<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 2000
REGISTRATION NO.: 333-36360
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NETGATEWAY, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 7373 87-0591719
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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NETGATEWAY, INC.
300 OCEANGATE, 5(TH) FLOOR
LONG BEACH, CALIFORNIA 90802
(562)308-0010/(562)308-0021 (TELECOPY)
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's principal executive offices)
------------------------
CRAIG S. GATARZ, ESQ.
GENERAL COUNSEL
NETGATEWAY, INC.
300 OCEANGATE, 5TH FLOOR
LONG BEACH, CALIFORNIA 90802
(562)308-0010/(562)308-0021 (TELECOPY)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------
COPY TO:
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C. THOMAS HOPKINS, ESQ. BRENT C. CHRISTENSEN, ESQ.
Nida & Maloney, LLP GEORGE M. FLINT III ESQ.
800 Anacapa Street Parsons, Behle & Latimer PC
Santa Barbara, California 93101 201 S. Main Street
Salt Lake City, Utah 84145
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------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the merger described herein.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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. / /
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
May 24, 2000
Dear Stockholder of Netgateway, Inc.:
Your board of directors has approved a merger agreement that would result in
Netgateway, Inc. acquiring Galaxy Enterprises, Inc., a provider of educational
seminars and Web-based technology designed to help small businesses establish a
presence on and use the Internet to conduct business. Your board of directors is
excited about this opportunity to expand and complement Netgateway's business.
If the merger is completed, Netgateway will exchange approximately 0.63 shares
of Netgateway common stock for each share of Galaxy Enterprises common stock, as
more fully described in this joint proxy statement/prospectus. In addition, each
outstanding option or warrant to purchase shares of Galaxy Enterprises common
stock will be assumed by Netgateway and converted into an option or warrant,
respectively, to purchase shares of Netgateway common stock, as more fully
described in this joint proxy statement/prospectus. Netgateway expects to issue
approximately 3.9 million shares of Netgateway common stock to the former
stockholders of Galaxy Enterprises, as more fully described in this joint proxy
statement/prospectus. Netgateway common stock is listed on The Nasdaq National
Market under the symbol "NGWY." Galaxy Enterprises common stock is currently
traded on the Nasdaq OTC Bulletin Board under the symbol "GLXY."
After careful consideration, your board of directors has unanimously
approved the terms and conditions of the merger and merger agreement and
unanimously recommends that you vote to approve and adopt the merger and merger
agreement.
Netgateway can complete the merger only if Netgateway's stockholders approve
the merger. Accordingly, Netgateway asks that you either attend the Netgateway
special meeting or send back the enclosed proxy card.
To complete the merger, you are asked to vote at a special meeting of
stockholders to be held on June 21, 2000, beginning at 9:00 a.m. California
time. At the Netgateway special meeting, your board of directors is asking you
to approve the merger agreement which provides for Galaxy Enterprises becoming a
wholly owned subsidiary of Netgateway. Only stockholders of record at the close
of business on May 18, 2000 will be entitled to vote at the Netgateway special
meeting.
Whether or not you plan to attend the special meeting, Netgateway urges you
to complete, sign and promptly return the enclosed proxy card to assure that
your shares will be voted at the special meeting. Your vote is very important
regardless of the number of shares you own. I urge you to vote in favor of the
merger.
This joint proxy statement/prospectus provides you with detailed information
concerning Netgateway, Galaxy Enterprises and the merger. Please read these
materials carefully. In particular you should carefully consider the discussion
in the section entitled "Risk Factors" beginning on page 13.
Very truly yours,
/s/ Roy W. Camblin
Roy W. Camblin III
CHIEF EXECUTIVE OFFICER
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE MERGER DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OR THE SHARES OF NETGATEWAY COMMON STOCK TO BE ISSUED IN
CONNECTION WITH THE MERGER. FURTHERMORE, THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS JOINT
PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT SOLICITING AN
OFFER TO BUY SECURITIES IN ANY JURISDICTION WHERE OFFERS OR SALES ARE NOT
PERMITTED.
This joint proxy statement/prospectus is dated May 24, 2000 and was first
mailed to Netgateway's stockholders on or about May 24, 2000.
<PAGE>
[LOGO]
May 24, 2000
Dear Stockholder of Galaxy Enterprises, Inc.:
Your board of directors has unanimously approved a merger which will result
in the acquisition of Galaxy Enterprises, Inc. by Netgateway, Inc., a provider
of eCommerce services, in exchange for shares of Netgateway's common stock. If
the merger is completed, Netgateway will issue approximately 0.63 of a share of
Netgateway common stock for each share of Galaxy Enterprises common stock, as
more fully described in this joint proxy statement/prospectus. In addition, each
outstanding option or warrant to purchase shares of Galaxy Enterprises common
stock will be assumed by Netgateway and converted into an option or warrant,
respectively, to purchase shares of Netgateway common stock, as more fully
described in this joint proxy statement/prospectus. Netgateway common stock is
listed on The Nasdaq National Market under the symbol "NGWY." Galaxy Enterprises
common stock is currently traded on the Nasdaq OTC Bulletin board under the
symbol "GLXY."
