm in payment for consulting services. The certificates
evidencing the shares of common stock were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
In connection with acquisition of Spartan Multimedia, in January 1999,
StoresOnline.com Ltd. issued 371,429 shares of class B common stock, each of
which is convertible into one share of Netgateway common stock. The certificates
evidencing the shares of common stock were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
In connection with the Consulting Agreement, dated as of January 26, 1999,
with Stock Maker, Inc., Netgateway issued 40,000 shares to such firm in payment
for advisory services. The certificates evidencing the shares of common stock
were appropriately legended. In the opinion of Netgateway, the offer and the
sale of the units (and the securities constituting the units) was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. This consulting agreement was terminated in June 1999 and Stock
Maker returned these shares to the authorized, but unissued, common stock of
Netgateway.
In connection with Netgateway's then pending private offering of convertible
debentures, on February 1, 1999, Netgateway issued warrants exercisable for an
aggregate of (i) 129,000 shares to Dean Dumont,(ii) 12,750 shares to Todd
Torneo, (iii) 3,000 shares to Tradeway Securities Group, (iv) 4,250 to John
Borcich, (v) 66,800 shares to Y2K Capital, (vi) 35,000 to Roxanne Melotte, and
(vii) 32,500 shares to Michael Vanderhoff. The certificates evidencing the
warrants and any securities underlying the warrants were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the units (and the
securities constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
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<PAGE>
In payment for financial consulting services, on February 15, 1999,
Netgateway issued an aggregate of 30,000 shares of common stock to two
individuals. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the units (and the securities constituting the units) was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder. These
shares were subsequently returned to the authorized, but unissued, common stock
of Netgateway.
In March 1999, Netgateway closed a private offering of $1 million principal
amount of convertible debentures for gross proceeds of $1 million. The
debentures are convertible into shares of common stock at the conversion price
of $2.50 per share. These debentures mature one year following the closing of
this offering. The certificates evidencing debentures, as well as any shares of
common stock issued upon the conversion thereof, were appropriately legended. In
the opinion of Netgateway, the offer and the sale of the debentures was exempt
by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. All of the investors in the offering were "accredited investors" as
defined in Rule 501 under the Securities Act.
On March 5, 1999, Netgateway issued an aggregate of 30,000 shares of common
stock in order to induce Joseph Py and Robert Ciri to make loans to Netgateway.
The certificates evidencing debentures, as well as any shares of common stock
issued upon the conversion thereof, were appropriately legended. In the opinion
of Netgateway, the offer and the sale of the debentures was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On March 17, 1999, Netgateway issued warrants exercisable for an aggregate
of 25,000 shares of common stock to XOOM.com, Inc. These warrants were
exercisable at $12.00 per share and were exercisable on a cashless basis. The
warrants were exercised in full on a cashless basis on April 14, 1999 for an
aggregate of 2,570 shares of common stock. The certificates evidencing the
warrants, as well as any shares of common stock issued upon the exercise
thereof, were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the debentures was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
On March 31, 1999, Netgateway issued 600 shares of common stock to Steve
Jorgenson, a professional golfer, in connection with Mr. Jorgenson acting as a
spokesman for Netgateway.
In April 1999, Netgateway closed a private offering of 329,000 shares of its
common stock. The shares were sold at the price of $3.00 per share, resulting in
gross proceeds of $987,000. Each of the investors agreed to acquire the shares
for investment purposes only and not with a view to distribution. The
certificates evidencing the shares of common stock were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. All of the investors in the offering were "accredited investors" as
defined in Rule 501 under the Securities Act.
On April 1, 1999, Netgateway issued warrants exercisable for an aggregate of
5,000 shares of common stock to Andrew Glashow in order to induce such
individual to make a loan to Netgateway. The certificates evidencing the
warrants were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the shares was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
On April 1, 1999, Netgateway issued warrants exercisable for an aggregate of
26,050 shares of common stock to Richard Berns in connection with Netgateway's
convertible debenture private offering. The certificates evidencing the warrants
were appropriately legended. In the opinion of Netgateway, the offer and the
sale of the shares was exempt by virtue of Section 4(2) of the Securities Act
and the rules promulgated thereunder.
In May and June 1999, Netgateway closed a private offering of 57.6 units,
each unit consisting of $50,000 principal amount of Series A 12% Senior Notes
due 2000 and 5,000 shares of common stock.
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<PAGE>
The notes mature on the earlier of April 30, 2000 and the date of the closing of
this offering. The units were sold at the price of $50,000 per unit, resulting
in gross proceeds of $2,000,000. Each of the investors agreed to acquire the
shares for investment purposes only and not with a view to distribution. The
certificates evidencing the securities underlying the units were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the shares was
exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. All of the investors in the offering were "accredited investors" as
defined in Rule 501 under the Securities Act. In addition, in connection with
this private offering, Netgateway granted to Cruttenden Roth and the other
agents responsible for placing such securities warrants exercisable for an
aggregate of 147,750 shares of common stock at an exercise price of $10.00 per
share.
In June 1999, Netgateway issued to Nida & Maloney, a law firm, three units
identical to the units described in the immediately preceding paragraph, in
satisfaction of its obligation for legal fees.
On May 3, 1999, Netgateway issued warrants exercisable for an aggregate of
5,000 shares of common stock to GMR for consulting services. The certificates
evidencing the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
Each of such transactions was exempt from registration under the Securities
Act by virtue of the provisions of Section 4(2) and/or Section 3(b) of the
Securities Act. Each purchaser of the securities described below has represented
that he/she/it understands that the securities acquired may not be sold or
otherwise transferred absent registration under the Securities Act or the
availability of an exemption from the registration requirements of the
Securities Act, and each certificate evidencing the securities owned by each
purchaser bears or will bear upon issuance a legend to that effect.
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1** Certificate of Incorporation
3.2* Bylaws
4.1** Form of Representatives' Warrant
4.2* Form of Common Stock Certificate
5.1* Opinion of Brock Silverstein LLC
10.1** Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and Keith D.
Freadhoff
10.2** Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and Donald M.
Corliss, Jr.
10.3** Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and David
Bassett-Parkins
10.4** Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and Hanh Ngo
10.5** Form of Employment Agreement, dated as of April 5, 1999, between Netgateway, Inc. and Craig Gatarz
10.6** 1998 Stock Compensation Program
10.7** 1998 Stock Option Plan for Senior Executives
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
10.8** Office Lease, dated as of June 26, 1998, between Netgateway, Inc. and Pacific Tower Associates
10.9** Form of Internet Data Center Services Agreement, between Netgateway, Inc. and Exodus Communications,
Inc.
10.10** Form of Secured Convertible Debenture due December 31, 1999
10.11** Agreement and Plan of Reorganization, dated as of June 2, 1998, among Netgateway, Infobahn
Technologies, LLC, Video Calling Card, Inc., the Netgateway Shareholders and the Video Majority
Shareholder
10.12** Software Assignment and Grant Back Limited License Agreement, dated as of November 16, 1999, between
Netgateway and Shopping Planet
10.13** Stock Purchase Agreement, dated as of November 1, 1998, among StoresOnline.com, Ltd., Netgateway,
Inc. and the Selling Stockholders
10.14** Amendment to Stock Purchase Agreement, among StoresOnline.com, Ltd., Netgateway, Inc. and the Selling
Stockholders
10.15** Form of Financial Consulting Agreement.
10.16* Form of Series A 12% Senior Note due 2000
10.17 Letter Agreement, dated June 3, 1998, between Netgateway and Nida & Maloney, including Terms of
Retention and Legal Fee Services Option
10.18 Consulting and Advisory Agreement, dated October 20, 1998, between Burchmont Equities Group, Inc. and
Netgateway
10.19 Consulting and Advisory Agreement, dated November 1, 1998, between North Coast Securities Corp. and
Netgateway
10.20 Consulting Agreement, dated December 24, 1998, between Netgateway and Glashow Associates
10.21 Consulting Agreement, dated July 1, 1999, between Netgateway and Glashow Associates LLC
10.22 Amended and Restated Subordinated Secured Promissory Note, dated August 28, 1998, from Admor Memory
Corp. and Netgateway, including the Security Agreement, dated as of August 28, 1998, among Admor
Memory Corp., Admor Memory, Ltd. and Netgateway
23.1 Consent of KPMG LLP
23.2 Consent of Wright Ford Young & Company
23.3 Consent of Allan Hogenson, Chartered Accountant
23.4* Consent of Brock Silverstein LLC (contained in the Opinion filed as Exhibit 5.1)
24.1** Power of Attorney
24.2 Power of Attorney of Van Andrews
24.3 Power of Attorney of William Brock
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
II-9
<PAGE>
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The Registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(2) For the purpose of determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of prospectus
as a new registration statement relating to the securities offered therein,
and the offering of such securities at that time as the initial bona fide
offering thereof.
(c) The Registrant hereby undertakes that it will provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(d) The Registrant hereby undertakes to supplement the prospectus, after the
expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by the
underwriters, and the terms of any subsequent reoffering thereof. If any public
offering by the underwriters is to be made on terms differing from those set
forth on the cover page of this prospectus, a post-effective amendment will be
filed to set forth the terms of such offering.
(e) The Registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement; (i) Include any
Prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
Reflect in the Prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 200
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; (iii) Include any material information which with respect to the
plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement;
(2) For the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) Remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this
Pre-Effective Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Long Beach,
California on July 18, 1999.
<TABLE>
<S> <C> <C>
NETGATEWAY, INC.
By: /s/ KEITH D. FREADHOFF
-----------------------------------------
Name: Keith D. Freadhoff
Title: Chairman of the Board of
Directors and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board of
/s/ KEITH D. FREADHOFF Directors and Chief
- ------------------------------ Executive Officer July 18, 1999
Keith D. Freadhoff (Principal Executive
Officer)
Chief Financial Officer,
* Chief Operating Officer,
- ------------------------------ and Director (Principal July 18, 1999
David Bassett-Parkins Financial and Accounting
Officer)
*
- ------------------------------ President and Director July 18, 1999
Donald M. Corliss, Jr.
*
- ------------------------------ Director July 18, 1999
Van Andrews
*
- ------------------------------ Director July 18, 1999
Scott Beebe
*
- ------------------------------ Director July 18, 1999
William Brock
*
- ------------------------------ Director July 18, 1999
Ronald Spires
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ KEITH D. FREADHOFF
-------------------------
Keith D. Freadhoff
ATTORNEY-IN-FACT
</TABLE>
II-11
<PAGE>
Exhibit 10.17
[LETTERHEAD OF NIDA & MALONEY]
June 3, 1998
Attorney-Client Privileged Communication
Donald M. Corliss, Jr., Esq.
Chief Executive Officer
NetGateway, Inc.
300 Oceangate, 5th Floor
Long Beach, CA 90802
Dear Don:
We thank you for affording us the opportunity of representing NetGateway,
Inc. (the "Company"). This letter, and the attached Terms of Retention (which
are an integral part of our retention agreement), will serve to confirm the
principal terms of our engagement.
We understand that the Company is retaining our firm to act as corporate
and securities counsel to the Company (the "Subject Engagement").
The hourly rates of our professional staff range (typically on the basis
of seniority) from $250 to $330 (in the case of partners), $150 to $245 (in the
case of associates) and $25 to $125 (in the case of legal and clerical
assistants). My own rate is currently $275 per hour. I presently anticipate that
Theodore R. Maloney, whose hourly rate is $275, and Kim R. McDaniel, whose
hourly rate is $225, among others, from this firm will also be working on this
matter. The hourly rates mentioned above may change and the applicable rates
will be those in effect at the time the particular services are rendered, as set
forth in paragraph 1 of the attached Terms of Retention.
We have agreed that no initial retainer will be required in this matter.
We will render to the Company periodic billings, typically at least
monthly and upon substantial completion of our substantive work for the Company.
Except as provided below, the
<PAGE>
NIDA & MALONEY
NetGateway, Inc.
June 3, 1998
Page 2
amounts reflected on our statements are due upon presentation and the Company
shall make payment of each of our statements upon presentation, subject to the
deferrals described below.
As an accommodation to the Company, we have agreed to defer payment of a
portion of the fees (but not expenses, which shall be paid by the Company in
full upon presentation of our periodic statements) incurred by the Company for
the periods and in the amounts specified below:
Period When Fees Incurred Fee Deferral Amount
------------------------- -------------------
April 29, 1998 through September 30, 1998 75 percent
October 1 through November 30, 1998 50 percent
December 1 through January 31, 1999 25 percent
On or before December 15, 1998, the Company shall make a cash payment to
us equal to 25 percent of the aggregate amount of deferred fees incurred through
November 30, 1998 and unpaid on December 15, 1998. The Company further agrees to
make payment of the non-deferred fee amount and all expenses incurred by us upon
presentation of our monthly statements and to pay all deferred fees in full on
or before February 15, 1999. Thereafter, the Company shall not be entitled to
any further deferral of fees.
In consideration of such fee deferral, the Company shall issue to the firm
an option as of the date hereof to purchase 100,000 shares of the Company's
common stock at an exercise price of $6.00 per share (the "Option").
Accompanying this letter is the form of the Option.
If this letter, including the attached Terms of Retention, accurately
reflects the Company's understanding of our relationship regarding the Subject
Engagement, please acknowledge the Company's approval and acceptance of these
terms by signing and returning the enclosed copy of this letter to me. We would
be pleased to answer any questions you might have.
BY SIGNING THIS AGREEMENT, AND AS FURTHER SET FORTH IN THE ATTACHED TERMS
OF RETENTION, THE COMPANY IS AGREEING TO BINDING ARBITRATION OF DISPUTES,
WHETHER AS TO FEES, QUALITY OF SERVICES RENDERED, OR OTHERWISE, ARISING
HEREUNDER AND THE COMPANY IS GIVING UP ITS RIGHT TO A JURY OR COURT TRIAL, AND
IS WAIVING ITS RIGHTS TO PROCEED UNDER THE ARBITRATION PROVISIONS OF THE STATE
BAR ACT, CALIFORNIA BUSINESS AND PROFESSIONS CODE ss.ss.6200, ET SEQ. IF THE
COMPANY
<PAGE>
NIDA & MALONEY
NetGateway, Inc.
June 3, 1998
Page 3
SO DESIRES, WE ENCOURAGE THE COMPANY TO HAVE THIS AGREEMENT REVIEWED BEFORE
EXECUTION BY INDEPENDENT COUNSEL ACTING ON ITS BEHALF.
Very truly yours,
NIDA & MALONEY, P.C.
/s/ C. Thomas Hopkins
C. Thomas Hopkins
The undersigned hereby agrees that the terms and conditions in the
foregoing letter and the accompanying Terms of Retention shall apply to those
services rendered by Nida & Maloney on behalf of the undersigned described in
the foregoing letter.
Date: June 3, 1998 NETGATEWAY, INC.
By: /s/ Donald M. Corliss, Jr.
---------------------------
Donald M. Corliss, Jr.
President
<PAGE>
NIDA & MALONEY
TERMS OF RETENTION
OF NIDA & MALONEY
Except as modified in writing, the following provisions will apply to the
relationship between Nida & Maloney and you:
1. Fees. Fees for our services will be based primarily on time spent
and our hourly billing rates current at the time that the services are
performed. The billing rates of our attorneys and legal assistants vary,
depending generally on the experience and capabilities of the attorney or legal
assistant involved, and we adjust these rates from time to time. The time for
which you will be charged will include, but will not be limited to, time spent
in telephone and office conferences with you and with our counsel, witnesses,
consultants, court personnel and others; conferences among our legal personnel;
factual investigation; legal research; responding to your requests for us to
provide information to auditors in connection with reviews or audits of
financial statements; drafting of letters, agreements, pleadings, briefs and
other documents; traveling; waiting in court; and depositions and other
discovery proceedings.
2. Costs and In-House Services. In addition to our fees, we will
bill you separately, and generally monthly, for costs and expenses incurred and
ancillary services provided such as photocopying, messenger and delivery
service, computerized research, travel (including mileage, parking, airfare,
lodging, meals and ground transportation), long distance telephone, word
processing, secretarial overtime, other costs and filing fees. Certain of such
items may be charged at more than our direct cost to cover our estimated
associated overhead. Unless special arrangements are made, we do not take
responsibility for paying fees and expenses of others, which will be the
responsibility of, and may be billed directly to, you.
3. Retainer. In addition to any retainer to which you and we have
presently agreed, we reserve the right, as a condition to the provision of
further services, to request the establishment of or an increase in the retainer
in the event that the amount of work which we are called upon to perform, or
expenses we are required to incur or advance, in connection with our
representation of you exceeds our firm's current expectation.
4. Estimates Not Binding. Although we may furnish estimates of fees
or costs that we anticipate will be incurred, these estimates are not intended
to be binding, are subject to unforeseen circumstances and are by their nature
inexact.
5. Billing and Payment. Fees and expenses will generally be billed
monthly and are payable upon presentation. We expect prompt payment. We reserve
the right to postpone or defer providing additional services or to discontinue
our representation if billed amounts are not paid when due. We will be entitled
to rely on the fact that you have raised any questions you have about a bill
within ten (10) days of receipt.