After careful consideration, your board of directors has unanimously
approved the terms and conditions of the merger and merger agreement and
unanimously recommends that you vote to approve and adopt the merger and merger
agreement.
Galaxy Enterprises can complete the merger with Netgateway only if Galaxy
Enterprises' stockholders approve the merger. Galaxy Enterprises is a Nevada
corporation. Under Nevada law, the affirmative vote of a majority of the
outstanding shares of Galaxy Enterprises common stock entitled to vote at the
special meeting is required to approve the merger. Stockholders of Galaxy
Enterprises owning approximately 19% of its common stock have agreed to vote all
of the shares of common stock owned by them in favor of the merger agreement.
To complete the merger, you are asked to vote at a special meeting of
stockholders to be held on June 21, 2000, beginning at 10:00 a.m. Utah time. At
the Galaxy Enterprises special meeting, your board of directors is asking you to
approve the merger agreement which provides for Galaxy Enterprises becoming a
wholly owned subsidiary of Netgateway. Only stockholders of record at the close
of business on May 18, 2000 will be entitled to vote at the Galaxy Enterprises
special meeting.
Whether or not you plan to attend the special meeting, Galaxy Enterprises
urges you to complete, sign and promptly return the enclosed proxy card to
assure that your shares will be voted at the special meeting. FAILURE TO RETURN
A PROPERLY EXECUTED PROXY CARD AND/OR TO VOTE AT THE SPECIAL MEETING WILL HAVE
THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL. Your vote is very important
regardless of the number of shares you own. I urge you to vote in favor of the
merger.
This joint proxy statement/prospectus provides you with detailed information
concerning Netgateway, Galaxy Enterprises and the merger. Please read these
materials carefully. In particular you should carefully consider the discussion
in the section entitled "Risk Factors" beginning on page 13.
Very truly yours,
/s/ John J. Poelman
John J. Poelman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE MERGER DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OR THE SHARES OF NETGATEWAY COMMON STOCK TO BE ISSUED IN
CONNECTION WITH THE MERGER. FURTHERMORE, THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS JOINT
PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT SOLICITING AN
OFFER TO BUY SECURITIES IN ANY JURISDICTION WHERE OFFERS OR SALES ARE NOT
PERMITTED.
This joint proxy statement/prospectus is dated May 24, 2000 and was first
mailed to Galaxy Enterprises' stockholders on or about May 24, 2000.
<PAGE>
[LOGO]
300 OCEANGATE, 5(TH) FLOOR
LONG BEACH, CA 90802
To the Stockholders of Netgateway, Inc.:
Netgateway, Inc. will hold a special meeting of the stockholders of
Netgateway on June 21, 2000, beginning at 9:00 a.m. California time, at the
Hilton Hotel--Long Beach, Two World Trade Center, Long Beach, California, for
the following purposes:
- To consider and vote upon a proposal to approve the Agreement and Plan of
Merger dated March 10, 2000. The merger agreement provides for the merger
of a subsidiary of Netgateway into Galaxy Enterprises, Inc. and the
issuance of approximately 0.63 shares of Netgateway common stock in
exchange for each outstanding share of common stock of Galaxy Enterprises,
as more fully described in this joint proxy statement/prospectus. In
addition, each outstanding option or warrant to purchase shares of Galaxy
Enterprises common stock will be assumed by Netgateway and converted into
an option or warrant, respectively, to purchase shares of Netgateway
common stock, as more fully described in this joint proxy
statement/prospectus.
- To transact such other business as may properly be brought before the
Netgateway special meeting or any postponement or adjournment of the
special meeting by its board of directors including, without limitation,
potential adjournments or postponements of the special meeting for the
purpose of soliciting additional proxies to approve the merger agreement
and the merger.
Only holders of record of Netgateway common stock at the close of business
on May 18, 2000, the record date for the Netgateway special meeting, are
entitled to notice of, and to vote at, the Netgateway special meeting and any
adjournments or postponements of the special meeting.
Your vote is very important. Netgateway can complete the merger with Galaxy
Enterprises only if holders of a majority of the shares of Netgateway common
stock present and entitled to vote at the special meeting vote in favor of the
merger. None of Netgateway's stockholders will have appraisal rights in
connection with the merger.
Whether or not you plan to attend the Netgateway special meeting, we urge
you to complete, sign and date the enclosed proxy card and return it promptly in
the enclosed postage paid envelope to ensure that your shares will be voted at
the special meeting.
You may revoke your proxy in the manner described in the accompanying joint
proxy statement/ prospectus at any time before it has been voted at the special
meeting. If you attend the special meeting you may vote in person even if you
returned a proxy.
By Order of the Board of Directors
/s/ Craig S. Gatarz
Craig S. Gatarz, Esq.
GENERAL COUNSEL AND CORPORATE
SECRETARY
Long Beach, California
May 24, 2000
<PAGE>
[LOGO]
754 E. TECHNOLOGY AVENUE
OREM, UTAH 84097
To the Stockholders of
Galaxy Enterprises, Inc.:
Galaxy Enterprises, Inc. will hold a special meeting of the stockholders of
Galaxy Enterprises on June 21, 2000, at 10:00 a.m. Utah time, at 754 E.
Technology Avenue, Orem, Utah, for the following purposes:
- To consider and vote upon a proposal to approve an Agreement and Plan of
Merger dated March 10, 2000. The merger agreement provides for the merger
of a wholly owned subsidiary of Netgateway, Inc. into Galaxy Enterprises
with Galaxy Enterprises continuing as the surviving corporation and the
exchange of approximately 0.63 of a share of Netgateway common stock for
each share of Galaxy Enterprises common stock, as more fully described in
this joint proxy statement/ prospectus. In addition, each outstanding
option or warrant to purchase shares of Galaxy Enterprises common stock
will be assumed by Netgateway and converted into an option or warrant,
respectively, to purchase shares of Netgateway common stock, as more fully
described in this joint proxy statement/prospectus.
- To transact such other business as may properly be brought before the
Galaxy Enterprises special meeting or any postponement or adjournment of
the special meeting by its board of directors including, without
limitation, potential adjournments or postponements of the special meeting
for the purpose of soliciting additional proxies in order to approve the
merger agreement and the merger.
Only holders of record of Galaxy Enterprises common stock at the close of
business on May 18, 2000, the record date for the Galaxy Enterprises special
meeting, are entitled to notice of, and to vote at, the Galaxy Enterprises
special meeting and any adjournments or postponements of the special meeting.
Galaxy Enterprises' stockholders are entitled to assert dissenters' rights
of appraisal pursuant to Sections 92A.300 ET SEQ. of the Nevada Revised
Statutes. Galaxy Enterprises stockholders who comply with the provisions of
applicable Nevada law relating to dissenters' rights, will be entitled to object
to the merger and make written demand that Netgateway pay them in cash the fair
value of their shares. A copy of the dissenters' rights statute is attached to
the enclosed joint proxy statement/prospectus as Appendix B.
Your vote is important. Galaxy Enterprises can complete the merger with
Netgateway only if holders of a majority of the shares of Galaxy Enterprises
common stock entitled to vote at the special meeting vote in favor of the
merger. Whether or not you plan to attend the special meeting, we urge you to
complete, sign and promptly return the enclosed proxy card to ensure that your
shares will be voted at the special meeting.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD AND/OR TO VOTE AT THE
SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL.
You may revoke your proxy in the manner described in the accompanying joint
proxy statement/prospectus at any time before it has been voted at the special
meeting. If you attend the special meeting you may vote in person even if you
returned a proxy.
Please do not send your stock certificates at this time. If the merger is
completed, you will be sent instructions regarding the surrender of your stock
certificates.
By Order of the Board of Directors
/s/ Frank C. Heyman
Frank C. Heyman
CORPORATE SECRETARY
Orem, Utah
May 24, 2000
<PAGE>
NETGATEWAY, INC. AND
GALAXY ENTERPRISES, INC.
JOINT PROXY STATEMENT
---------------------
NETGATEWAY, INC.
PROSPECTUS
---------------------
Netgateway, Inc. and Galaxy Enterprises, Inc. have entered into an agreement
and plan of merger. In the merger, (1) Galaxy Enterprises will become a wholly
owned subsidiary of Netgateway, (2) Galaxy Enterprises stockholders will receive
approximately 0.63 of a share of Netgateway common stock for each share of
Galaxy Enterprises common stock held by them, and (3) each outstanding option or
warrant to purchase shares of Galaxy Enterprises common stock will be converted
into an option or warrant, respectively, to purchase shares of Netgateway common
stock.
The terms of the merger are more fully described in this joint proxy
statement/prospectus.
This joint proxy statement/prospectus also constitutes the prospectus of
Netgateway with respect to approximately 3.9 million shares of Netgateway common
stock to be issued to Galaxy Enterprises stockholders in the merger in exchange
for the outstanding shares of Galaxy Enterprises common stock, as more fully
described in this joint proxy statement/prospectus.
Netgateway common stock is designated for quotation on The Nasdaq National
Market under the symbol "NGWY," and will continue to trade under that symbol
after the merger. Galaxy Enterprises common stock currently trades on the Nasdaq
OTC Bulletin Board under the symbol "GLXY." Netgateway has agreed to apply to
have the shares of Netgateway common stock issued to the Galaxy Enterprises
stockholders approved for trading on The Nasdaq National Market. That approval
must be obtained before the merger is completed.