6. Cooperation. You will cooperate fully in our efforts on your
behalf.
7. Termination By You. You have the right, at any time, in your sole
discretion, to terminate our services and representation. Upon such termination
by you, you will remain obligated to pay for all services rendered and costs of
expenses paid or incurred on your behalf or through the date of our receipt of
notice of such termination or which are reasonably necessary thereafter.
<PAGE>
NIDA & MALONEY
8. Termination By Us. We reserve the absolute right to withdraw from
representing you if, among other things, you fail to honor the terms of our
engagement letter, you fail to cooperate or follow our advice on a material
matter, or any fact or circumstance occurs that would, in our view, render our
continuing representation unlawful or unethical. If we elect to withdraw, you
will take all steps necessary to free us of any obligation to perform further
services, including the execution of any documents necessary to complete our
withdrawal, and we will be entitled to be paid at the time of withdrawal for all
services rendered and costs and expenses paid or incurred on your behalf.
9. Date of Termination. Our representation of you will be considered
terminated at the earlier of (i) your termination of our representation, (ii)
our withdrawal from our representation of you or (iii) the substantial
completion of our substantive work for you.
10. Related Activities. If any claim or action is brought against us or
any personnel of the firm based on your negligence or misconduct, or if we are
asked to testify as a result of our representation of you or must defend the
confidentiality of your communications in any proceeding, you agree to pay us
for any resulting costs or damages, including our time, even if our
representation of you has ended.
11. No Guarantee of Outcome. We do not and cannot guarantee any outcome in
a matter.
12. Conflicts. Our ethical obligations will require us, while this
representation is ongoing, to decline any other engagements which conflict
directly with this representation. However, when this representation is
concluded, you understand that we will not be excluded from accepting a
representation adverse to you, except where there is a substantial relationship
between that representation and our present representation of you. Naturally, we
will not disclose any confidential information received in the course of our
representation of you in any future representation without your consent, just as
we will not disclose to you the confidences of our other clients even if that
might be to your advantage.
13. Client. Our client for the purpose of our representation, is only the
person or entity identified in the letter accompanying these Terms of Retention.
Unless expressly agreed, we are not undertaking the representation of any
related or affiliated person or entity, nor any parent, brother-sister,
subsidiary, or affiliated corporation or entity, nor any of your or their
officers, directors, agents, employees or shareholders.
14. Payment Notwithstanding Dispute. In the event of any dispute that
relates to our entitlement to any payment from you, all undisputed amounts shall
be paid by you. Any amounts in any client trust account held on your behalf,
sufficient to pay the disputed amounts, shall continue to be held in such trust
account until the final disposition of the dispute.
15. Document Retention and Destruction. In the course of our
representation of you, we are likely to come into possession of copies or
originals of documents or other materials belonging to you or others
(collectively, "materials"). Once our substantive work on the particular matter
to which those materials relate has been substantially completed, we will have
no further responsibility to maintain such materials. If you have not sought the
return of such materials within one year of the
2
<PAGE>
NIDA & MALONEY
substantial completion of our substantive work on the matter to which such
materials relate, we will thereupon have the right to destroy such materials.
16. Attorneys' Lien. You hereby grant to us a contractual lien
pursuant to California Civil Code Section 2881 on any and all claims or causes
of action (and all proceeds thereof) that are the subject of our representation
of you. This attorneys' lien will be for any sums due and owing to us for our
services and any amounts advanced by us on your behalf. This lien will attach to
any recovery you may obtain whether by arbitration, mediation, judgment,
settlement or otherwise. If requested by us, you agree to execute a financing
statement (UCC-1) in connection with the lien granted to us hereby.
17. Late Charge. All statements are due and payable upon
presentation. Amounts not paid within thirty (30) days of the billing date are
subject to a late charge of 1% per month. Such late charge applies to all
amounts due hereunder, whether for fees or reimbursement of costs. Such late
charge, although not imposed until the thirty-first (31st) day after an unpaid
amount was initially billed, will accrue on such unpaid amount from the date our
statement therefor was rendered. Our failure to impose this late charge on any
occasion, or on multiple, numerous and even repetitive occasions, is not a
waiver of our right to thereafter impose this charge on unpaid amounts
commencing the thirty-first (31st) day after each unpaid amount was initially
billed; but effective the date such amount was billed.
18. Application To Subsequent Matters. The agreement reflected in
these Terms of Retention and in the accompanying letter apply to the "Subject
Engagement" described in the accompanying letter and, unless otherwise agreed
with respect to any subsequent matters which we agree to undertake on your
behalf, to such subsequent matters as well.
19. Arbitration. IN THE EVENT OF A DISPUTE BETWEEN YOU AND US
REGARDING FEES, COSTS OR ANY OTHER MATTER RELATED TO OR ARISING OUT OF OUR
ENGAGEMENT BY YOU, OR YOUR OR OUR PERFORMANCE OF THE AGREEMENT PURSUANT TO WHICH
OUR SERVICES ARE PERFORMED, INCLUDING THE QUALITY OF THE SERVICES WHICH WE
RENDER, THE DISPUTE SHALL BE DETERMINED, SETTLED AND RESOLVED BY CONFIDENTIAL
ARBITRATION IN SANTA BARBARA, CALIFORNIA. ANY AWARD SHALL BE FINAL, BINDING AND
CONCLUSIVE UPON THE PARTIES AND A JUDGMENT RENDERED THEREON MAY BE ENTERED IN
ANY COURT HAVING JURISDICTION THEREOF. THE PREVAILING PARTY IN ANY SUCH
ARBITRATION SHALL BE ENTITLED TO REASONABLE ATTORNEYS' FEES AND COSTS.
Arbitration may be demanded by the sending of written notice to the
other party. If arbitration is demanded, within twenty (20) days of the demand
you shall present a list of five (5) qualified individuals who would be willing
to serve that you would find acceptable to act as arbitrator. To serve as
arbitrator, the individual must be a retired judge having served on any federal
court or the California Superior Court or higher court in the State of
California. Within twenty (20) days of receiving your list, we may at our sole
discretion (i) select any individual from that list and that individual shall
serve as the arbitrator, or (ii) propose our own list of five (5) individuals
for arbitrator. If we choose to present a separate list, you may within twenty
(20) days select any individual from that list and that person shall serve as
arbitrator. If no arbitrator can be agreed upon at the end of this process, each
of us shall select one individual from our own respective list and those two
persons shall jointly select the arbitrator. The arbitration shall be conducted
pursuant to the procedures set forth in the California Code of Civil Procedure
ss.ss. 1280, et. seq. and in that connection you and we agree that Section
1283.05 thereof is applicable to any such arbitration. Nothing herein shall
limit the right of the parties to stipulate and
3
<PAGE>
NIDA & MALONEY
agree to conduct the arbitration pursuant to the then-current rules of the
American Arbitration Association, the Judicial Arbitration & Mediation Services
or any other agreed-upon arbitration services provider.
4
<PAGE>
EXECUTION COPY
NETGATEWAY, INC.
LEGAL SERVICES FEE OPTION
This NETGATEWAY, INC. LEGAL SERVICES FEE OPTION (the "Option") is made and
entered into at Long Beach, California, on the date of issuance set forth on the
signature page hereof by and between NetGateway, Inc., a Nevada corporation (the
"Company") and the undersigned (the "Holder").
WHEREAS
A. The Holder has contemporaneously entered into a legal services
agreement with the Company of even date herewith (the "Agreement"); and
B. The Company has, as incentive to the Holder to perform the Holder's
legal services, agreed to grant to the Holder this Option entitling the Holder
to acquire One Hundred Thousand (100,000) shares of NetGateway, Inc. Common
Stock (the "Option Shares") at the Strike Price (as defined below), subject to
the terms and vesting upon the dates set forth below.
NOW, THEREFORE, in consideration of the premises and of the mutual
promises, warranties and representations herein contained, the parties agree as
follows:
1. OPTION. Subject to the conditions set forth herein, the Company hereby
grants to the Holder the right, privilege and option to purchase up to One
Hundred Thousand (100,000) shares of Common Stock (the "Option Shares") at the
Strike Price per share set forth below, said number of Option Shares and said
Strike Price being subject to adjustment as provided herein. No fractional
Option Shares will be issued.
2. VESTING. Subject to the continuation of the Agreement, the Option will
vest and the shares underlying the Option will be available for purchase, in the
following manner: Option Shares will vest on a monthly basis at the end of each
month based on work performed by the Holder. The amount of such work performed
shall be calculated from the amount of fees deferred by the Holder in such month
and the difference between the current Strike Price and the average of the last
reported price (or the average of the low bid and high asked price) of the
Company's Common Stock over the last five trading days of such month. By way of
example only, if fees of $12,000 are to be deferred in a month and the average
market price of the Company's Common Stock over the last five trading days of
such month as calculated hereunder is $9.00 per share, 4,000 Option Shares will
vest (4,000 x ($9.00 - $6.00) = $12,000). Vesting of the Option may also
accelerate, based on the preceding formula, in the event the Company is in
Default (as defined below) in the payment of any fees or expenses then due and
payable to the Holder. For purposes hereof, "Default" shall mean the Company's
failure to pay any fees and expenses to the firm not otherwise deferred within
30 days of presentation of our statement or other date such fees and expenses
are due and payable pursuant to the Agreement. At the end of each month, the
Holder shall deliver to the Company a statement of fees, the reported average
market price and the calculated vesting of the Option, which statement shall
constitute a vesting addendum to this Option and which shall evidence the vested
portion of the Option.
3. STRIKE PRICE. The exercise price per share for the Option Shares shall
be Six Dollars ($6.00) per share (the "Strike Price").
<PAGE>
EXECUTION COPY
4. METHOD OF EXERCISE. Stock purchased under this Option shall, at the
time of purchase, be paid for in full. The right to purchase shares hereunder
may be exercised, from time to time after the vesting dates specified in Section
2 above, by written notice to the Company stating the number of shares of Common
Stock with respect to which this Option is being exercised and the time of
delivery thereof, which shall be at least ten (10) days after the giving of such
notice, unless an earlier date shall have been mutually agreed upon. At the time
specified in such notice, the Company shall, without transfer or issue tax to
the Holder, deliver to the Holder by certified mail, a certificate or
certificates for the number of shares of Common Stock with respect to which this
Option is being exercised, against the payment of the Strike Price, in full, for
the number of shares to be delivered, by certified or bank cashier's check, or
the equivalent thereof acceptable to the Company. If the Holder fails to accept
delivery of and pay for all or any part of the number of shares of Common Stock
specified in the notice given by the Holder, upon tender and delivery of said
shares, the Holder's right to exercise this Option with respect to such
undelivered shares shall be terminated. As a condition of the exercise of the
Option, the Company may require the Holder to make such investment
representation(s) or other representation(s) to the Company as the Company may
deem to be necessary or appropriate under any applicable law or regulation.
5. TERMINATION OF OPTION. Except as herein otherwise stated, the Option,
to the extent not theretofore exercised, shall terminate at 5:00 p.m. Pacific
Time on April 30, 2005.
6. RECLASSIFICATION, CONSOLIDATION OR MERGER; ANTI-DILUTION. If, and to
the extent that the number of issued shares of Common Stock of the Company shall
be increased or reduced by change in par value, subdivision, combination,
split-up, reclassification, distribution of a dividend payable in stock, or the
like (but excluding dividends payable in cash), the number of Option Shares
subject to this Option, and the Strike Price therefor, shall be proportionately
adjusted. Subject to the terms of any agreement and plan or merger or
reorganization, if the Company is reorganized or consolidated, or merged with
any other corporation, the Holder shall be entitled to receive Options covering
shares of Common Stock of such reorganized, consolidated or merged Company in
the same proportion, at an equivalent aggregate exercise price, and subject to
the same conditions as holders of similar derivative securities of the Company.
If, at any time, while this Option is outstanding, the Company issues Common
Stock or other securities convertible into, or exercisable for, Common Stock
(other than pursuant to stock options existing on the date hereof or any stock
options issued to directors, officers and employees of the Company), at a price
per share of Common Stock equivalent that is less than the Strike Price (or New
Strike Price (as defined below) if the Strike Price has been adjusted
previously), then (a) the Strike Price shall be reduced to an amount equal to
the price per share of Common Stock equivalent in such issuance (the "New Strike
Price") and (b) the number of Option Shares to be issued under the Option shall
be increased by multiplying the Option Shares by the following fraction: Strike
Price/New Strike Price. Upon the occurrence of any of the foregoing events, the
Company shall promptly notify the Holder in writing and provide Holder with a
certificate of the Company's Chief Financial Officer setting forth any required
adjustment in the Option, the Strike Price or the Option Shares and the facts
upon which such adjustment are based.
7. RIGHTS PRIOR TO EXERCISE OF OPTION. The Holder shall have no rights as
a shareholder of shares subject to this Option until payment of the Strike Price
and the delivery of the Option Shares upon such exercise as herein provided.
- 2 -
<PAGE>
EXECUTION COPY
8. CERTAIN COVENANTS OF THE COMPANY. The Company covenants and agrees that
all shares which may be issued upon the exercise of this Option, will, upon
issuance, be duly and validly issued, fully paid and nonassessable; and will
from time to time take all such action as may be requisite to assure that the
par value per share of the Common Stock is at all times equal to or less than
the then effective purchase price per share of the Common Stock issuable
pursuant to this Option. The Company further covenants and agrees that, during
the period within which the rights represented by this Option may be exercised,
the Company will at all times have authorized, and reserved for the purpose of
issuance upon exercise of the purchase rights evidenced by this Option, a
sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Option. The Company also further covenants that
it will not, by amendment of its Certificate or Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issuance or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Option, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the holder of this Option against
impairment. Without limiting the generality of the foregoing, the Company (a)
will not increase the par value of any shares of stock issuable upon the
exercise of this Option above the amount payable therefor on such exercise, and
(b) will take all action that may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
stock on the exercise of this Option.
9. TRANSFER OF OPTION. This Option may not be transferred by the Holder
without the prior written consent of the Company; provided, however, that the
Option and the Common Stock issuable upon conversion thereof may be transferred
or distributed to shareholders of Holder.
10. REGISTRATION RIGHTS. The Company agrees to register the shares
underlying the Option on the Company's first registration statement on Form S-8
(or any necessary form for such purpose) or on such other form provided by the
Securities and Exchange Commission (other than the Company's initial
registration statement on Form S-4) or shall permit registration of such shares
as shall be filed by the Company for the purpose of registering shares for sale
by the Company or resale for third persons. The Company shall pay the expenses
of such registration. In addition, the Holder shall have such other registration
rights for the shares of Common Stock issuable upon exercise of this Option as
the Company shall have granted or shall hereafter grant to any other consultant
or investor, on a most-favored-nation basis.
12. UNDERSTANDING OF HOLDER. Unless otherwise registered pursuant to
Section 11, the Company's obligation to issue the Option Shares as set forth
herein shall be conditioned upon a timely receipt by the Company in writing of
investment representations as deemed appropriate by the Company in its sole and
absolute discretion sufficient to assure the Company that the Option Shares upon
issuance will be exempt from registration under the Securities Act of 1933, as
amended.
13. BINDING EFFECT. This Option shall be binding upon and inure to the
benefit of the heirs, executors, administrators and successors of the parties
hereto.
14. GOVERNING LAW. This Option shall be governed by, and construed and
enforced in accordance with, the law of the State of California.
- 3 -
<PAGE>
EXECUTION COPY
15. NOTICES. Any notice or demand to the Company under this Option may be
given and shall conclusively be deemed and considered to have been given and
received upon the date shown to have been received on any postal receipt or
independent courier receipt at the address of the Company appearing on the
records of the Holder, but actual written notice (including by telefax, hand
delivery, Federal Express, or other means), however given or received, shall
always be effective. For the purposes hereof, the addresses of the Company and
the Holder (until notice of a change thereof is given as provided in this
Section 15) shall be as follows:
If to the Holder At the address set forth on the signature page
hereof
If to the Company: NetGateway, Inc.
300 Oceangate, 5th Floor
Long Beach, CA 90802
Attn: Chief Executive Officer
16. EXECUTION IN COUNTERPARTS. This Option may be executed in any number
of counterparts and any party hereto or thereto may execute any counterpart,
each of which when executed and delivered will be deemed to be an original and
all of which counterparts of this Option taken together will be deemed to be but
one and the same instrument. The execution of this Option by any party hereto
will not become effective until counterparts hereof or thereof, as the case may
be, have been executed by all the parties hereto or thereto, and transmitted by
facsimile copy with overnight delivery of manually executed copies.
Notwithstanding the above, the date of issuance of this Option shall be the date
which is specifically indicated on the signature page hereof.
- 4 -
<PAGE>
EXECUTION COPY
IN WITNESS WHEREOF, the parties have caused this Legal Consulting Fee
Option to be executed as of the 3rd day of June, 1998.