On December 10, 1999, the last full trading day prior to the public
announcement of the proposed merger, the closing price of Netgateway common
stock on The Nasdaq National Market was $10.125 per share and the closing price
of Galaxy Enterprises common stock on the Nasdaq OTC Bulletin Board was $5.0625
per share. On May 22, 2000, the closing price of Netgateway common stock was
$2.4375 per share and the closing price of Galaxy Enterprises was $1.5 per
share.
The merger requires the approval of both Netgateway and Galaxy Enterprises
stockholders. THE BOARDS OF DIRECTORS OF NETGATEWAY AND GALAXY ENTERPRISES
UNANIMOUSLY RECOMMEND THAT YOU VOTE IN FAVOR OF THE MERGER. YOUR VOTE IS VERY
IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND A SPECIAL MEETING, PLEASE TAKE THE
TIME TO VOTE BY COMPLETING AND RETURNING THE ENCLOSED PROXY CARD.
This joint proxy statement/prospectus provides detailed information about
the merger, a description of which begins on page 33. YOU SHOULD ALSO CAREFULLY
READ THE SECTION ENTITLED, "RISK FACTORS," BEGINNING ON PAGE 13, FOR A
DISCUSSION OF CERTAIN RISKS THAT YOU SHOULD CONSIDER IN DETERMINING HOW TO VOTE
ON THE PROPOSED MERGER.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the securities to be issued in this transaction or
determined that this joint proxy statement/prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
This joint proxy statement/prospectus is dated May 24, 2000, and is first
being mailed or delivered to stockholders of Netgateway and Galaxy Enterprises
on or about May 24, 2000.
<PAGE>
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... v
SUMMARY..................................................... 1
The Companies............................................. 1
The Merger................................................ 1
Netgateway Stockholder Approval........................... 2
Galaxy Enterprises Stockholder Approval................... 2
Voting Agreements......................................... 2
Voting Shares Held by Your Broker in Street Name.......... 2
Changing Your Vote........................................ 2
Completion of the Merger.................................. 2
Exchanging Your Stock Certificates........................ 2
Netgateway's Reasons for the Merger; Recommendation of
Netgateway's Board...................................... 2
Galaxy Enterprises' Reasons for the Merger; Recommendation
of Galaxy Enterprises' Board............................ 3
Opinion of Financial Advisor to Netgateway................ 4
Opinion of Financial Advisor to Galaxy Enterprises........ 4
Interests of Certain Persons in the Merger................ 4
Rights of Dissenting Stockholders......................... 4
Conditions to the Merger.................................. 4
No Solicitation........................................... 5
Termination of the Merger Agreement....................... 5
Termination Fee and Expenses.............................. 5
Netgateway Stock Option................................... 5
Federal Income Tax Consequences........................... 6
Anticipated Accounting Treatment.......................... 6
Forward-Looking Statements May Prove Inaccurate........... 6
Who Can Help Answer Your Questions........................ 6
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION..... 7
Netgateway Selected Historical Consolidated Financial
Data.................................................... 7
Galaxy Enterprises Selected Historical Consolidated
Financial Data.......................................... 8
Selected Unaudited Pro Forma Combined Financial Data...... 9
Comparative Per Share Data................................ 10
Recent Share Prices....................................... 12
RISK FACTORS................................................ 13
Risks Related to the Merger............................... 13
Risks Specific to Netgateway.............................. 15
Risks Specific to Galaxy Enterprises...................... 16
Risks Related to Netgateway and Galaxy Enterprises as a
Combined Company........................................ 17
Investment Risks.......................................... 26
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS............ 28
THE NETGATEWAY, INC. SPECIAL MEETING........................ 29
Date, Time and Place of Special Meeting................... 29
Matters to be Considered at Special Meeting............... 29
Record Date for Voting on the Merger; Stockholders
Entitled to Vote........................................ 29
Voting and Revocation of Proxies.......................... 29
Stockholder Vote is Required to Approve the Merger........ 30
Board Recommendation...................................... 30
THE GALAXY ENTERPRISES, INC. SPECIAL MEETING................ 30
Date, Time and Place of Special Meeting................... 30
Matters to be Considered at Special Meeting............... 30
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Record Date for Voting on the Merger; Stockholders
Entitled to Vote........................................ 30
Voting and Revocation of Proxies.......................... 30
Stockholder Vote is Required to Approve the Merger........ 31
Board Recommendation...................................... 31
Solicitation of Proxies; Expenses......................... 32
THE MERGER.................................................. 33
Background of the merger.................................. 33
Netgateway's Reasons for the Merger....................... 35
Board Recommendation of Netgateway's Board of Directors... 37
Galaxy Enterprises' Reasons for the Merger................ 37
Board Recommendation of Galaxy Enterprises Board of
Directors............................................... 40
Opinion of Roth Capital Partners.......................... 40
Opinion of Houlihan Lokey Howard & Zukin.................. 41
Interests of Certain Persons in the Merger................ 44
Appraisal Rights of Dissenting Stockholders............... 46
Federal Income Tax Considerations......................... 48
Completion and Effectiveness of the Merger................ 50
Anticipated Accounting Treatment.......................... 50
Delisting and Deregistration of Galaxy Enterprises Common
Stock................................................... 50
Listing of Netgateway Common Stock to be Issued in the
Merger.................................................. 50
Restriction on Resales of Netgateway Common Stock......... 50
Operations After the Merger............................... 50
THE MERGER AGREEMENT........................................ 51
The Merger................................................ 51
The Effective Time........................................ 51
Directors and Officers of Galaxy Enterprises After the
Merger.................................................. 51
Conversion of Shares in the Merger........................ 51
Galaxy Enterprises' Stock Option and Stock Purchase
Plans................................................... 52
The Exchange Agent........................................ 52
Procedures for Exchanging Stock Certificates.............. 52
Holders of Galaxy Enterprises Common Stock Should Not
Surrender Their Galaxy Enterprises Stock Certificates
Until They Receive the Letter of Transmittal From the
Exchange Agent.......................................... 52
Distributions with Respect to Unexchanged Shares.......... 53
No Fractional Shares...................................... 53
Dissenting Shares......................................... 53
Representations and Warranties............................ 53
Concept of Material Adverse Effect........................ 55
Conduct of Business of Galaxy Enterprises Pending
Completion of the Merger................................ 55
Conduct of Business of Netgateway Pending Completion of
the Merger.............................................. 56
No Solicitation........................................... 56
Director and Officer Indemnification and Release of
Personal Guaranties..................................... 57
Conditions to the Merger.................................. 58
Termination of the Merger Agreement....................... 58
Fees and Expenses......................................... 58
Amendment or Waiver of the Merger Amendment............... 59
NETGATEWAY STOCK OPTION AGREEMENT........................... 60
VOTING AND AFFILIATE AGREEMENTS............................. 60
Voting Agreement.......................................... 60
Galaxy Enterprises Affiliate Agreements................... 60
eCOMMERCE SERVICES AGREEMENT................................ 61
FUTURE AGREEMENT............................................ 61
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FINDER'S FEE AGREEMENT...................................... 61
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS........... 62
DESCRIPTION OF NETGATEWAY AND GALAXY CAPITAL STOCK.......... 69
COMPARISON OF RIGHTS OF HOLDERS OF GALAXY ENTERPRISES COMMON
STOCK AND NETGATEWAY COMMON STOCK......................... 70
Comparison of Rights of Netgateway's Stockholders and
Galaxy Enterprises' Stockholders........................ 70
Indemnification........................................... 70
Restrictions on Business Combinations..................... 71
Directors................................................. 71
Amendment of Organizational Documents..................... 72
Voting Rights............................................. 72
Treasury Shares........................................... 72
Stockholder Meetings...................................... 73
Dissenters' Rights........................................ 73
INFORMATION REGARDING NETGATEWAY............................ 74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF NETGATEWAY................... 76
General................................................... 76
Fluctuations in Quarterly Results and Seasonality......... 76
Results of Operations..................................... 76
Liquidity and Capital Resources........................... 78
Recent Events............................................. 78
MARKET PRICE AND DIVIDEND INFORMATION FOR NETGATEWAY........ 79
Dividends................................................. 79
BUSINESS OF NETGATEWAY...................................... 80
General................................................... 80
Industry Background....................................... 80
The Netgateway Solution................................... 82
Business Strategy......................................... 83
Services Offered.......................................... 84
Sales and Marketing....................................... 86
Clients and Strategic Relationships....................... 86
Research and Development.................................. 90
Competition............................................... 90
Intellectual Property..................................... 91
Employees................................................. 92
Facilities................................................ 92
Governmental Regulation................................... 93
Legal Matters............................................. 93
MANAGEMENT OF NETGATEWAY.................................... 94
Our Directors and Executive Officers...................... 94
Director Compensation..................................... 98
Board of Directors Meetings and Committees................ 98
Election of Officers...................................... 99
Executive Compensation.................................... 99
Employment Agreements..................................... 102
Stock Option Grants in Last Fiscal Year................... 104
Aggregated Stock Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values........................... 105
Stock Option Plans........................................ 106
Compensation Committee Interlocks and Insider
Participation........................................... 110
Limitation of Liability and Indemnification Matters....... 110
</TABLE>
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF
NETGATEWAY.................................................. 111
Stockholder Return for Last Fiscal Year................... 111
RELATED PARTY TRANSACTIONS.................................. 112
INFORMATION REGARDING GALAXY ENTERPRISES, INC............... 114
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF GALAXY ENTERPRISES........... 116
Results of Operations..................................... 116
Capital Resources......................................... 119
Liquidity................................................. 122
MARKET PRICE AND DIVIDEND INFORMATION FOR GALAXY
ENTERPRISES................................................. 123
BUSINESS OF GALAXY ENTERPRISES.............................. 124
General................................................... 124
Services Offered.......................................... 124
IMI Business.............................................. 126
Sales and Marketing....................................... 126
Competition............................................... 127
Real Property............................................. 128
Suppliers and Customers................................... 128
Intellectual Property..................................... 128
Governmental Regulations.................................. 128
Research and Development.................................. 129
Compliance With Environmental Laws........................ 129
Employees................................................. 129
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF GALAXY
ENTERPRISES............................................... 130
Stockholders.............................................. 130
Legal Proceedings......................................... 131
Indemnification of Directors and Officers................. 131
FUTURE STOCKHOLDER PROPOSALS................................ 131
EXPERTS..................................................... 132
LEGAL MATTERS............................................... 132
WHERE YOU CAN FIND MORE INFORMATION......................... 132
APPENDICES TO THE JOINT PROXY STATEMENT/PROSPECTUS
Appendix A--Agreement and Plan of Merger.................. A-1
Appendix B--Rights of Dissenting Stockholders............. B-1
Appendix C--Opinion of Roth Capital Partners.............. C-1
Appendix D--Opinion of Houlihan Lokey Howard & Zukin...... D-1
</TABLE>
iv
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QUESTIONS AND ANSWERS ABOUT THE MERGER
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Q: WHAT IS THE MERGER?