"Company" The "Holder"
NETGATEWAY, INC. INC., NIDA & MALONEY, P.C.
a Nevada corporation
By: /s/ [ILLEGIBLE] By:
--------------------- --------------------------------
Its: President Its:
Address: 800 Anacapa Street
Santa Barbara, CA 93101
--------------------------------
Tax Id. #: 770417415
DATE OF ISSUANCE OF OPTION:
===========================
- --------------------------------------------------------------------------------
June 3, 1998
- --------------------------------------------------------------------------------
NUMBER OF OPTION SHARES INITIALLY SUBJECT OF OPTION:
====================================================
- --------------------------------------------------------------------------------
One Hundred Thousand (100,000)
- --------------------------------------------------------------------------------
- 5 -
<PAGE>
Exhibit 10.18
CONSULTING AND ADVISORY AGREEMENT
This Consulting and Advisory Agreement ("Agreement") is made and entered as of
this 20th day of October, 1998, and between BURCHMONT EQUITIES GROUP INC., (or
"BMEG") and Netgateway, Inc. (or "NGWY")
Recitals
A. BMEG is experienced as a consultant and advisor in the securities
industry. BMEG has played a key role in assisting in the dissemination of
information of certain publicly traded companies and providing the
necessary strategy for growth of the public awareness within the companies
where it has been retained. BMEG is also experienced in dealing with
brokers, NASD broker/dealers, financial institutions, and equity investors
as it pertains to the securities transactions and in corporate finance in
the securities industry.
B. BMEG is experienced at making presentations to the brokerage community in
addition to providing market analysts and NASD broker/dealer interviews
concerning the energy industry and the current activities of the
company's wherein he has been contracted as an advisor.
C. NGWY desires to publicize itself with the intention of making its name and
business better known to shareholders, investors, and the financial
communities and to avail itself of BMEG's experience, advice and contacts
within these communities. NGWY desires to enter into this Agreement with
BMEG and BMEG is willing to provide consulting and advisory services to
NGWY under the following terms and conditions of this Agreement.
NOW, THEREFORE, for and in consideration of the mutual promises and covenants
herein and for good valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. Engagements. NGWY hereby retains BMEG to present the Company to
institutions, broker/dealers and prospective investors and shareholders.
BMEG hereby agrees to make itself available to render its professional
advise and reasonable assistance to NGWY and NGWY's Board of Directors
under the terms and conditions herein set forth.
2. Duties. During the term of this Agreement, BMEG agrees to assist and
advise NGWY in the following areas; however it is understood by the
parties hereto that BMEG will only play an active role in day to day
operations if requested to do so:
a) Assist in the dissemination of information concerning Netgateway
Inc.;
<PAGE>
b) Interview and source qualified investment opportunities to be
presented to the board of directors.
c) Assist in the presentation of due diligence material included in
investment memoranda and other similar matters as may be required by
industry partners, bankers, financial institutions, NASD
broker/dealers, securities analysts and equity investors;
d) Such other general assistance and advice as may be mutually agreed
upon.
3. Compensation. In exchange for the services to be rendered hereunder, BMEG
will be compensated as follows:
a) For promotional services:
1) 100,000 shares of restricted Rule 144 common stock, subject to
piggyback registration rights deliverable in seven (7) days.
2) 300,000 stock options at a strike price of $1.50 per share.
b) The compensation for promotional services will only vest upon the
happening of all of the following events:
(i) NGWY becomes listed on the NASDAQ Small Cap Market;
(ii) NGWY files an effective S-1 Registration statement for its
existing shares, including the shares governed hereunder;
(iii) NGWY files a Form 10 and becomes a 12(g) reporting company;
and
c) NGWY also agrees to pay compensation not to exceed 10% of the gross
proceeds raised by BMEG on behalf of the Company, whether raised
through loans, direct equity lending or other negotiated financial
instruments.
4. Term. This agreement shall be for a term of twelve (12) months, provided,
however, that after the initial sixty (60) days, NGWY may terminate this
agreement upon thirty (30) days prior written notice.
5. Accuracy Information and Indemnification. NGWY agrees to furnish to BMEG
truthful and accurate information in all respects. NGWY agrees to
cooperate with BMEG in the performance of BMEG's consulting services and
experience. Any written materials generated by BMEG concerning NGWY for
distribution must be reviewed prior to and approved in writing by NGWY
before distribution.
6. Miscellaneous.
a) Assignability. Unless otherwise agreed to in writing by both
parties hereto, the rights, obligations and benefits established by
this Agreement shall be nonassignable by either of the parties
hereto and any such attempt of assignment shall be null and void and
of no effect whatsoever.
<PAGE>
b) Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to the subject matter hereof, and may not
be changed except by a writing signed by the party against whom
enforced or discharged is sought.
c) Waiver of Breach. The waiver by either party of a breach of any
position of this agreement by the other shall not operate or be
construed as a waiver of any subsequent breach by the other party.
d) Construction of Language. The language used in this Agreement shall
be construed as a whole according to its fair meaning, and not
strictly for nor against either party.
e) Captions and Headings. The paragraph headings throughout this
Agreement are for convenience and reference only, and shall in no
way be deemed to define, limit or add to the meaning of any
provision of the Agreement.
f) State of Law. This Agreement, its interpretation, and its
application shall be governed by the laws of the State of Nevada.
g) Counterpart. This agreement may be executed in several counterparts,
each of which shall be an original, and such counterparts shall
together constitute one and the same instrument.
h) Costs. In the event of any legal proceedings between any of the
parties to enforce or defend the terms and rights set forth in this
Agreement, the prevailing party or parties shall be paid all costs
of such legal proceeding, including but not limited to, attorney
fees by the other party.
IN WITNESS THEREOF, the parties have executed this agreement to be effective as
of the day and the year first mentioned above written notwithstanding the actual
date of signatures.
BURCHMONT EQUITIES GROUP, INC.
By: /s/ Dean S. Dumont
-------------------------------
Dean S. Dumont
Title: President
Netgateway Inc.
By: /s/ Keith D. Freadhoff
-------------------------------
Keith D. Freadhoff
Title: CEO
<PAGE>
Exhibit 10.19
CONSULTING AND ADVISORY AGREEMENT
This Consulting and Advisory Agreement ("Agreement") is made and entered as of
this 1st day of November, 1998, and between North Coast Securities, Corp., (or
"NCSC") and Netgateway, Inc. (or "NGWY")
Recitals
A. NCSC is experienced as a consultant and advisor in the securities
industry. NCSC has played a key role in assisting in the dissemination of
information of certain publicly traded companies and providing the
necessary strategy for growth of the public awareness within the companies
where it has been retained. NCSC is also experienced in dealing with
brokers, NASD broker/dealers, financial institutions, and equity investors
as it pertains to the securities transactions and in corporate finance in
the securities industry.
B. NCSC is experienced at making presentations to the brokerage community in
addition to providing market analysts and NASD broker/dealer interviews
concerning the energy industry and the current activities of the company's
wherein he has been contracted as an advisor.
C. NGWY desires to publicize itself with the intention of making its name and
business better known to shareholders, investors, and the financial
communities and to avail itself of NCSC's experience, advice and contacts
within these communities. NGWY desires to enter into this Agreement with
NCSC and NCSC is willing to provide consulting and advisory services to
NGWY under the following terms and conditions of this Agreement.
NOW, THEREFORE, for and in consideration of the mutual promises and covenants
herein and for good valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. Engagements. NGWY hereby retains NCSC to present the Company to
institutions, broker/dealers and prospective investors and shareholders.
NCSC hereby agrees to make itself available to render its professional
advise and reasonable assistance to NGWY and NGWY's Board of Directors
under the terms and conditions herein set forth.
2. Duties. During the term of this Agreement, NCSC agrees to assist and
advise NGWY in the following areas; however it is understood by the
parties hereto that NCSC will only play an active role in day to day
operations if requested to do so:
a) Assist in the dissemination of information concerning Netgateway
Inc.;
<PAGE>
b) Interview and source qualified investment opportunities to be
presented to the board of directors.
c) Assist in the presentation of due diligence material included in
investment memoranda and other similar matters as may be required by
industry partners, bankers, financial institutions, NASD
broker/dealers, securities analysts and equity investors;
d) Such other general assistance and advice as may be mutually agreed
upon.
3. Compensation. In exchange for the services to be rendered hereunder, NCSC
will be compensated as follows:
1) 10,000 shares of restricted Rule 144 common stock, subject to
piggy-back registration rights deliverable in seven (7) days.
2) 25,000 stock options at a strike price of $3.00 per share,
deliverable in ninety (90) days.
4. Term. This agreement shall be for a term of twelve (12) months, provided,
however, that after the initial sixty (60) days, NGWY may terminate this
agreement upon thirty (30) days prior written notice.
5. Accuracy if Information and Indemnification. NGWY agrees to furnish to
NCSC truthful and accurate information in all respects. NGWY agrees to
cooperate with NCSC in the performance of NCSC's consulting services and
experience. Any written materials generated by NCSC concerning NGWY for
distribution must be reviewed prior to and approved in writing by NGWY
before distribution.
6. Miscellaneous.
a) Assignability. Unless otherwise agreed to in writing by both parties
hereto, the rights, obligations and benefits established by this
Agreement shall be nonassignable by either of the parties hereto and
any such attempt of assignment shall be null and void and of no
effect whatsoever.
b) Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to the subject matter hereof, and may not
be changed except by a writing signed by the party against whom
enforced or discharged is sought.
c) Waiver of Breach. The waiver by either party of a breach of any
position of this agreement by the other shall not operate or be
construed as a waiver of any subsequent breach by the other party.
d) Construction of Language. The language used in this Agreement shall
be construed as a whole according to its fair meaning, and not
strictly for nor against either party.
e) Captions and Headings. The paragraph headings throughout this
Agreement are for convenience and reference only, and shall in no
way be deemed to define, limit or add to the meaning of any
provision of the Agreement.
f) State of Law. This Agreement, its interpretation, and its
application shall be governed by the laws of the State of
California.
<PAGE>
g) Counterparts. This agreement may be executed in several
counterparts, each of which shall be an original, and such
counterparts shall together constitute one and the same instrument.
h) Costs. In the event of any legal proceedings between any of the
parties to enforce or defend the terms and rights set forth in this
Agreement, the prevailing party or parties shall be paid all costs
of such legal proceeding, including but not limited to, attorney
fees by the other party.
IN WITNESS THEREOF, the parties have executed this agreement to be effective as
of the day and the year first mentioned above written notwithstanding the actual
date of signatures.
North Coast Securities, Corp.
By:
----------------------------
Title: Managing Director
Netgateway Inc.
By: /s/ Keith D. Freadhoff
----------------------------
Keith D. Freadhoff
Title: CEO
<PAGE>
g) Counterparts. This agreement may be executed in several
counterparts, each of which shall be an original, and such
counterparts shall together constitute one and the same instrument.
h) Costs. In the event of any legal proceedings between any of the
parties to enforce or defend the terms and rights set forth in this
Agreement, the prevailing party or parties shall be paid all costs
of such legal proceeding, including but not limited to, attorney
fees by the other party.
IN WITNESS THEREOF, the parties have executed this agreement to be effective as
of the day and the year first mentioned above written notwithstanding the actual
date of signatures.
North Coast Securities, Corp.
By:
----------------------------
Title: Managing Director
Netgateway Inc.
By: /s/ Keith D. Freadhoff
----------------------------
Keith D. Freadhoff
Title: CEO
595 Market St.
Suite 2100
San Francisco,
94105
(415) 977-1500
<PAGE>
Exhibit 10.20
[LETTERHEAD OF GLASHOW ASSOCIATES]
CONSULTING AGREEMENT dated of December 24, 1998 between NETGATEWAY, Inc. A
Nevada Corporation with executive offices located at 300 Oceangate, Long Beach,
California 90802 (the "Company"), and GLASHOW ASSOCIATES, LLC with executive
offices located at 1224 West 61st Street, Kansas City, MO 64113 (the
"Consultant").
WITNESSETH
WHEREAS, the Consultant, through its affiliates and principals, has extensive
experience in its areas of expertise, including, without limitation, marketing,
finance, strategic planning and other business matters; and
WHEREAS, the Company desires to retain the services of the Consultant to render
strategic advice with respect to the development of the Company, and the
Consultant wishes to render such services to the Company, on the terms and
conditions, and subject to the qualifications, set forth in this Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual promises and
covenants hereinafter set forth, and subject to the conditions contained herein,
the parties hereto agree as follows:
I. Terms of Service.
Section 1.01 Duties. The Consultant will advise the Company's
management, employees, and agents with respect to the Company's field of
interest and business, and strategic and commercial matters related to the
Consultant's areas of expertise. Upon reasonable notice to the Consultant, the
Company will have access to the Consultant at reasonable times in order to
discuss matters related to the Company's business. The services to be provided
by the Consultant pursuant to the terms, hereof, whether such services are
performed verbally or in writing, shall be reasonable in terms of hours per
month. If no such services are requested, the consulting fees provided for
herein shall still be paid.
Section 1.02 Term; Termination. The term (the "Term") of this
Agreement shall be 12 months, commencing on the date hereof. In the event the
Company shall terminate this Agreement for any reason, the parties hereto agree
that the Consultant shall be entitled to the amounts otherwise due hereunder
notwithstanding each termination.
Section 1.03 Compensation. As compensation of the services to be
performed under the terms of this agreement, consultant shall be entitled to
receive and the company agrees to pay the following compensation.
o The Company shall issue 100,000 shares of stock upon signing of this
agreement as previous compensation. Consultant shall have "piggy back"
registration rights without cost to Consultant.
o In the event the consultant introduces the company to a qualified investor
who is willing to make an investment on terms acceptable to the company
the consultant shall be entitled to receive five percent (5%) of the gross
proceeds received, provided, however, that no more than a total of 10%
shall be paid on any such transaction, and this 5% fee shall be adjusted
as needed.
<PAGE>
In the event the Consultant arranges a change of control or sale of the company
within 12 months of the signing of this agreement the Consultant will receive a
fee equal to one percent (1%) of the total value of the transaction. Consultant
may elect to take said compensation in the form of stock and/or cash.
All stock warrants or any other monies due shall vest immediately upon sale,
acquisition or change of control of the company.
Section 1.04 Expenses. If the Company requests the Consultant to
provide any specific services hereunder that cause the Consultant to incur
expenses, the Company shall reimburse the Consultant for all reasonable expenses
upon presentation of expense vouchers or statements or such other supporting
information as the Company require. The company agrees to incur the costs of a
due diligence trip to be made by Bob Ciri the first week of January 1999.
Section 1.05 Sale of Company. If the Company is sold, acquired, or
there is a change in control this agreement shall be considered as if terminated
by the Company and all action described herein and related to the previous
sections shall go into effect upon consummation of any of these actions. The
company shall compensate the consultant as described within 30 days of said
action. In the event any of these actions are taken within six months of
termination of this contract all compensation described herein shall be
considered due the consultant.
II. Miscellaneous.
Section 2.01 No Violation of Other Agreements. Each of the parties hereto
represents and warrants that execution, delivery, or performance of this
Agreement does not conflict with or violate the terms of, any other agreement to
which it is a party or by which it is bound.
Section 2.02 Independent Contractor; Limitation of Liability.
(a) The Consultant is an independent contractor to the Company, and
nothing herein shall be deemed to constitute the Consultant or
its agents as an employee of the Company.
(b) The Company acknowledges that it remains solely responsible for the
conduct and operation of its business and that the Consultant makes
no representation or warranty and assumes no liability with respect
to the outcome or result of any particular course of action or
operation of the Company's business.
Section 2.03 Notices. Any notice provided under this Agreement shall be in
writing and shall be deemed to have been effectively given when delivered
personally, sent by private express mail service (such as Federal Express), or
sent by registered or certified mail (return receipt requested) to the address
set forth in the introductory paragraph hereof (or to such other address as any
party has furnished in writing to the other parties in accordance with the
provisions of this Section 2.03).
Section 2.04 Assignment. Glashow may not assign its interest in this Agreement
or delegate its responsibilities hereunder without the prior written consent of
the other party.
Section 2.05 Severability. The invalidity or unenforceability of any particular
provision of this Agreement or portion thereof shall not affect the validity or
enforceability of any other provision thereof or portion thereof. If any
provision of this Agreement is adjudicated to be so broad as to be
unenforceable, it shall be interpreted to be only as broad as enforceable.
Section 2.06 Counterparts. Governing Law. This Agreement may be executed in any
number of counterparts each of which shall be deemed an original, but all of
which together shall constitute
<PAGE>
one and the same instrument. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Pennsylvania, without giving effect
to conflict of laws.
Section 2.07 Headings. The article and section headings in this Agreement are
solely for convenience of reference and shall be given no effect in the
construction or interpretation of this Agreement.
Section 2.08 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same instrument.
Section 2.09 Indemnification. The Company shall indemnify the consultant to the
extent permitted by law, against claims, liabilities, costs and expenses,
including legal fees, incurred by consultant as a result of activities
undertaken in good faith to promote the best interest of the company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
NETGATEWAY
By: /s/ Donald M. Cortiss, Jr.
-----------------------------
Name: Donald M. Cortiss, Jr.