A. The merger will combine the businesses of Galaxy Enterprises
and Netgateway. After the merger, Galaxy Enterprises will be
a wholly owned subsidiary of Netgateway. Based on the
capitalization of Netgateway as of March 31, 1999, the
former stockholders of Galaxy Enterprises will receive in
the merger a number of shares of Netgateway representing
approximately 18% of Netgateway's outstanding common stock
after giving effect to the merger.
Q: WHY DOES NETGATEWAY PROPOSE TO ACQUIRE GALAXY ENTERPRISES?
A: This is a unique opportunity to acquire a complementary
business that markets internet solutions to small
businesses. Netgateway offers solutions to businesses
wanting to conduct commercial transactions with other
businesses over the Internet. The marketing and educational
expertise and existing client base of Galaxy Enterprises
will provide Netgateway the opportunity to effectively offer
its solutions to a larger pool of potential clients.
Q: WHY DOES GALAXY ENTERPRISES PROPOSE TO BE ACQUIRED BY
NETGATEWAY?
A: The acquisition will allow Galaxy Enterprises stockholders
to obtain increased liquidity and participate in the growth
of the combined company following the merger. In addition,
it will offer Galaxy Enterprises access to a number of
important additional channels of distribution.
Q: WHAT I WILL RECEIVE IN THE MERGER?
A: NETGATEWAY STOCKHOLDERS: You will not receive any
consideration in the merger.
GALAXY ENTERPRISES STOCKHOLDERS: You will receive
approximately 0.63 of a share of Netgateway common stock for
each share of Galaxy Enterprises common stock you hold, as
more fully described in this joint proxy
statement/prospectus. For example, if you own 100 shares of
Galaxy Enterprises common stock, we currently estimate that
you will receive approximately 63 shares of Netgateway
common stock in exchange for your shares. In addition, each
outstanding option or warrant to purchase shares of Galaxy
Enterprises common stock will be assumed by Netgateway and
converted into an option or warrant, respectively, to
purchase shares of Netgateway common stock, as more fully
described in this joint proxy statement/prospectus.
Netgateway will not issue fractional shares of common stock.
Instead, Galaxy Enterprises stockholders otherwise entitled
to receive a fractional share of Netgateway common stock
will receive cash based on the average closing sale price of
Netgateway common stock for the 20 most recent trading days
ending on the trading day immediately prior to the effective
time of the merger.
The number of shares of Netgateway common stock to be issued
in the merger will not be adjusted based upon changes in the
value of Netgateway common stock. As a result, the value of
Netgateway common stock that you receive in the merger will
not be determined at the time you vote on the merger and its
value will go up or down as the market price of Netgateway
common stock goes up or down.
</TABLE>
v
<PAGE>
The following table reflects the value of Netgateway common stock that you
will receive per share of Galaxy Enterprises common stock for various market
prices of Netgateway common stock and assumes an exchange ratio of 0.63217.
Netgateway's stock price is volatile and the exchange ratio may change under
certain circumstances. The values shown are purely hypothetical, and the actual
market price and the corresponding value of Netgateway common stock that you may
receive in the merger may be more or less than the range of values shown in the
table.
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE OF MERGER VALUE PER SHARE OF GALAXY
NETGATEWAY COMMON STOCK ENTERPRISES COMMON STOCK
------------------------- --------------------------------
<S> <C>
$ 1.50 $0.95
$ 2.50 $1.58
$ 5.00 $3.16
$ 7.50 $4.74
$10.00 $6.32
$12.50 $7.90
</TABLE>
<TABLE>
<S> <C>
On May 22, 2000, the closing sale price per share of
Netgateway common stock on The Nasdaq National Market was
$2.4375. Neither party is permitted to terminate the merger
agreement based solely on changes in the value of Netgateway
common stock prior to the closing of the merger.
Q. HOW DOES MY BOARD OF DIRECTORS RECOMMEND THAT I VOTE?
A. Netgateway's and Galaxy Enterprises' boards of directors
unanimously recommend that their stockholders vote in favor
of the merger.
Q. WHAT RISKS SHOULD I CONSIDER IN DECIDING WHETHER TO VOTE FOR
THE MERGER?
A. In evaluating the merger, you should carefully read this
joint proxy statement/prospectus and especially consider the
factors discussed in the section entitled "Risk Factors"
beginning on page 13.
Q: IF NETGATEWAY IS NOT ITSELF MERGING, WHY ARE NETGATEWAY'S
STOCKHOLDERS BEING ASKED TO VOTE?
A: The number of shares of Netgateway common stock to be issued
in the merger is likely to equal or exceed 20% of the number
of shares of Netgateway common stock outstanding immediately
before the merger is completed. Netgateway common stock is
traded on The Nasdaq National Market which requires
stockholder approval in these circumstances. In addition,
the merger agreement provides that Netgateway must obtain
stockholder approval as a condition to closing.
Q: CAN I CHANGE MY VOTE AFTER I HAVE SENT IN MY PROXY CARD?
A: Yes. You can change your vote any time before your proxy is
voted at the special meeting. You can do this in one of
three ways. You can send a written notice stating that you
would like to revoke your proxy. You can also complete and
deliver a new proxy. If you choose either of these methods,
you must submit your notice of revocation or your new proxy
card to Netgateway's or Galaxy Enterprises' secretary, as
the case may be, before your stockholders meeting. Finally,
you can attend your special meeting and vote in person.
Simply attending your meeting, however, will not revoke your
proxy. If you have instructed a broker to vote your shares,
you must follow directions received from your broker to
change your vote.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY A BROKER, WILL THE
BROKER VOTE THE SHARES FOR ME?
A: Your broker will vote your shares only if you provide
instructions on how to vote. Follow the directions provided
by your broker regarding how to instruct your broker to vote
your shares. Without instructions, your shares will not be
voted.
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: Netgateway and Galaxy Enterprises are working to complete
the merger as soon as possible. Netgateway and Galaxy
Enterprises expect to complete the merger during the third
quarter of calendar year 2000.
Q. AM I ENTITLED TO APPRAISAL RIGHTS?
A. NETGATEWAY STOCKHOLDERS: No.
GALAXY ENTERPRISES STOCKHOLDERS: Yes. Under Nevada law you
are entitled to exercise dissenters' rights of appraisal. If
you comply with the provisions of applicable law relating to
dissenters' rights, you will be entitled to object to the
merger and make a written demand that Netgateway pay you in
cash the fair value of your shares of Galaxy Enterprises
common stock. The requirements under Nevada law for
exercising dissenters' rights are very specific and must be
followed exactly.
Q: SHOULD I SEND IN MY GALAXY ENTERPRISES STOCK CERTIFICATES
NOW?
A: No. Galaxy Enterprises will send you a letter of transmittal
for surrendering certificates representing shares of Galaxy
Enterprises common stock. DO NOT SEND YOUR STOCK
CERTIFICATES UNTIL YOU RECEIVE THE LETTER OF TRANSMITTAL.
Q. WILL I RECOGNIZE A GAIN OR LOSS ON THE TRANSACTION?
A. Netgateway and Galaxy Enterprises do not expect that you
will recognize gain or loss for United States Federal income
tax purposes if the merger is completed, except with respect
to cash received instead of fractional shares. You are urged
to consult your own tax advisor to determine your particular
tax consequences.
Q: WHO CAN I CALL WITH QUESTIONS?
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
A: NETGATEWAY STOCKHOLDERS: GALAXY ENTERPRISES STOCKHOLDERS:
NETGATEWAY, INC. GALAXY ENTERPRISES, INC.
300 Oceangate, 5(th) Floor 754 E. Technology Avenue
Long Beach, CA 90802 Orem, Utah 84097
Attention: Investor Relations Attention: Investor Relations
(562) 308-0010 (801) 227-0004
</TABLE>
vii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT IS PROVIDED IN GREATER
DETAIL ELSEWHERE IN THIS DOCUMENT. EVEN THOUGH WE HAVE HIGHLIGHTED FOR YOU WHAT
WE BELIEVE IS THE MOST IMPORTANT INFORMATION, NETGATEWAY AND GALAXY ENTERPRISES
ENCOURAGE YOU TO CAREFULLY READ THE ENTIRE JOINT PROXY STATEMENT/ PROSPECTUS FOR
A COMPLETE UNDERSTANDING OF THE PROPOSED MERGER.
THE COMPANIES
Netgateway, Inc.