Title: President
GLASHOW ASSOCIATES, LLC
By: /s/ Andrew J. Glashow
-----------------------------
Name: Andrew J. Glashow
Title: Managing Director
<PAGE>
Exhibit 10.21
CONSULTING AGREEMENT, dated as of July 1, 1999, between NETGATEWAY, INC.,
a Nevada corporation with executive offices located at 300 Oceangate, Floor 5,
Long Beach, California 90802 (the "Company"), GLASHOW ASSOCIATES, with executive
offices located at 1224 West 61st Street, Kansas City, Missouri 64113 (the
"Consultant").
WITNESSETH:
WHEREAS, the Consultant, through its affiliates and principals, has
extensive experience in their respective areas of expertise, including, without
limitation, marketing and public relations and other business matters; and
WHEREAS, the Company desires to retain the services of the Consultant to
render strategic advice with respect to the development of the Company, and the
Consultant wishes to render such services to the Company, on the terms and
conditions, and subject to the qualifications, set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants hereinafter set forth, and subject to the conditions contained
herein, the parties hereto hereby agree as follows:
I. Terms of Service.
Section 1.01 Duties. The Consultant will advise the Company's management,
employees, and agents with respect to the Company's field of interest and
business, and strategic and commercial matters related to the Consultant's areas
of expertise. Upon reasonable notice to the Consultant, the Company will have
access to the Consultant at reasonable times in order to discuss matters related
to the Company's business. The services to be provided by the Consultant
pursuant to the terms hereof, whether such services are performed verbally or in
writing, shall be reasonable in terms of hours per month and shall not, in any
case, exceed in the aggregate ten hours per month. If no such services are
requested, the consulting fees provided for herein shall nevertheless be paid.
Section 1.02 Term; Termination. The term (the "Term") of this Agreement
shall be 24 months, commencing on the date hereof. In the event this Agreement
shall be terminated by the Company for any reason, the parties hereto agree that
the Consultants shall be entitled to the amounts otherwise due hereunder
notwithstanding such termination.
Section 1.03 Consulting Fee. In consideration of the services to be
performed hereunder, the Consultant shall receive the fee of $5,000 per month,
net of taxes, excises, and other governmental and other charges, payable monthly
on the first of each month in advance commencing on July 1, 1999. The Consultant
may offset such fee against amount otherwise owned by Consultant or affiliates
thereof to the Company.
<PAGE>
Section 1.04 Expenses. If the Company requests the Consultant to provide
any specific services hereunder that cause the Consultant to incur expenses, the
Company shall reimburse the Consultant for all reasonable expenses upon
presentation of expense vouchers or statements or such other supporting
information as the Company may require.
II. Confidentiality.
Section 2.01 Acknowledgements. The Consultant acknowledges that, during
the course of performing services hereunder, the Company may be disclosing
information to the Consultant related to the Company's business, projects, and
plans, as well as other information (collectively, "Confidential Information").
The Consultant acknowledges that the Company's business is extremely
competitive, dependent in part upon the maintenance of secrecy, and that any
disclosure of the Confidential Information would result in serious harm to the
Company.
Section 2.02 Use of Confidential Information. The Consultant agrees that
the Confidential Information will be used by the Consultant only in connection
with consulting activities hereunder and will not be used in any way that is
detrimental to the Company.
Section 2.03 Non-Disclosure. The Consultant agrees not to disclose,
directly or indirectly, the Confidential Information to any third person or
entity, other than representatives or agents of the Company or legal advisors,
expert consultants, and other advisors utilized by the Consultant in connection
with consulting activities hereunder; provided, however, that each such advisor
agrees to keep such information confidential and to use it only in connection
with such consulting activities. The Consultant will treat all such Confidential
Information as confidential and proprietary property of the Company.
Section 2.04 Confidential Information. The term "Confidential Information"
does not include information that (a) is or becomes generally available to the
public other than by disclosure in violation of this Agreement, (b) becomes
available to the Consultant on a non-confidential basis (it being understood
that information that the Consultant obtained as a result of any officer,
director, or employer thereof being previously employed by, or otherwise
serving, the Company, shall be deemed to be Confidential Information, unless
otherwise exempt under this Section 2.04, or (c) was independently developed by
the Consultant after the date hereof without reference to the information
provided by the Company.
Section 2.05 Permitted Disclosure. The Consultant may disclose any
Confidential Information that is required to be disclosed by law, government
regulation, or court or administrative order or process. If disclosure is
required, the Consultant will give the Company advance notice so that the
Company may seek a protective order or take other action reasonable under of the
circumstances.
Section 2.06 Return of Confidential Information. Upon termination of this
Agreement, the Consultant will promptly return to the Company all materials
containing Confidential Information, including, but not limited to, data,
records, reports, and other property furnished by
-2-
<PAGE>
the Company to the Consultant or produced by the Consultant in connection with
services rendered hereunder. Notwithstanding such return, the Consultant shall
continue to be bound by the terms of the confidentiality provisions contained in
this Article II for a period of one year after the termination of this
Agreement.
III. Miscellaneous.
Section 3.01 No Violation of Other Agreements. Each of the parties hereto
represents and warrants that execution, delivery, or performance of this
Agreement does not conflict with, or violate the terms of, any other agreement
to which it is a party or by which it is bound.
Section 3.02 Independent Contractor; Limitation of Liability.
(a) The Consultant is an independent contractor to the Company, and
nothing herein shall be deemed to constitute the Consultant or its agents as an
employee or agent of the Company.
(b) The Company acknowledges that it remains solely responsible for
the conduct and operation of its business and that the Consultant makes no
representation or warranty and assumes no liability with respect to the outcome
or result of any particular course of action or operation of the Company's
business.
Section 3.03 Notices. Any notice provided under this Agreement shall be in
writing and shall be deemed to have been effectively given when delivered
personally, sent by private express mail service (such as Federal Express), or
sent by registered or certified mail (return receipt requested) to the address
set forth in the introductory paragraph hereof (or to such other address as any
party has furnished in writing to the other parties in accordance with the
provisions of this Section 3.03).
Section 3.04 Assignment. None of the parties may assign its interest in
this Agreement or delegate its responsibilities hereunder without the prior
written consent of the other party.
Section 3.05 Severability. The invalidity or unenforceability of any
particular provision of this Agreement or portion thereof shall not affect the
validity or enforceability of any other provision thereof or portion thereof. If
any provision of this Agreement is adjudicated to be so broad as to be
unenforceable, it shall be interpreted to be only as broad as is enforceable.
Section 3.06 Counterparts; Governing Law. This Agreement may be executed
in any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument. This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of New York, without giving effect to conflict of laws.
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<PAGE>
Section 3.07 Headings. The article and section headings in this Agreement
are solely for convenience of reference and shall be given no effect in the
construction or interpretation of this Agreement.
Section 3.08 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
NETGATEWAY, INC.
By: /s/ [ILLEGIBLE]
----------------------------
Name: [ILLEGIBLE]
Title: CEO
GLASHOW ASSOCIATES
By: /s/ Andrew Glashow
----------------------------
Name: Andrew Glashow
Title: DIRECTOR
-5-
<PAGE>
Exhibit 10.22
AMENDED AND RESTATED
SUBORDINATED SECURED PROMISSORY NOTE
$800,000.00 August 28, 1998
ADMOR MEMORY CORP., a Nevada Corporation ("Maker") previously
delivered a Subordinated Secured Promissory Note, dated July 24, 1998 (the
"Original Note") to NETGATEWAY, INC., a Nevada Corporation ("Holder").
The Maker and the Holder have agreed to amend and restate the Original
Note with this Amended and Restated Subordinated Secured Promissory Note
1. Principal.
For value received, Maker promises to pay to the order of Holder, at its
offices at 300 Oceangate, 5th Floor, Long Beach, California 90802, or at such
other place as Holder may from time to time designate in writing, the principal
sum of Eight Hundred Thousand and No One Hundredths Dollars ($800,000.00),
together with accrued interest from the date of disbursement hereunder on the
unpaid principal at the rate set forth in Paragraph 4. As used herein, the term
"Holder" shall mean Holder and any subsequent holder of this Subordinated
Secured Promissory Note (this "Note"), whichever is applicable from time to
time.
Maker previously has borrowed Six Hundred Thousand Dollars ($600,000.00)
from Holder, pursuant to the terms hereof. Maker is also entitled to borrow up
to an additional Two Hundred Thousand Dollars ($200,000.00) pursuant to the
terms hereof as soon as reasonably practicable hereafter.
2. Maturity Date.
Maker and Holder have previously entered into a definitive agreement (the
"Agreement") pursuant to which Holder or a wholly-owned subsidiary of Holder
shall acquire a minimum of ninety percent (90%) of the outstanding shares of
common stock of Maker through the Agreement and an exchange offer to Maker's
stockholders (the "Transaction"). The unpaid principal balance hereof, together
with all unpaid interest accrued thereon, shall be due and payable on December
31, 1999 or such earlier date, if any, that is ninety (90) days after the date
that the Agreement shall be terminated without the Transaction having been
consummated (the "Maturity Date").
-1-
<PAGE>
3. Prepayment.
This Note may be prepaid in full or in part, at any time without penalty,
upon not less than one business days' prior written notice to Holder. Maker
shall have no right to reborrow any such prepaid amounts.
4. Interest.
All interest on the outstanding principal balance hereof shall be due and
payable on the Maturity Date. The outstanding principal balance hereof shall
bear interest at a rate of 9.5% per annum. All payments of principal of and
interest on the Note shall be made without deduction of any present and future
taxes, levies, imposts, deductions, charges or withholdings, which amounts shall
be paid by Maker. Maker will pay the amounts necessary such that the gross
amount of the principal and interest received by Holder is not less than that
required by this Note. All stamp and documentary taxes shall be paid by Maker.
If, notwithstanding the foregoing, Holder pays such taxes, Maker will reimburse
Holder for the amount paid. Maker will furnish Holder official tax receipts or
other evidence of payment of all taxes. Throughout the term of this Note,
interest shall be calculated on a 360-day year, but shall be computed for the
actual number of days in the period for which interest is charged.
5. Manner of Payment.
Principal and interest are payable in lawful money of the United States of
America. All payments of principal and interest on the Note shall be made to
Holder in immediately available funds not later than 11:30 a.m. Los Angeles time
on the dates such payments are to be made. Any payment received after 11:30 a.m.
shall be deemed received by Holder on the next business day.
6. Applications of Payments.
Payments received by Holder pursuant to the terms hereof shall be applied
first to the payment of all interest accrued to the date of such payment and
second to the payment of principal. Notwithstanding anything to the contrary
contained herein, after the occurrence and during the continuation of an Event
of Default (as hereinafter defined), all amounts received by Holder from any
party shall be applied in such order as Holder, in its sole discretion, may
elect.
7. Security.
This Note is secured by a Security Agreement of even date herewith,
executed by Maker and Admor Memory, Ltd., a California corporation ("Limited").
Within five days of the date hereof, Maker shall provide Holder with certified
resolutions of the Boards of Directors of Maker and Limited approving the
proposed Transaction, the loan evidenced by this Note and the Security
Agreement.
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<PAGE>
8. Subordination.
The indebtedness evidenced by this Note and the obligations relating to
the security provided pursuant to Paragraph 7 above are subordinated in right of
payment to the Senior Indebtedness. Such subordination is for the benefit of the
holders of Senior Indebtedness. "Senior Indebtedness" means (i) the principal
of, premium, if any, and interest on, and any other indebtedness of the Maker to
its primary senior bank lender(s), plus interest and customary expenses with
respect to such Senior Indebtedness and (ii) refinancings, deferrals,
refundings, replacements, extensions and renewals of or amendments,
modifications or supplements to such Senior Indebtedness.
9. Events of Default.
The occurrence of any of the following shall be deemed to be an event of
default ("Event of Default") hereunder:
(a) Holder shall have notified Maker in writing of a default in the
payment of principal or interest when due pursuant to the terms hereof; or
(b) the occurrence of an Event of Default under the Security
Agreement or under any other deed of trust, security agreement, lease
assignment, guaranty or other agreement (including any amendment,
modification or extension thereof) now or hereafter securing this Note.
10. Remedies; Post-Default Rate; Late Charge.
Upon the occurrence of an Event of Default and without demand or notice,
Holder shall have the option to declare the entire balance of principal together
with all accrued interest thereon immediately due and payable and to exercise
all rights and remedies available to it under the Security Agreement or
applicable law. Notwithstanding any provision of this Note or the Security
Agreement to the contrary, any principal, accrued interest, and other amounts
payable under this Note or the Security Agreement which remain unpaid after the
Maturity Date or any acceleration of this Note, shall bear interest at a rate
per annum equal to 14.5% (the "Post-Default Rate"). If any payment under this
Note (whether of principal or interest or both and including the payment due on
the Maturity Date or upon any acceleration of this Note) is not paid within ten
(10) days after the date on which the payment is due, Maker shall pay to Holder,
in addition to the delinquent payment and without any requirement of notice or
demand by Holder, a late payment charge equal to five percent (5%) of such
delinquent amount. MAKER EXPRESSLY ACKNOWLEDGES AND AGREES THAT THE FOREGOING
ACCRUAL OF INTEREST AT THE POST-DEFAULT RATE AND LATE PAYMENT CHARGE PROVISION
IS REASONABLE UNDER THE CIRCUMSTANCES EXISTING ON THE DATE OF THIS
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<PAGE>
NOTE, THAT IT WOULD BE EXTREMELY DIFFICULT AND IMPRACTICAL TO FIX HOLDER'S
ACTUAL DAMAGES ARISING OUT OF (i) ANY FAILURE TO PAY SUCH OUTSTANDING
INDEBTEDNESS OF THIS NOTE UPON THE MATURITY DATE OR UPON ANY ACCELERATION OF
THIS NOTE AND (ii) ANY LATE PAYMENT AND THAT INTEREST ACCRUED AT THE
POST-DEFAULT RATE AND THE FOREGOING LATE PAYMENT CHARGE SHALL BE PRESUMED TO BE
THE ACTUAL AMOUNT OF SUCH DAMAGES INCURRED BY HOLDER. The application of this
default rate or late charge shall not be interpreted or deemed to limit any of
Holder's remedies hereunder or thereunder. No delay or omission on the part of
Holder hereof in exercising any right under this Note or the Security Agreement
shall operate as a waiver of such right.
11. WAIVER.
MAKER HEREBY WAIVES DILIGENCE, PRESENTMENT, PROTEST AND DEMAND, NOTICE OF
PROTEST, DISHONOR AND NONPAYMENT OF THIS NOTE AND EXPRESSLY AGREES THAT, WITHOUT
IN ANY WAY AFFECTING THE LIABILITY OF MAKER HEREUNDER, HOLDER MAY EXTEND ANY
MATURITY DATE OR THE TIME FOR PAYMENT OF ANY INSTALLMENT DUE HEREUNDER, ACCEPT
SECURITY, RELEASE ANY PARTY LIABLE HEREUNDER AND RELEASE ANY SECURITY NOW OR
HEREAFTER SECURING THIS NOTE. MAKER FURTHER WAIVES, TO THE FULL EXTENT PERMITTED
BY LAW, THE RIGHT TO PLEAD ANY AND ALL STATUTES OF LIMITATIONS AS A DEFENSE TO
ANY DEMAND ON THIS NOTE, OR ON ANY DEED OF TRUST, SECURITY AGREEMENT, LEASE
ASSIGNMENT, GUARANTY OR OTHER AGREEMENT NOW OR HEREAFTER SECURING THIS NOTE.
MAKER ALSO EXPRESSLY AND UNCONDITIONALLY WAIVES, IN CONNECTION WITH ANY SUIT,
ACTION OR PROCEEDING BROUGHT BY HOLDER ON THIS NOTE, ANY AND EVERY RIGHT IT MAY
HAVE TO (I) INJUNCTIVE RELIEF, (II) A TRIAL BY JURY, (III) INTERPOSE ANY
COUNTERCLAIM THEREIN AND (IV) HAVE THE SAME CONSOLIDATED WITH ANY OTHER OR
SEPARATE SUIT, ACTION OR PROCEEDING. NOTHING HEREIN CONTAINED SHALL PREVENT OR
PROHIBIT MAKER FROM INSTITUTING OR MAINTAINING A SEPARATE ACTION AGAINST HOLDER
WITH RESPECT TO ANY ASSERTED CLAIM.
12. Attorneys' Fees.
If this Note is not paid when due or if any Event of Default occurs, Maker
promises to pay all costs of enforcement and collection, including but not
limited to, Holder's reasonable attorneys' fees, whether or not any action or
proceeding is brought to enforce the provisions hereof. Upon demand by Holder,
Maker shall also pay the reasonable fees and expenses of Holder's counsel
incurred in connection with the preparation of this Note and the Security
Agreement.
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<PAGE>
13. Severability.
Every provision of this Note is intended to be severable. In the event any
term or provision hereof is declared by a court of competent jurisdiction, to be
illegal or invalid for any reason whatsoever, such illegality or invalidity
shall not affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable.
14. Interest Rate Limitation.
It is the intent of Maker and Holder in the execution of this Note and all
other instruments securing this Note that the loan evidenced hereby comply with
the usury laws of the State of California. Holder and Maker stipulate and agree
that none of the terms and provisions contained herein shall ever be construed
to create a contract for use, forbearance or detention of money requiring
payment of interest at a rate in excess of the maximum interest rate permitted
to be charged by the laws of the State of California. In such event, if any
Holder of this Note shall collect monies which are deemed to constitute interest
which would otherwise increase the effective interest rate on this Note to a
rate in excess of the maximum rate permitted to be charged by the laws of the
State of California, all such sums deemed to constitute interest in excess of
such maximum rate shall, at the option of Holder, be credited to the payment of
the sums due hereunder or returned to Maker.
15. Number and Gender.
In this Note the singular shall include the plural and the masculine shall
include the feminine and neuter gender, and vice versa, if the context so
requires.
16. Headings.
Headings at the beginning of each numbered Paragraph of this Note are
intended solely for convenience and are not to be deemed or construed to be a
part of this Note.
17. Choice of Law.
This Note shall be governed by and construed in accordance with the law of
the State of California.
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<PAGE>
IN WITNESS WHEREOF, Maker has executed this Secured Promissory Note as of
the date first above written.
ADMOR MEMORY CORP.
By: /s/ Van M. Andrews
-----------------------------
Name: Van M. Andrews
Title: President
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<PAGE>
EXHIBIT B
SECURITY AGREEMENT
See attached Security Agreement.
5
<PAGE>
================================================================================
SECURITY AGREEMENT
Dated as of August 28, 1998
among
ADMOR MEMORY CORP.,
ADMOR MEMORY, LTD.
and
NETGATEWAY, INC.
================================================================================
<PAGE>
SECURITY AGREEMENT
This SECURITY AGREEMENT (this "Agreement") dated as of August 28,
1998 is made among Admor Memory Corp., a Nevada corporation ("Admor") and Admor
Memory, Ltd., a California corporation ("Limited" and together with Admor, the
"Company"), and NetGateway, Inc., a Nevada corporation ("NetGateway").
The Agreement and Plan of Reorganization dated as of July 24, 1998
(the "Purchase Agreement") among Admor, certain stockholders of Admor and
NetGateway provides, subject to its terms and conditions, for the acquisition by
NetGateway of at least 90% of the stock of Admor. It is a condition to the
obligations of the parties under the Purchase Agreement that NetGateway make a
loan of $800,000 to Admor and that Admor shall have executed and delivered a
Secured Promissory Note and the Company shall have executed and delivered, and
granted the Liens provided for in, this Agreement.
To induce NetGateway to enter into, and to consummate the
transactions under, the Purchase Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company has agreed to pledge and grant a security interest in the Collateral as
security for the Secured Obligations. Accordingly, the Company agrees with
NetGateway as follows:
Section 1. Definitions and Interpretation.
1.01 Certain Defined Terms. Unless otherwise defined, all
capitalized terms used in this Agreement that are defined in the Purchase
Agreement (including those terms incorporated by reference) shall have the
respective meanings assigned to them in the Purchase Agreement. In addition, the
following terms shall have the following meanings under this Agreement:
"Accounts" shall have the meaning assigned to that term in Section
2.01(b).
"Basic Documents" means, collectively, the Purchase Agreement, the
Note and each other document executed by the Company in connection therewith.
"Collateral" shall have the meaning assigned to that term in Section
2.01.
"Copyright Collateral" shall mean all Copyrights, whether now owned
or hereafter acquired by the Company, including each Copyright identified in
Annex 2.
"Copyrights" shall mean, collectively, (a) all copyrights, copyright
registrations and applications for copyright registrations, (b) all renewals and
extensions of all copyrights, copyright registrations and applications for
copyright registration and (c) all rights, now existing or hereafter coming into
existence, (i) to all income, royalties, damages and other payments (including
in respect of all past, present or future infringements) now or hereafter due or
payable
<PAGE>
under or with respect to any of the foregoing, (ii) to sue for all past, present
and future infringements with respect to any of the foregoing and (iii)
otherwise accruing under or pertaining to any of the foregoing throughout the
world.
"Documents" shall have the meaning assigned to that term in Section
2.01(f).
"Equipment" shall have the meaning assigned to that term in Section
2.01(e).
"Event of Default" shall mean the occurrence of one or more of the
following events:
(a) The Company shall: (i) default in the payment of any principal
of the loan evidenced by the Note when due (whether at stated maturity or
otherwise); or (ii) default in the payment of any interest on the loan evidenced
by the Note or any other Secured Obligation when due and such default shall have
continued unremedied for ten (10) or more days;
(b) The Company or any other guarantor of the loan evidenced by the
Note (collectively, the "Relevant Parties") shall default in the payment when
due of any principal of or interest on any of its other indebtedness; or any
event specified in any note, agreement, indenture or other document evidencing
or relating to any such indebtedness shall occur if the effect of such event is
to cause, or (with the giving of any notice or the lapse of time or both) to
permit the holder or holders of such indebtedness (or a trustee or agent on
behalf of such holder or holders) to cause, such indebtedness to become due, or
to be prepaid in full (whether by redemption, purchase, offer to purchase or
otherwise), prior to its stated maturity or to have the interest rate on such
indebtedness reset to a level so that securities evidencing such indebtedness
trade at a level specified in relation to its par value; provided that the
foregoing Event of Default shall be deemed not to apply to existing defaults
under the Company's Senior Indebtedness (as defined in clause (i) of such
definition) existing on the date hereof for so long as the Company and the
lenders thereunder are conducting active negotiations to consensually
restructure such indebtedness other than pursuant to a proceeding under the
Bankruptcy Code (as defined below);
(c) Any representation, warranty or certification made or deemed
made in this Agreement or the Note by any Relevant Party, or any certificate
furnished to NetGateway pursuant to the provisions of this Agreement, shall
prove to have been false or misleading as of the time made or furnished or
deemed made or furnished in any material respect;
(d) The Company shall default in the performance of any of its
obligations under Sections 4.02 or 5.02 hereof; or the Company shall default in
the performance of any of its other obligations in this Agreement and such
default shall continue unremedied for a period of 30 days after notice of such
default to the Company by NetGateway;
(e) Any Relevant Party shall admit in writing its inability to, or
be generally unable to, pay its debts as such debts become due;
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<PAGE>
(f) Any Relevant Party shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
examiner or liquidator of itself or of all or a substantial part of its
property, (ii) make a general assignment for the benefit of its creditors, (iii)
commence a voluntary case under the United States Bankruptcy Code of 1978, as
amended (the "Bankruptcy Code"), (iv) file a petition seeking to take advantage
of any other law relating to bankruptcy, insolvency, reorganization,
liquidation, dissolution, arrangement or winding-up, or composition or
readjustment of debts, (v) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against it in an
involuntary case under the Bankruptcy Code or (vi) take any corporate action for
the purpose of effecting any of the foregoing;
(g) A proceeding or case shall be commenced, without the application
or consent of the affected Relevant Party, in any court of competent
jurisdiction, seeking (i) its reorganization, liquidation, dissolution,
arrangement or winding-up, or the composition or readjustment of its debts, (ii)
the appointment of a receiver, custodian, trustee, examiner, liquidator or the
like of such Relevant Party or of all or any substantial part of its Property,
or (iii) similar relief in respect of such Relevant Party under any law relating
to bankruptcy, insolvency, reorganization, winding-up, or composition or
adjustment of debts, and such proceeding or case shall continue undismissed, or
an order, judgment or decree approving or ordering any of the foregoing shall be
entered and continue unstayed and in effect, for a period of 60 or more days; or
an order for relief against any Relevant Party shall be entered in an
involuntary case under the Bankruptcy Code;
(h) An event or condition shall occur or exist with respect to any
employee benefit plan to which the Company is a party or in which its employees
participate and, as a result of such event or condition, together with all other
such events or conditions, the Company or any affiliate under the Employee
Retirement Income Security Act of 1974, as amended shall incur or shall be
reasonably likely to incur a liability to an employee benefit plan or the
Pension Benefit Guaranty Corporation (or any combination of the foregoing) in
excess of $100,000;
(i) A reasonable basis shall exist for the assertion against any
Relevant Party (or there shall have been asserted against any Relevant Party)
claims or liabilities, whether accrued, absolute or contingent, based on or
arising from the generation, storage, transport, handling or release of
hazardous materials by the Company or any of its subsidiaries or affiliates, or
any predecessor in interest of the Company or any of its subsidiaries or
affiliates, or relating to any site, facility or vessel owned, operated or
leased by the Company or any of its subsidiaries or affiliates, which claims or
liabilities (insofar as they are payable by the Company or any of its
subsidiaries but after deducting any portion which is reasonably expected to be
paid by other creditworthy persons jointly and severally liable for such
portion), in the judgment of NetGateway are reasonably likely to be determined
adversely to the Company or any of its subsidiaries, and the amount of such
claims or liabilities is, singly or in the aggregate, reasonably likely to have
a material adverse effect on the business, properties or prospects of the
Company;
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<PAGE>
or
(j) Except for expiration in accordance with its terms, this
Agreement or any other security document shall be terminated or shall cease to
be in full force and effect, for whatever reason or any guarantor of the loan
evidenced by the Note shall revoke or seek or purport to revoke its obligations
under any such guaranty.
"Instruments" shall have the meaning assigned to that term in
Section 2.01(c).
"Intellectual Property" shall mean all Copyright Collateral, all
Patent Collateral and all Trademark Collateral, together with (a) all
inventions, processes, production methods, proprietary information, know-how and
trade secrets of the Company; (b) all licenses or user or other agreements
granted to the Company with respect to any of the foregoing, in each case
whether now or hereafter owned or used, including the licenses or other
agreements with respect to the Copyright Collateral, the Patent Collateral or
the Trademark Collateral listed in Annex 5; (c) all information, customer lists,
identification of suppliers, data, plans, blueprints, specifications, designs,
drawings, recorded knowledge, surveys, engineering reports, test reports,
manuals, materials standards, processing standards, performance standards,
catalogs, computer and automatic machinery software and programs; (d) all of the
Company's field repair data, sales data and other information relating to sales
or service of products now or hereafter manufactured; (e) all of the Company's
accounting information and all media in which or on which any information or
knowledge or data or records may be recorded or stored and all computer programs
used for the compilation or printout of such information, knowledge, records or
data; (f) the approvals of any governmental person now held or hereafter
obtained by the Company in respect of any of the foregoing; and (g) all causes
of action, claims and warranties now owned or hereafter acquired by the Company
in respect of any of the foregoing. It is understood that Intellectual Property
shall include all of the foregoing owned or acquired by the Company on a
worldwide basis.
"Inventory" shall have the meaning assigned to that term in Section
2.01(d).
"Issuers" shall mean, collectively, each subsidiary, directly or
indirectly, of the Company that is the issuer (as defined in the Uniform
Commercial Code) of any shares of capital stock now owned or hereafter acquired
by the Company, including the respective corporations identified in Annex 1
under the caption "Issuer."
"Patent Collateral" shall mean all Patents, whether now owned or
hereafter acquired by the Company, including each Patent identified in Annex 3.
"Patents" shall mean, collectively, (a) all patents and patent
applications, (b) all reissues, divisions, continuations, renewals, extensions
and continuations-in-part of all patents or patent applications and (c) all
rights, now existing or hereafter coming into existence, (i) to all income,
royalties, damages, and other payments (including in respect of all past,
present and
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<PAGE>
future infringements) now or hereafter due or payable under or with respect to
any of the foregoing, (ii) to sue for all past, present and future infringements
with respect to any of the foregoing and (iii) otherwise accruing under or
pertaining to any of the foregoing throughout the world, including all
inventions and improvements described or discussed in all such patents and
patent applications.
"Pledged Stock" shall have the meaning assigned to that term in
Section 2.01(a).
"Secured Obligations" shall mean (a) the payment and performance of
the Note by the Company and (b) any and all obligations of the Company for the
performance of its agreements, covenants and undertakings under or in respect of
the Note and this Agreement.
"Stock Collateral" shall have the meaning assigned to that term in
Section 2.01(a).
"Senior Indebtedness" means (i) the principal of, premium, if any,
and interest on, and any other indebtedness of the Company to its primary senior
bank lender(s), plus interest and customary expenses with respect to such Senior
Indebtedness and (ii) refinancings, deferrals, refundings, replacements,
extensions and renewals of or amendments, modifications or supplements to such
Senior Indebtedness.
"Trademark Collateral" shall mean all Trademarks, whether now owned
or hereafter acquired by the Company, including each Trademark identified in
Annex 4. Notwithstanding the foregoing, the Trademark Collateral shall not
include any Trademark which would be rendered invalid, abandoned, void or
unenforceable by reason of its being included as part of the Trademark
Collateral nor shall the Company be required to take any action hereunder that
would render any Trademark invalid, abandoned, void or unenforceable by reason
of such action.
"Trademarks" shall mean, collectively, (a) all trade names,
trademarks and service marks, logos, trademark and service mark registrations
and applications for trademark and service mark registrations, (b) all renewals
and extensions of any of the foregoing and (c) all rights, now existing or
hereafter coming into existence, (i) to all income, royalties, damages and other
payments (including in respect of all past, present and future infringements)
now or hereafter due or payable under or with respect to any of the foregoing,
(ii) to sue for all past, present and future infringements with respect to any
of the foregoing and (iii) otherwise accruing under or pertaining to any of the
foregoing throughout the world, together, in each case, with the product lines
and goodwill of the business connected with the use of, or otherwise symbolized
by, each such trade name, trademark and service mark.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as
in effect in the State of California from time to time or, by reason of
mandatory application, any other applicable jurisdiction.
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<PAGE>
Section 1.02 Interpretation. In this Agreement, unless otherwise
indicated: the singular includes the plural and plural the singular; words
importing either gender include the other gender; references to statutes or
regulations are to be construed as including all statutory or regulatory
provisions consolidating, amending or replacing the statute or regulation
referred to; references to "writing" include printing, typing, lithography and
other means of reproducing words in a tangible visible form; the words
"including," "includes" and "include" shall be deemed to be followed by the
words "without limitation;" references to articles, sections (or subdivisions of
sections), exhibits, annexes or schedules are to this Agreement; references to
agreements and other contractual instruments shall be deemed to include all
subsequent amendments, extensions and other modifications to such instruments
(without, however, limiting any prohibition on any such amendments, extensions
and other modifications by the terms of any Basic Document); references to
persons include their respective permitted successors and assigns and, in the
case of governmental persons, persons succeeding to their respective functions
and capacities and references to the Company shall include Admor and Limited,
jointly and severally.
Section 2. Collateral.
2.01 Grant. As collateral security for the prompt payment in full of
the Note when due (whether at stated maturity, by acceleration or otherwise) and
performance of the Secured Obligations, the Company hereby pledges and grants to
NetGateway a security interest in all of the Company's right, title and interest
in and to the following property, whether now owned or hereafter acquired by the
Company and whether now existing or hereafter coming into existence
(collectively, the "Collateral"):
(a) (i) all of the shares of capital stock of all subsidiaries of
the Company, including the Issuers represented by the respective certificates
identified in Annex 1 and all other shares of capital stock of whatever class of
the Issuers, now owned or hereafter acquired by the Company, together with in
each case the certificates representing the same (collectively, the "Pledged
Stock");
(ii) all shares, securities, moneys or property representing a
dividend on, or a distribution or return of capital in respect of, any of the
Pledged Stock, resulting from a split-up, revision, reclassification or other
like change of any of the Pledged Stock or otherwise received in exchange for
any of the Pledged Stock and all rights issued to the holders of, or otherwise
in respect of, any of the Pledged Stock; and
(iii) without affecting the obligations of the Company under
any provision prohibiting such action under any Basic Document, in the event of
any consolidation or merger in which any Issuer is not the surviving
corporation, all shares of each class of the capital stock of the successor
corporation (unless such successor corporation is the Company itself) formed by
or resulting from such consolidation or merger (collectively, and together with
the property described in clauses (i) and (ii) above, the "Stock Collateral");
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<PAGE>
(b) all accounts and general intangibles (each as defined in the
Uniform Commercial Code) of the Company constituting a right to the payment of
money, whether or not earned by performance, including all moneys due and to
become due to the Company in repayment of any loans or advances, in payment for
goods (including Inventory and Equipment) sold or leased or for services
rendered, in payment of tax refunds and in payment of any guarantee of any of
the foregoing (collectively, the "Accounts");
(c) all instruments, chattel paper or letters of credit (each as
defined in the Uniform Commercial Code) of the Company evidencing, representing,
arising from or existing in respect of, relating to, securing or otherwise
supporting the payment of, any of the Accounts (collectively, the
"Instruments");
(d) all inventory (as defined in the Uniform Commercial Code) and
all other goods of the Company that are held by the Company for sale, lease or
furnishing under a contract of service (including to its subsidiaries or
affiliates), that are so leased or furnished or that constitute raw materials,
work in process or material used or consumed in its business, including all
spare parts and related supplies, all goods obtained by the Company in exchange
for any such goods, all products made or processed from any such goods and all
substances, if any, commingled with or added to any such goods (collectively,
the "Inventory");
(e) all equipment (as defined in the Uniform Commercial Code) and
all other goods of the Company that are used or bought for use primarily in its
business, including all spare parts and related supplies, all goods obtained by
the Company in exchange for any such goods, all substances, if any, commingled
with or added to such goods and all upgrades and other improvements to such
goods, in each case to the extent not constituting Inventory (collectively, the
"Equipment");
(f) all documents of title (as defined in the Uniform Commercial
Code) or other receipts of the Company covering, evidencing or representing
Inventory or Equipment (collectively, the "Documents");
(g) all contracts and other agreements of the Company relating to
the sale or other disposition of all or any part of the Inventory, Equipment or
Documents and all rights, warranties, claims and benefits of the Company against
any person arising out of, relating to or in connection with all or any part of
the Inventory, Equipment or Documents of the Company, including any such rights,
warranties, claims or benefits against any person storing or transporting any
such Inventory or Equipment or issuing any such Documents;
(h) all other accounts or general intangibles of the Company not
constituting Accounts, including, to the extent related to all or any part of
the other Collateral, all books, correspondence, credit files, records,
invoices, tapes, cards, computer runs and other papers and documents in the
possession or under the control of the Company or any computer bureau or service
company from time to time acting for the Company;
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(i) all other tangible and intangible property of the Company,
including all Intellectual Property; and
(j) all proceeds and products in whatever form of all or any part of
the other Collateral, including all proceeds of insurance and all condemnation
awards and all other compensation for any casualty with respect to all or any
part of the other Collateral (together with all rights to recover and proceed
with respect to the same), and all accessories to, substitutions for and
replacements of all or any part of the other Collateral.
2.02 Intellectual Property. For the purpose of enabling NetGateway
to exercise its rights, remedies, powers and privileges under Section 6 at such
time or times as NetGateway shall be lawfully entitled to exercise such rights,
remedies, powers and privileges, and for no other purpose, the Company hereby
grants to NetGateway, to the extent assignable, an irrevocable, nonexclusive
license (exercisable without payment of royalty or other compensation to the
Company) to use, assign, license or sublicense any of the Intellectual Property
of the Company, together with reasonable access to all media in which any of the
licensed items may be recorded or stored and to all computer programs used for
the compilation or printout of such items.
2.03 Perfection. Concurrently with the execution and delivery of
this Agreement, the Company shall (i) file such financing statements and other
documents in such offices as shall be necessary or as NetGateway may request to
perfect and establish the priority of the Liens granted by this Agreement, (ii)
deliver and pledge to NetGateway any and all Instruments, endorsed or
accompanied by such instruments of assignment and transfer in such form and
substance as NetGateway may request, (iii) deliver to NetGateway all
certificates identified in Annex 1, accompanied by undated stock powers duly
executed in blank and (iv) take all such other actions as shall be necessary or
as NetGateway may request to perfect and establish the priority of the Liens
granted by this Agreement.
2.04 Preservation and Protection of Security Interests. The Company
shall:
(a) upon the acquisition after the Closing Date by the Company of
any Stock Collateral, promptly either (x) transfer and deliver to NetGateway all
such Stock Collateral (together with the certificates representing such Stock
Collateral securities duly endorsed in blank or accompanied by undated stock
powers duly executed in blank) or (y) take such other action as NetGateway shall
deem necessary or appropriate to perfect, and establish the priority of, the
Liens granted by this Agreement in such Stock Collateral;
(b) upon the acquisition after the Closing Date by the Company of
any Instrument, promptly deliver and pledge to NetGateway all such Instruments,
endorsed or accompanied by such instruments of assignment and transfer in such
form and substance as NetGateway may request;
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(c) upon the acquisition after the Closing Date by the Company of
any Equipment covered by a certificate of title or ownership, promptly cause
NetGateway to be listed as the lienholder on such certificate of title and
within 30 days of the acquisition of such Equipment deliver evidence of the same
to NetGateway;
(d) upon the Company's acquiring, or otherwise becoming entitled to
the benefits of, any Copyright (or copyrightable material), Patent (or
patentable invention), Trademark (or associated goodwill) or other Intellectual
Property or upon or prior to the Company's filing, either directly or through
any agent, licensee or other designee, of any application with any governmental
person with respect to any Copyright, Patent, Trademark, or other Intellectual
Property, in each case after the Closing Date, to the extent the Company has the
right to do so, execute and deliver such contracts, agreements and other
instruments as NetGateway may request to evidence, validate, perfect and
establish the priority of the Liens granted by this Agreement in such and any
related Intellectual Property and, if requested by NetGateway, amend Annex 2, 3
or 4 (as the case may be) to reflect the inclusion of any such Intellectual
Property as part of the Collateral (it being understood that the failure to
amend any such Annex shall not affect the Liens granted by this Agreement on any
such Intellectual Property); and
(e) give, execute, deliver, file or record any and all financing
statements, notices, contracts, agreements or other instruments, obtain any and
all approvals of governmental persons and take any and all steps that may be
necessary or as NetGateway may request to create, perfect, establish the
priority of, or to preserve the validity, perfection or priority of, the Liens
granted by this Agreement or to enable NetGateway to exercise and enforce its
rights, remedies, powers and privileges under this Agreement with respect to
such Liens, including causing any or all of the Stock Collateral to be
transferred of record into the name of NetGateway or its nominee (and NetGateway
agrees that if any Stock Collateral is transferred into its name or the name of
its nominee, NetGateway will thereafter promptly give to the Company copies of
any notices and communications received by it with respect to the Stock
Collateral pledged by the Company), provided that notices to account debtors in
respect of any Accounts or Instruments shall be subject to the provisions of
Section 3.01.
2.05 Attorney-in-Fact.
(a) Subject to the rights of the Company under Sections 2.06, 2.07,
2.08 and 2.09, NetGateway is hereby appointed the attorney-in-fact of the
Company, effective as of the Closing Date and terminating upon termination of
this Agreement for the purpose of carrying out the provisions of this Agreement
and taking any action and executing any instruments which NetGateway may deem
necessary or advisable to accomplish the purposes of this Agreement, to preserve
the validity, perfection and priority of the Liens granted by this Agreement
and, following any Event of Default, to exercise its rights, remedies, powers
and privileges under this Agreement. This appointment as attorney-in-fact is
irrevocable and coupled with an interest. Without limiting the generality of the
foregoing, NetGateway shall be entitled under this
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Agreement upon the occurrence and continuation of any Event of Default (i) to
ask, demand, collect, sue for, recover, receive and give receipt and discharge
for amounts due and to become due under and in respect of all or any part of the
Collateral; (ii) to receive, endorse and collect any Instruments or other
drafts, instruments, documents and chattel paper in connection with clause (i)
above (including any draft or check representing the proceeds of insurance or
the return of unearned premiums); (iii) to file any claims or take any action or
proceeding that NetGateway may reasonably deem necessary or advisable for the
collection of all or any part of the Collateral, including the collection of any
compensation due and to become due under any contract or agreement with respect
to all or any part of the Collateral; and (iv) to execute, in connection with
any sale or disposition of the collateral under Section 6, any endorsements,
assignments, bills of sale or other instruments of conveyance or transfer with
respect to all or any part of the Collateral.
(b) Without limiting the rights and powers of NetGateway under
Section 2.05(a), the Company hereby appoints NetGateway as its attorney-in-fact,
effective as of the Closing Date and terminating upon the termination of this
Agreement, for the purpose of (i) filing such applications with such state
agencies and (ii) executing such other documents and instruments on behalf of,
and taking such other action in the name of, the Company as NetGateway may
reasonably deem necessary or advisable to accomplish the purposes of this
Agreement. This appointment as attorney-in-fact is irrevocable and coupled with
an interest.
2.06 Special Provisions Relating to Stock Collateral.
(a) So long as no Event of Default shall have occurred and be
continuing, the Company shall have the right to exercise all voting, consensual
and other powers of ownership pertaining to the Stock Collateral for all
purposes not inconsistent with the terms of any Basic Document, provided that
the Company agrees that it will not vote the Stock Collateral in any manner that
is inconsistent with the terms of any Basic Document; and NetGateway shall, at
the Company expense, execute and deliver to the Company or cause to be executed
and delivered to the Company all such proxies, powers of attorney, dividend and
other orders and other instruments, without recourse, as the Company may
reasonably request for the purpose of enabling the Company to exercise the
rights and powers which it is entitled to exercise pursuant to this Section
2.06(a).
(b) So long as no Event of Default shall have occurred and be
continuing, the Company's shall be entitled to receive and retain any dividends
on the Stock Collateral paid in cash out of earned surplus.
(c) If any Event of Default shall have occurred and be continuing,
and whether or not NetGateway exercises any available right to declare any
Secured Obligation due and payable or seeks or pursues any other right, remedy,
power or privilege available to it under applicable law, this Agreement or any
other Basic Document, all dividends and other distributions on the Stock
Collateral shall be paid directly to NetGateway as part of the Stock
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Collateral, subject to the terms of this Agreement, and, if NetGateway shall so
request, the Company agrees to execute and deliver to NetGateway appropriate
additional dividend, distribution and other orders and instruments to that end,
provided that if such Event of Default is cured, any such dividend or
distribution paid to NetGateway prior to such cure shall, upon request of the
Company (except to the extent applied to the Secured Obligations), be returned
by NetGateway to the Company.
(d) Notwithstanding anything to the contrary contained in this
Agreement, the security interest in the Stock Collateral shall be subordinate to
the security interest granted in favor of the holders of Senior Indebtedness and
the provisions hereof relating to Stock Collateral shall be deemed to be
satisfied through such holders as collateral agent for NetGateway (subordinate
to the rights of the holders of Senior Indebtedness).
2.07 Use of Intellectual Property. So long as no Event of Default
shall have occurred and be continuing, the Company will be permitted to exploit,
use, enjoy, protect, license, sublicense, assign, sell, dispose of or take any
other actions with respect to the Intellectual Property in the ordinary course
of the business of the Company. In furtherance of the foregoing, so long as no
Event of Default shall have occurred and be continuing, if necessary NetGateway
shall from time to time, upon the request of the Company, execute and deliver
any instruments, certificates or other documents, in the form so requested, to
allow the Company to take any action permitted above (including relinquishment
of the license provided pursuant to Section 2.02 as to any specific Intellectual
Property). The exercise of rights, remedies, powers and privileges under Section
6 by NetGateway shall not terminate the rights of the holders of any licenses or
sublicenses theretofore granted by the Company in accordance with the first
sentence of this Section 2.07.
2.08 Instruments. So long as no Event of Default shall have occurred
and be continuing, the Company may retain for collection in the ordinary course
of business any Instruments obtained by it in the ordinary course of business,
and NetGateway shall, promptly upon the request, and at the expense of, the
Company, make appropriate arrangements for making any Instruments pledged by the
Company available to the Company for purposes of presentation, collection or
renewal. Any such arrangement shall be effected, to the extent deemed
appropriate by NetGateway, against trust receipt or like document.
2.09 Use of Collateral. So long as no Event of Default shall have
occurred and be continuing, the Company shall, in addition to its rights under
Sections 2.06, 2.07 and 2.08 in respect of the Collateral contemplated in those
sections, be entitled to use and possess the other Collateral and to exercise
its rights, title and interest in all contracts, agreements, licenses and
approvals of governmental persons, subject to the rights, remedies, powers and
privileges of NetGateway under Sections 3 and 6 and to such use, possession or
exercise not otherwise constituting an Event of Default.
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2.10 Rights and Obligations.
(a) The Company shall remain liable to perform its duties and
obligations under the contracts and agreements included in the Collateral in
accordance with their respective terms to the same extent as if this Agreement
had not been executed and delivered. The exercise by NetGateway of any right,
remedy, power or privilege in respect of this Agreement shall not release the
Company from any of its duties and obligations under such contracts and
agreements. NetGateway shall have no duty, obligation or liability under such
contracts and agreements or in respect to any approval of any governmental
persons included in the Collateral by reason of this Agreement or any other
Basic Document, nor shall NetGateway be obligated to perform any of the duties
or obligations of the Company under any such contract or agreement or any such
approval of any governmental persons or to take any action to collect or enforce
any claim (for payment) under any such contract or agreement or approval of any
governmental persons.
(b) No Lien granted by this Agreement in the Company's right, title
and interest in any contract, agreement or approval of any governmental person
shall be deemed to be a consent by NetGateway to any such contract, agreement or
approval of any governmental person.
(c) No reference in this Agreement to proceeds or to the sale or
other disposition of Collateral shall authorize the Company to sell or otherwise
dispose of any Collateral except to the extent otherwise expressly permitted by
the terms of any Basic Document.
(d) NetGateway shall not be required to take steps necessary to
preserve any rights against prior parties to any part of the Collateral.
2.11 Termination. When all Secured Obligations shall have been paid
or performed in full, this Agreement shall terminate, and NetGateway shall
forthwith cause to be assigned, transferred and delivered, against receipt but
without any recourse, warranty or representation whatsoever, any remaining
Collateral and money received in respect of the Collateral, to or on the order
of the Company and to be released, canceled and granted back all licenses and
rights referred to in Section 2.02. NetGateway shall also execute and deliver to
the Company upon such termination such Uniform Commercial Code termination
statements, and such other documentation as shall be reasonably requested by the
Company to effect the termination and release of the Liens granted by this
Agreement on the Collateral.
2.12 Subordination. The Lien granted hereby in the Collateral in
favor of NetGateway and the obligations relating to the Collateral are
subordinate to any Lien granted to holders of the Senior Indebtedness. Such
subordination is for the benefit of the holders of Senior Indebtedness.
NetGateway shall execute and deliver to the holders of the Senior Indebtedness
such inter-creditor and subordination agreements as the holders of the Senior
Indebtedness shall reasonably request to evidence such subordination.
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Section 3. Certain Proceeds.
3.01 Notice to Account Debtors. If any Event of Default shall have
occurred and be continuing, the Company shall, upon request of NetGateway,
promptly notify (and the Company hereby authorizes NetGateway so to notify) each
account debtor in respect of any Accounts or Instruments that such Collateral
has been assigned to NetGateway under this Agreement and that any payments due
or to become due in respect of such Collateral are to be made directly to
NetGateway.
3.02 Proceeds Held in Trust. If any Event of Default shall have
occurred and be continuing, the Company agrees that if the proceeds of any
Collateral (including payments made in respect of Accounts and Instruments)
shall be received by it, all such proceeds shall be held in trust by the Company
for and as the property of NetGateway and shall not be commingled with any other
funds or property of the Company.
Section 4. Representations and Warranties. As of the Closing Date,
the Company represents and warrants to NetGateway as follows:
4.01 Title. The Company is the sole beneficial owner of the
Collateral in which it purports to grant a Lien pursuant to this Agreement, and
such Collateral is free and clear of all Liens and, with respect to the Stock
Collateral, of any right in favor of any other person, subject in each case to
Liens in favor of the holders of Senior Indebtedness. Subject to Section 2.03
above, the Liens granted by this Agreement in favor of NetGateway have attached
and constitute a perfected security interest in all of such Collateral (other
than Intellectual Property registered or otherwise located outside of the United
States of America) prior to all other Liens, other than Liens in favor of the
holders of Senior Indebtedness.
4.02 Pledged Stock.
(a) The Pledged Stock evidenced by the certificates identified in
Annex 1 is duly authorized, validly existing, fully paid and nonassessable, and
none of such Pledged Stock is subject to any contractual restriction, or any
restriction under the charter or by-laws of the respective Issuer of such
Pledged Stock, upon the transfer of such Pledged Stock (except for any such
restriction contained in any Basic Document).
(b) The Pledged Stock evidenced by the certificates identified in
Annex 1 constitutes all of the issued and outstanding shares of capital stock of
any class of the Issuers beneficially owned by the Company on the Closing Date
(whether or not registered in the name of the Company), and Annex 1 correctly
identifies, as at the Closing Date, the respective Issuers of such Pledged
Stock, the respective class and par value of the shares comprising such Pledged
Stock and the respective number (and registered owners) of the shares evidenced
by each such certificate.
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4.03 Intellectual Property.
(a) Annexes 2, 3 and 4 set forth completely and correctly all
registered Copyrights and applications therefore, Patents and Trademarks owned
by the Company on the Closing Date; except pursuant to licenses and other
agreements entered into by the Company in the ordinary course of business and
listed in Annex 5, the Company owns and possesses the right to use, and has done
nothing to authorize or enable any other person to use, any Copyright, Patent or
Trademark listed in Annex 2, 3 or 4; all registrations listed in Annexes 2, 3
and 4 are in full force and effect; and, except as may be set forth in Annex 5,
the Company owns and possesses the right to use all Copyrights, Patents and
Trademarks listed in Annexes 2, 3 and 4;
(b) Annex 5 sets forth completely and correctly all material
licenses and other agreements included in the Intellectual Property on the
Closing Date;
(c) To the Company's knowledge, (i) except as set forth in Annex 5,
there is no violation by others of any right of the Company with respect to any
Copyright, Patent or Trademark listed in Annex 2, 3 or 4 and (ii) the Company is
not infringing in any respect upon any Copyright, Patent or Trademark of any
other person; and no proceedings have been instituted, are pending against the
Company or, to the Company's knowledge, have been threatened against, and no
claim has been received by, the Company, alleging any such violation, except as
may be set forth in Annex 5; and
(d) The Company does not own any Trademarks registered in the United
States of America to which the last sentence of the definition of Trademark
Collateral applies.
4.04 Limited Waivers, Etc. Limited acknowledges that the obligations
undertaken by it under this Agreement involve the guarantee of obligations of
persons other than Limited and that such obligations of Limited are absolute,
irrevocable and unconditional under any and all circumstances. In full
recognition and in furtherance of the foregoing, Limited agrees that:
(a) Without affecting the enforceability or effectiveness of this
Agreement in accordance with its terms and without affecting, limiting,
reducing, discharging or terminating the liability of Limited, or the rights,
remedies, powers and privileges of NetGateway under this Agreement, NetGateway
may, at any time and from time to time and without notice or demand of any kind
or nature whatsoever:
(i) amend, supplement, modify, extend, renew, waive,
accelerate or otherwise change the time for payment or performance of, or the
terms of, all or any part of the Secured Obligations (including any increase or
decrease in the rate or rates of interest on all or any part of the Secured
Obligations);
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(ii) amend, supplement, modify, extend, renew, waive or
otherwise change, or enter into or give, any Basic Document or any agreement,
security document, guarantee, approval, consent or other instrument with respect
to all or any part of the Secured Obligations, any Basic Document or any such
other instrument or any term or provision of the foregoing;
(iii) accept or enter into new or additional agreements,
security documents, guarantees (including letters of credit) or other
instruments in addition to, in exchange for or relative to any Basic Document,
all or any part of the Secured Obligations or any collateral now or in the
future serving as security for the Secured Obligations;
(iv) accept or receive partial payments or performance on the
Secured Obligations (whether as a result of the exercise of any right, remedy,
power or privilege or otherwise);
(v) accept, receive and hold any additional collateral for all
or any part of the Secured Obligations;
(vi) release, reconvey, terminate, waive, abandon, allow to
lapse or expire, fail to perfect, subordinate, exchange, substitute, transfer,
foreclose upon or enforce any collateral, security documents or guarantees
(including letters of credit) for or relative to all or any part of the Secured
Obligations;
(vii) apply any collateral or the proceeds of any collateral
or guarantee (including any letter of credit) to all or any part of the Secured
Obligations in such manner and extent as NetGateway may in its discretion
determine;
(viii) release any person from any personal liability with
respect to all or any part of the Secured Obligations;
(ix) settle, compromise, release, liquidate or enforce upon
such terms and in such manner as NetGateway may determine or as applicable law
may dictate all or any part of the Secured Obligations or any collateral on or
guarantee of (including any letter of credit issued with respect to) all or any
part of the Secured Obligations;
(x) consent to the merger or consolidation of, the sale of
substantial assets by, or other restructuring or termination of the corporate
existence of the Company or any other person;
(xi) proceed against Admor, Limited or any other guarantor of
(including any issuer of any letter of credit issued with respect to) all or any
part of the Secured Obligations or any collateral provided by any person and
exercise the rights, remedies, powers and privileges of NetGateway under the
Basic Documents or otherwise in such order and such
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manner as NetGateway may, in its discretion, determine, without any necessity to
proceed upon or against or exhaust any collateral, right, remedy, power or
privilege before proceeding to call upon or otherwise enforce this Agreement as
to Limited;
(xii) foreclose upon any deed of trust, mortgage or other
instrument creating or granting liens on any interest in real property by
judicial or nonjudicial sale or by deed in lieu of foreclosure, bid any amount
or make no bid in any foreclosure sale or make any other election of remedies
with respect to such liens or exercise any right of set-off;
(xiii) obtain the appointment of a receiver with respect to
any collateral for all or any part of the Secured Obligations and apply the
proceeds of such receivership as NetGateway may in its discretion determine (it
being agreed that nothing in this clause (xiii) shall be deemed to make
NetGateway a party in possession in contemplation of law, except at its option);
(xiv) enter into such other transactions or business dealings
with the Company, any subsidiary or affiliate of the Company or any other
guarantor of all or any part of the Secured Obligations as NetGateway may
desire; and
(xv) do all or any combination of the actions set forth in
this Section 4.04(a).
(b) The enforceability and effectiveness of this Agreement and the
liability of Limited, and the rights, remedies, powers and privileges of
NetGateway, under this Agreement shall not be affected, limited, reduced,
discharged or terminated, and Limited hereby expressly waives to the fullest
extent permitted by law any defense now or in the future arising, by reason of:
(i) the illegality, invalidity or unenforceability of all or
any part of the Secured Obligations, any Basic Document or any agreement,
security document, guarantee or other instrument relative to all or any part of
the Secured Obligations;
(ii) any disability or other defense with respect to all of
any part of the Secured Obligations of the Company or any other guarantor of all
or any part of the Secured Obligations (including any issuer of any letters of
credit), including the effect of any statute of limitations that may bar the
enforcement of all or any part of the Secured Obligations or the obligations of
any such other guarantor;
(iii) the illegality, invalidity or unenforceability of any
security or guarantee (including any letter of credit) for all or any part of
the Secured Obligations or the lack of perfection or continuing perfection or
failure of the priority of any lien on any collateral for all or any part of the
Secured Obligations;
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(iv) the cessation, for any cause whatsoever, of the liability
of the Company or any other guarantor of all or any part of the Secured
Obligations (other than by reason of the full payment and performance of all
Secured Obligations);
(v) any failure of NetGateway to marshal assets in favor of
the Company or any other person, to exhaust any collateral for all or any part
of the Secured Obligations, to pursue or exhaust any right, remedy, power or
privilege it may have against the Company, any other guarantor of all or any
part of the Secured Obligations (including any issuer of any letter of credit)
or any other person or to take any action whatsoever to mitigate or reduce
Limited's liability under this Agreement, NetGateway being under no obligation
to take any such action notwithstanding the fact that all or any part of the
Secured Obligations may be due and payable and that the Company may be in
default of its obligations under any Basic Document;
(vi) any failure of NetGateway to give notice of sale or other
disposition of any collateral (including any notice of any judicial or
nonjudicial foreclosure or sale of any interest in real property serving as
collateral for all or any part of the Secured Obligations) for all or any part
of the Secured Obligations to the Company, Limited or any other person or any
defect in, or any failure by Limited or any other person to receive, any notice
that may be given in connection with any sale or disposition of any collateral;
(vii) any failure of NetGateway to comply with applicable laws
in connection with the sale or other disposition of any collateral for all or
any part of the Secured Obligations;
(viii) any judicial or nonjudicial foreclosure or sale of, or
other election of remedies with respect to, any interest in real property or
other collateral serving as security for all or any part of the Secured
Obligations, even though such foreclosure, sale or election of remedies may
impair the subrogation rights of Limited or may preclude Limited from obtaining
reimbursement, contribution, indemnification or other recovery from the Company,
any other guarantor or any other person and even though the Company may not, as
a result of such foreclosure, sale or election of remedies, be liable for any
deficiency;
(ix) any benefits the Company or any other guarantor may
otherwise derive from Section 580a, 580b, 580d or 726 of the California Code of
Civil Procedure or any comparable provisions of the laws of any other
jurisdiction;
(x) any act or omission of NetGateway or any other person that
directly or indirectly results in or aids the discharge or release of the
Company of all or any part of the Secured Obligations or any security or
guarantee (including any letter of credit) for all or any part of the Secured
Obligations by operation of law or otherwise;
(xi) any law which provides that the obligation of a surety or
guarantor must neither be larger in amount nor in other respects more burdensome
than that of the
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principal or which reduces a surety's or guarantor's obligation in proportion to
the principal obligation;
(xii) the possibility that the obligations of the Company to
NetGateway may at any time and from time to time exceed the aggregate liability
of the Limited under this Agreement;
(xiii) any counterclaim, set-off or other claim which the
Company has or alleges to have with respect to all or any part of the Secured
Obligations;
(xiv) any failure of NetGateway to file or enforce a claim in
any bankruptcy or other proceeding with respect to any person;
(xv) the election by NetGateway, in any bankruptcy proceeding
of any person, of the application or nonapplication of Section 1111(b)(2) of the
Bankruptcy Code;
(xvi) any extension of credit or the grant of any Lien under
Section 364 of the Bankruptcy Code;
(xvii) any use of cash collateral under Section 363 of the
Bankruptcy Code;
(xviii) any agreement or stipulation with respect to the
provision of adequate protection in any bankruptcy proceeding of any person;
(xix) the avoidance of any Lien in favor of NetGateway for any
reason;
(xx) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, liquidation or dissolution proceeding commenced by or
against any person, including any discharge of, or bar or stay against
collecting, all or any part of the Secured Obligations (or any interest on all
or any part of the Secured Obligations) in or as a result of any such
proceeding;
(xxi) any action taken by NetGateway that is authorized by
this Section 4.04 or otherwise in this Agreement or by any other provision of
any Basic Document or any omission to take any such action; or
(xxii) any other circumstance whatsoever that might otherwise
constitute a legal or equitable discharge or defense of a surety or guarantor,
including by reason of Sections 2809, 2810, 2819, 2839, 2845, 2850, 2899, 3275
and 3433 of the California Civil Code, and any future judicial decisions or
legislation or of any comparable provisions of the laws of any other
jurisdiction.
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(c) Limited expressly waives, for the benefit of NetGateway, all
set-offs and counterclaims and all presentments, demands for payment or
performance, notices of nonpayment or nonperformance, protests, notices of
protest, notices of dishonor and all other notices or demands of any kind or
nature whatsoever with respect to the Secured Obligations, and all notices of
acceptance of this Agreement or of the existence, creation, incurring or
assumption of new or additional Secured Obligations. Limited further expressly
waives the benefit of any and all statutes of limitation and any and all laws
providing for the exemption of property from execution or for valuation and
appraisal upon foreclosure, to the fullest extent permitted by applicable law.
(d) Limited represents and warrants to NetGateway that it has
established adequate means of obtaining financial and other information
pertaining to the business, operations and condition (financial and otherwise)
of the Company and its properties on a continuing basis and that Limited is now
and will in the future remain fully familiar with the business, operations and
condition (financial and otherwise) of the Company and its properties. Limited
further represents and warrants that it has reviewed and approved each of the
Basic Documents and is fully familiar with the transaction contemplated by the
Basic Documents and that it will in the future remain fully familiar with such
transaction and with any new Basic Documents and the transactions contemplated
by such Basic Documents. Limited hereby expressly waives and relinquishes any
duty on the part of NetGateway (should any such duty exist) to disclose to
Limited any matter of fact or other information related to the business,
operations or condition (financial or otherwise) of the Company or its
properties or to any Basic Document or the transactions undertaken pursuant to,
or contemplated by, any such Basic Document, whether now or in the future known
by NetGateway.
(e) Limited intends that its rights and obligations shall be those
expressly set forth in this Agreement and that its obligations shall not be
affected, limited, reduced, discharged or terminated by reason of any principles
or provisions of law which conflict with the terms of this Agreement.
(f) Limited warrants and agrees that each of the waivers and
consents set forth in this Agreement is made voluntarily and unconditionally
after consultation with outside legal counsel and with full knowledge of its
significance and consequences, with the understanding that events giving rise to
any defense or right waived may diminish, destroy or otherwise adversely affect
rights which Limited otherwise may have against the Company, NetGateway or any
other person or against any Collateral. If, notwithstanding the intent of the
parties that the terms of this Agreement shall control in any and all
circumstances, any such waivers or consents are determined to be unenforceable
under applicable law, such waivers and consents shall be effective to the
fullest extent permitted by law.
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<PAGE>
(g) Limited hereby waives, and agrees not to exercise, all rights,
remedies, powers or privileges, such as rights of subrogation, contribution,
reimbursement or indemnity or related remedies, powers or privileges, arising
against the Company or any other guarantor of all or any part of the Secured
Obligations or any collateral for all or any part of the Secured Obligations
(whether by contract or operation of law, including under the Bankruptcy Code)
by reason of any payment or other performance by Limited pursuant to the
provisions of this Agreement and agrees for the benefit of each of the Company's
creditors (including NetGateway) that any such payment by it shall constitute a
contribution of capital by Limited to the Company. Limited further agrees that,
to the extent that the waiver of, or agreement not to exercise, any such rights,
remedies, powers or privileges is found by a court of competent jurisdiction to
be void or voidable for any reason, any such rights, remedies, powers or
privileges Limited may have shall be junior and subordinate to the rights,
remedies, powers and privileges of NetGateway against Limited under this
Agreement.
(h) The obligations of Limited under this Agreement shall be
automatically reinstated if and to the extent that for any reason any payment by
or on behalf of the Company or any other person or any other application of
funds (including the proceeds of any Collateral for all or any part of the
Secured Obligations) in respect of all or any part of the Secured Obligations is
rescinded or must be otherwise restored by any holder of such Secured
Obligations, whether as a result of any proceedings in bankruptcy,
reorganization or otherwise and Limited agrees that it will indemnify NetGateway
on demand for all reasonable costs and expenses (including fees and expenses of
counsel) incurred by NetGateway in connection with such rescission or
restoration.
(i) NetGateway may bring and prosecute a separate action or actions
against Limited whether or not the Company, any other guarantor or any other
person is joined in any such action or a separate action or actions are brought
against the Company, any other guarantor, any other person, or any Collateral
for all or any part of the Secured Obligations. The obligations of Limited
under, and the effectiveness of, this Agreement are not conditioned upon the
existence or continuation of any other guarantee (including any letter of
credit) of all or any part of the Secured Obligations.
Section 5. Covenants.
5.01 Books and Records. The Company shall:
(a) keep full and accurate books and records relating to the
Collateral and stamp or otherwise mark such books and records in such manner as
NetGateway may reasonably require in order to reflect the Liens granted by this
Agreement;
(b) furnish to NetGateway from time to time (but, unless any Event
of Default shall have occurred and be continuing, no more frequently than
quarterly) statements and
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schedules further identifying and describing the Copyright Collateral, the
Patent Collateral and the Trademark Collateral and such other reports in
connection with the Copyright Collateral, the Patent Collateral and the
Trademark Collateral, as NetGateway may reasonably request, all in reasonable
detail;
(c) within 5 business days of filing, either directly or through an
agent, licensee or other designee, any application for any Copyright, Patent or
Trademark, furnish to NetGateway prompt notice of such proposed filing; and
(d) permit representatives of NetGateway, upon reasonable notice, at
any time during normal business hours to inspect and make abstracts from its
books and records pertaining to the Collateral, permit representatives of
NetGateway to be present at the Company's place of business to receive copies of
all communications and remittances relating to the Collateral and forward copies
of any notices or communications received by the Company with respect to the
Collateral, all in such manner as NetGateway may reasonably request.
5.02 Removals, Etc. Without at least 30 days' prior written notice
to NetGateway, the Company shall not (i) maintain any of its books and records
with respect to the Collateral at any office or maintain its principal place of
business at any place, or permit any Inventory or Equipment to be located
anywhere, other than at the address initially indicated for notices to it under
Section 7 or at one of the locations identified in Annex 6 or in transit from
one of such locations to another or (ii) change its corporate name, or the name
under which it does business, from the name shown on the signature pages to this
Agreement.
5.03 Sales and Other Liens. Except for sales of inventory in the
ordinary course of business and the disposal of obsolete property on
commercially reasonable terms, the Company shall not knowingly dispose of any
Collateral, create, incur, assume or suffer to exist any Lien upon any
Collateral or file or suffer to be on file or authorize to be filed, in any
jurisdiction, any financing statement or like instrument with respect to all or
any part of the Collateral in which NetGateway is not named as the sole secured
party for its own benefit.
5.04 Stock Collateral. The Company will cause the Stock Collateral
to constitute at all times 100% of the total number of shares of each class of
capital stock of each Issuer then outstanding. The Company shall cause all such
shares to be duly authorized, validly issued, fully paid and nonassessable and
to be free of any contractual restriction or any restriction under the charter
or bylaws of the respective Issuer of such Stock Collateral, upon the transfer
of such Stock Collateral (except for any such restriction contained in any Basic
Document).
5.05 Intellectual Property.
(a) The Company (either itself or through licensees) will, for each
Trademark, to the extent consistent with past practice and good business
judgment, (i) continue to use such Trademark on each and every trademark class
of goods applicable to its current line as reflected
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in its current catalogs, brochures and price lists in order to maintain such
Trademark in full force and effect free from any claim of abandonment for
nonuse, (ii) maintain as in the past the quality of products and services
offered under such Trademark, (iii) employ such Trademark with the appropriate
notice of registration and (iv) not (and not permit any licensee or sublicensee
to) do any act or knowingly omit to do any act whereby any Trademark material to
the conduct of its business may become invalidated.
(b) The Company (either itself or through licensees) will not
knowingly do any act or knowingly omit to do any act whereby any Patent material
to the conduct of its business may become abandoned or dedicated to the public
domain.
(c) The Company shall notify NetGateway immediately if it knows or
has reason to know that any Intellectual Property material to the conduct of its
business may become abandoned or dedicated to the public domain, or of any
adverse determination or development (including the institution of, or any such
determination or development in, any proceeding before any governmental person)
regarding the Company's ownership of any Intellectual Property material to its
business, its right to copyright, patent or register the same (as the case may
be), or its right to keep, use and maintain the same.
(d) The Company will take all necessary steps that are consistent
with good business practices in any proceeding before any appropriate
governmental person to maintain and pursue each application relating to any
Intellectual Property (and to obtain the relevant registrations) and to maintain
each registration material to the conduct of its business, including payment of
maintenance fees, filing of applications for renewal, affidavits of use,
affidavits of incontestability and opposition, interference and cancellation
proceedings.
(e) In the event that any Intellectual Property material to the
conduct of its business is infringed, misappropriated or diluted by a third
party, the Company shall notify NetGateway within (10) days after it learns of
such event and shall, if consistent with good business practice, promptly sue
for infringement, misappropriation or dilution, seek temporary restraints and
preliminary injunctive relief to the extent practicable, seek to recover any and
all damages for such infringement, misappropriation or dilution and take such
other actions as are appropriate under the circumstances to protect such
Collateral.
(f) The Company shall, through counsel acceptable to NetGateway,
prosecute diligently any application relating to any Intellectual Property
pending before any governmental person as of the date of this Agreement or
thereafter made until the termination of this Agreement, make application on
uncopyrighted but copyrightable material, unpatented but patentable inventions
and unregistered but registerable Trademarks and preserve and maintain all
rights in applications for any Intellectual Property; provided, however, nothing
in this Agreement or in the Basic Documents shall impose upon the Company any
obligation to make any such application if making such application would be
unnecessary or imprudent in the good faith business judgment of the Company. Any
expenses incurred in connection with such an
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<PAGE>
application shall be borne by the Company. The Company shall not abandon any
right to file an application for any Intellectual Property or any pending such
application in the United States without the consent of NetGateway, which
consent shall not be unreasonably withheld.
(g) If any Event of Default shall have occurred and be continuing,
NetGateway shall have the right but shall in no way be obligated to bring suit
in its own name to enforce the Copyrights, Patents and Trademarks and any
license under such Intellectual Property, in which event the Company shall, at
the request of NetGateway, do any and all lawful acts and execute and deliver
any and all proper documents required by NetGateway in aid of such enforcement
action.
5.06 Further Assurances. The Company agrees that, from time to time
upon the written request of NetGateway, the Company will execute and deliver
such further documents and do such other acts and things as NetGateway may
reasonably request in order fully to effect the purposes of this Agreement.
Section 6. Remedies.
6.01 Events of Default, Etc. If any Event of Default shall have
occurred and be continuing:
(a) NetGateway in its discretion may require the Company to, and the
Company shall, assemble the Collateral owned by it at such place or places,
reasonably convenient to both NetGateway and the Company, designated in
NetGateway's request;
(b) NetGateway in its discretion may make any reasonable compromise
or settlement it deems desirable with respect to any of the Collateral and may
extend the time of payment, arrange for payment in installments, or otherwise
modify the terms of, all or any part of the Collateral;
(c) NetGateway in its discretion may, in its name or in the name of
the Company or otherwise, demand, sue for, collect or receive any money or
property at any time payable or receivable on account of or in exchange for all
or any part of the Collateral, but shall be under no obligation to do so;
(d) NetGateway in its discretion may, upon ten business days = prior
written notice to the Company of the time and place, with respect to all or any
part of the Collateral which shall then be or shall thereafter come into the
possession, custody or control of NetGateway or any of its agents, sell, lease
or otherwise dispose of all or any part of such Collateral, at such place or
places as NetGateway deems best, for cash, for credit or for future delivery
(without thereby assuming any credit risk) and at public or private sale,
without demand of performance or notice of intention to effect any such
disposition or of time or place of any such sale (except such notice as is
required above or by applicable statute and cannot be waived),
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<PAGE>
and NetGateway or any other person may be the purchaser, lessee or recipient of
any or all of the Collateral so disposed of at any public sale (or, to the
extent permitted by law, at any private sale) and thereafter hold the same
absolutely, free from any claim or right of whatsoever kind, including any right
or equity of redemption (statutory or otherwise), of the Company, any such
demand, notice and right or equity being hereby expressly waived and released.
In the event of any sale, license or other disposition of any of the Trademark
Collateral, the goodwill connected with and symbolized by the Trademark
Collateral subject to such disposition shall be included, and the Company shall
supply to NetGateway or its designee, for inclusion in such sale, assignment or
other disposition, all Intellectual Property relating to such Trademark
Collateral. NetGateway may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for the sale, and such sale may be made at any time
or place to which the sale may be so adjourned; and
(e) NetGateway shall have, and in its discretion may exercise, all
of the rights, remedies, powers and privileges with respect to the Collateral of
a secured party under the Uniform Commercial Code (whether or not the Uniform
Commercial Code is in effect in the jurisdiction where such rights, remedies,
powers and privileges are asserted) and such additional rights, remedies, powers
and privileges to which a secured party is entitled under the laws in effect in
any jurisdiction where any rights, remedies, powers and privileges in respect of
this Agreement or the Collateral may be asserted, including the right, to the
maximum extent permitted by law, to exercise all voting, consensual and other
powers of ownership pertaining to the Collateral as if NetGateway were the sole
and absolute owner of the Collateral (and the Company agrees to take all such
action as may be appropriate to give effect to such right).
The proceeds of, and other realization upon, the Collateral by virtue of
the exercise of remedies under this Section 6.01 and of the exercise of the
license granted to NetGateway in Section 2.02 shall be applied in accordance
with Section 6.04.
6.02 Deficiency. If the proceeds of, or other realization upon, the
Collateral by virtue of the exercise of remedies under Section 6.01 and of the
exercise of the license granted by NetGateway in Section 2.02 are insufficient
to cover the costs and expenses of such exercise and the payment in full of the
other Secured Obligations, the Company's shall remain liable for any deficiency.
6.03 Private Sale.
(a) NetGateway shall incur no liability as a result of the sale,
lease or other disposition of all or any part of the Collateral at any private
sale pursuant to Section 6.01 conducted in a commercially reasonable manner. The
Company hereby waives any claims against NetGateway arising by reason of the
fact that the price at which the Collateral may have been sold at such a private
sale was less than the price which might have been obtained at a public sale or
was less than the aggregate amount of the Secured Obligations, even if
NetGateway accepts the first offer received and does not offer the Collateral to
more than one offeree.
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<PAGE>
(b) The Company recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933 and applicable state securities laws,
NetGateway may be compelled, with respect to any sale of all or any part of the
Collateral, to limit purchasers to those who will agree, among other things, to
acquire the Collateral for their own account, for investment and not with a view
to distribution or resale. The Company acknowledges that any such private sales
may be at prices and on terms less favorable to NetGateway than those obtainable
through a public sale without such restrictions, and, notwithstanding such
circumstances, agree that any such private sale shall be deemed to have been
made in a commercially reasonable manner and that NetGateway shall have no
obligation to engage in public sales and no obligation to delay the sale of any
Collateral for the period of time necessary to permit the respective Issuer of
such Collateral to register it for public sale.
6.04 Application of Proceeds. Except as otherwise expressly provided
in this Agreement and except as provided below in this Section 6.04, the
proceeds of, or other realization upon, all or any part of the Collateral by
virtue of the exercise of remedies under Section 6.01 or of the exercise of the
license granted in Section 2.02, and any other cash at the time held by
NetGateway under Section 3 or this Section 6, shall be applied by NetGateway:
First, to the payment of the costs and expenses of such exercise of
remedies, including reasonable out-of-pocket costs and expenses of NetGateway,
the fees and expenses of its agents and counsel and all other expenses incurred
and advances made by NetGateway in that connection;
Next, to the payment in full of the remaining Secured Obligations in
such manner as NetGateway may determine; and
Finally, to the payment to the Company, or its respective successors
or assigns, or as a court of competent jurisdiction may direct, of any surplus
then remaining.
As used in this Section 6, "proceeds" of Collateral shall mean cash,
securities and other property realized in respect of, and distributions in kind
of, Collateral, including any property received under any bankruptcy,
reorganization or other similar proceeding as to the Company or any issuer of,
or account debtor or other the Company on, any of the Collateral.
Section 7. Miscellaneous.
7.01 Waiver. No failure on the part of NetGateway to exercise and no
delay in exercising, and no course of dealing with respect to, any right,
remedy, power or privilege under this Agreement shall operate as a waiver of
such right, remedy, power or privilege, nor shall any single or partial exercise
of any right, remedy, power or privilege under this Agreement preclude any other
or further exercise of any such right, remedy, power or privilege or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges provided
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<PAGE>
in this Agreement are cumulative and not exclusive of any rights, remedies,
powers and privileges provided by law.
7.02 Notices. All notices and other communications provided for in
this Agreement shall be in writing and delivered by registered or certified
mail, postage prepaid, or delivered by overnight courier (for next business day
delivery) or telecopied, addressed as follows, or at such other address as any
of the parties hereto may hereafter designate by notice to the other parties
given in accordance with this Section:
1) if to the Company:
Admor Memory Corp.
217 Technology Drive, Suite 100
Irvine, CA 92618
(Fax: (949) 789-7294)
Attn: President
2) if to NetGateway:
NetGateway, Inc.
300 Oceangate, 5th Floor
Long Beach, California 90802
Attn: Donald M. Corliss, Jr.
(Fax: (562) 981-7383)
Any such notice or communication shall be deemed to have been duly given on the
fifth day after being so mailed, the next business day after delivery by
overnight courier, when received when sent by telecopy or upon receipt when
delivered personally.
7.03 Expenses, Etc. The Company agrees to pay or to reimburse
NetGateway for all costs and expenses (including reasonable attorney's fees and
expenses) that may be incurred by NetGateway in any effort to enforce any of the
provisions of Section 6 or any of the obligations of the Company in respect of
the Collateral or in connection with (a) the preservation of the Lien of, or the
rights of NetGateway under this Agreement or (b) any actual or attempted sale,
lease, disposition, exchange, collection, compromise, settlement or other
realization in respect of, or care of, the Collateral, including all such costs
and expenses (and reasonable attorney's fees and expenses) incurred in any
bankruptcy, reorganization, workout or other similar proceeding.
7.04 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. Signatures may be
exchanged by telecopy, with original signatures to follow. Each of the parties
hereto agrees that it will be bound by its own telecopied signature and that it
accepts the telecopied signatures of the other parties to this Agreement. The
original
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<PAGE>
signature pages shall be forwarded to NetGateway or its counsel and NetGateway
or its counsel will provide all of the parties hereto with a copy of the entire
Agreement.
7.05 Amendments. This Agreement may only be amended by a writing
duly executed by the parties hereto.
7.06 Severability. If any term or provision of this Agreement or any
other document executed in connection herewith shall be determined to be illegal
or unenforceable, all other terms and provisions hereof and thereof shall
nevertheless remain effective and shall be enforced to the fullest extent
permitted by applicable law.
7.07 Governing Law; Submission to Process. EXCEPT TO THE EXTENT THAT
THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY SELECTED IN A DOCUMENT, THIS
AGREEMENT AND ALL AMENDMENTS, SUPPLEMENTS, WAIVERS AND CONSENTS RELATING HERETO
OR THERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW, OR WHERE
APPLICABLE U.S. LAW. THE COMPANY HEREBY IRREVOCABLY SUBMITS ITSELF TO THE
NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE STATE
OF CALIFORNIA AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON
IT IN ANY LEGAL PROCEEDINGS RELATING HERETO BY ANY MEANS ALLOWED UNDER
CALIFORNIA OR FEDERAL LAW. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURT AND ANY CLAIM
THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
7.08 Entire Agreement. This Agreement contains the entire Agreement
of the parties hereto with respect to the transactions contemplated hereby and
supersedes all previous oral and written, and all previous contemporaneous oral
negotiations, commitments and understandings.
7.09 Further Assurances. The Company agrees promptly to execute and
deliver such documents and to take such other acts as are reasonably necessary
to effectuate the purposes of this Agreement.
7.10 Headings. The headings contained herein are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
7.11 Waiver of Jury Trial. THE COMPANY AND NETGATEWAY EACH HEREBY
AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
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<PAGE>
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THIS WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS AGREEMENT OR ANY OTHER DOCUMENTS OR AGREEMENTS RELATING HERETO.
[Signature Page Follows]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto execute this Agreement as of
the date first set forth above.
NETGATEWAY:
NETGATEWAY, INC.,
a Nevada corporation
By: /s/ Donald M. Corliss, Jr.
-------------------------------------
Name: Donald M. Corliss, Jr.
Title: President
THE COMPANY:
ADMOR MEMORY CORP.,
a Nevada corporation
By: /s/ Van M. Andrews
-------------------------------------
Name: Van M. Andrews
Title: Pres.
ADMOR MEMORY, LTD.,
a California corporation
By: /s/ Van M. Andrews
-------------------------------------
Name: Van M. Andrews
Title: Pres.
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<PAGE>
ANNEX 1
PLEDGED STOCK
Certificate Registered
Issuer Nos. Owner Number of Shares
Annex 1 to Security Agreement
<PAGE>
ANNEX 2
LIST OF COPYRIGHTS, COPYRIGHT REGISTRATIONS AND
APPLICATIONS FOR COPYRIGHT REGISTRATIONS
Title Date Filed Registration No. Effective Date
Annex 2 to Security Agreement
<PAGE>
ANNEX 3
LIST OF PATENTS AND PATENT APPLICATIONS
File Patent Country Registration No. Date
Annex 3 to Security Agreement
<PAGE>
ANNEX 4
LIST OF TRADE NAMES, TRADEMARKS, SERVICES MARKS,
TRADEMARK AND SERVICE MARK REGISTRATIONS AND
APPLICATIONS FOR TRADEMARK AND SERVICE MARK REGISTRATIONS
U.S. Trademarks
Application (A)
Registration (R) Registration
Mark or Series No. (S) or Filing Date
Annex 4 to Security Agreement
<PAGE>
Foreign Trademarks
Application (A) Registration or
Mark Registration (R) Country Filing Date (F)
Annex 4 to Security Agreement
<PAGE>
ANNEX 5
LIST OF MATERIAL CONTRACTS, LICENSES AND OTHER AGREEMENTS
Annex 5 to Security Agreement
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
The Board of Directors
NetGateway, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
Our report dated July 2, 1999, contains an explanatory paragraph that states
that the Company's planned principal operations have commenced; however,
minimal revenues have been generated. Additionally, the Company continues to
incur net losses and has continuing financial needs. These matters raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ KPMG LLP
Los Angeles, California
July 15, 1999
<PAGE>
EXHIBIT 23.2
WRIGHT FORD YOUNG & CO.
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS, INC.
The Members
Infobahn Technologies, LLC (d/b/a Digital Genesis):
We consent to the inclusion of our report dated April 20, 1999, with respect
to the balance sheets of Infobahn Technologies, LLC (d/b/a Digital Genesis) as
of December 31, 1997 and 1996, and the related statements of operations,
members' equity and cash flows for the years then ended, which report appears in
the Form S-1 of Netgateway, Inc., reference number: 333-79751 and reference to
our firm under the heading "Experts" in the prospectus..
/s/ WRIGHT FORD YOUNG & CO.
- --------------------------------------
WRIGHT FORD YOUNG & CO.
Dated: July 20, 1999
<PAGE>
EXHIBIT 23.3
July 20, 1999
To: Spartan Multimedia, Inc.
Dear Sirs: RE: NETGATEWAY, INC.
I refer to the prospectus of the above company with the filing no. of
333-79751 relating to the sale and issue of Netgateway common stock.
I consent to the use in the above mentioned prospectus of my report dated
April 19, 1999 to the shareholders of Spartan Multimedia Inc. on the following
financial statements:
Balance sheet as at August 31, 1998:
Statements of earnings and retained earnings and changes in financial
position for the period ended August 31, 1998.
I consent to the reference to my firm under the heading "Experts" in the
prospectus.
I report that I have read the prospectus and have no reason to believe that
there are any misrepresentations in the information contained therein that is
derived from the financial statements upon which I have reported or that is
within my knowledge as a result of my audit of such financial statements.
/s/ Allan Hogenson
- --------------------------------------
Allan Hogenson
CHARTERED ACCOUNTANT
<PAGE>
EXHIBIT 24.2
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Keith D. Freadhoff, Donald M. Corliss, Jr., and
David Bassett-Parkins, and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and his
name, place and stead, and in any and all capacities, to sign any and all
amendments to the Registration Statement (Registration No. 333-79751), including
post-effective amendments and registration statements filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended and otherwise, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting to said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform such and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
<TABLE>
<S> <C>
/s/ VAN ANDREWS
------------------------------------------
Name: Van Andrews
</TABLE>
<PAGE>
EXHIBIT 24.3
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Keith D. Freadhoff, Donald M. Corliss, Jr., and
David Bassett-Parkins, and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and his
name, place and stead, and in any and all capacities, to sign any and all
amendments to the Registration Statement (Registration No. 333-79751), including
post-effective amendments and registration statements filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended and otherwise, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting to said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform such and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
<TABLE>
<S> <C>
/s/ WILLIAM BROCK
------------------------------------------
Name: William Brock
</TABLE>