300 Oceangate, 5(th) Floor
Long Beach, CA 90802
Attention: Investor Relations
(562) 308-0010
Netgateway provides electronic commerce, or eCommerce, services that enable
its clients to extend their business to the Internet. The hub of the Netgateway
eCommerce solution is its proprietary Internet Commerce Center-TM-, which
consists of the hardware and licensed software, as well as related technical and
other services, necessary for its clients to transact business over the
Internet. Netgateway also designs and builds custom interfaces, or spokes, to
connect business clients to the Internet Commerce Center.
Galaxy Enterprises, Inc.
754 E. Technology Avenue
Orem, Utah 84097
Attention: Investor Relations
(801) 227-0004
Galaxy Enterprises, through its subsidiary Galaxy Mall, Inc., sells
electronic home pages, or storefronts, on its Internet shopping mall. It also
hosts those storefront sites on its Internet server. Storefronts are designed
and programmed by Galaxy Mall or its customers for display on the Galaxy Mall at
HTTP://WWW.GALAXYMALL.COM. Galaxy Mall also operates the portal and search
engine, MatchSite.com, at HTTP://WWW.MATCHSITE.COM.
Galaxy Enterprises' subsidiary, IMI, Inc., also designs, manufactures and
markets multimedia brochures, shaped compact disks and other products and
services to facilitate traditional marketing and bridge the gap between
conventional and Internet marketing.
Galaxy Mall attracts its customers primarily through Internet marketing
workshops. The workshops provide an intensive training course on Internet
marketing using e-mail, news groups, auto-responders and other Internet tools to
market products and services.
THE MERGER (PAGE 33)
Netgateway and Galaxy Enterprises have entered into a merger agreement that
sets forth the terms and conditions of the proposed merger of Netgateway and
Galaxy Enterprises. If the merger is approved, Galaxy Acquisition Corp., a
subsidiary of Netgateway, will merge with and into Galaxy Enterprises and Galaxy
Enterprises will become a wholly owned subsidiary of Netgateway. Galaxy
Enterprises stockholders will become stockholders of Netgateway following the
merger. We currently estimate that each share of Galaxy Enterprises will be
exchanged for approximately 0.63 of a share of Netgateway common stock, as more
fully described in this joint proxy statement/prospectus. In addition, each
outstanding option or warrant to purchase shares of Galaxy Enterprises common
stock will be assumed by Netgateway and converted into an option or warrant,
respectively, to purchase shares of Netgateway common stock, as more fully
described in this joint proxy statement/prospectus.
1
<PAGE>
NETGATEWAY STOCKHOLDER APPROVAL (PAGE 30)
The holders of a majority of the shares of Netgateway common stock present
in person or by proxy at the meeting must approve the merger. Therefore, a
failure to vote or attend the meeting will not have the effect of a vote against
the merger. Netgateway stockholders may cast one vote for each share of
Netgateway common stock held at the close of business on May 18, 2000.
On that date, Netgateway's directors and executive officers and their
affiliates beneficially owned approximately 4,331,231 shares of Netgateway
common stock entitling them to exercise about 24.5% of the voting power of the
Netgateway common stock entitled to vote at the special meeting.
GALAXY ENTERPRISES STOCKHOLDER APPROVAL (PAGE 31)
The holders of a majority of the outstanding shares of Galaxy Enterprises
common stock must approve the merger. Therefore, a failure to vote will have the
same effect as voting against the merger. Galaxy Enterprises stockholders may
cast one vote for each share of Galaxy Enterprises common stock held at the
close of business on May 18, 2000.
On that date, Galaxy Enterprises' directors and executive officers and their
affiliates beneficially owned approximately 991,213 shares of Galaxy Enterprises
common stock entitling them to exercise about 16% of the voting power of the
Galaxy Enterprises common stock entitled to vote at the special meeting.
VOTING AGREEMENTS (PAGE 60)
Galaxy Enterprises stockholders owning approximately 19% of Galaxy
Enterprises' outstanding common stock have agreed to vote all of their shares of
Galaxy Enterprises common stock for approval of the merger.
VOTING SHARES HELD BY YOUR BROKER IN STREET NAME (PAGES 29 AND 30)
Your broker will vote your shares only if you provide instructions on how to
vote. If you do not instruct your broker on how to vote, your shares will not be
voted at the special meeting and, if you are a Galaxy Enterprises stockholder,
it will have the same effect as voting against approval of the merger.
CHANGING YOUR VOTE (PAGES 29 AND 31)
If you want to change your vote, send a later-dated, signed proxy card to
the secretary of Netgateway or Galaxy Enterprises, as applicable, before the
respective special meeting or attend the respective special meeting in person
and vote. You may also revoke your proxy by sending written notice to the
secretary of Netgateway or Galaxy Enterprises, as applicable, before the
respective special meeting of Netgateway or Galaxy Enterprises.
COMPLETION OF THE MERGER (PAGE 50)
Assuming approval of the merger and the satisfaction or waiver of all other
conditions of the merger agreement, we anticipate that the merger will occur on
the date of the special meetings and in any event will occur within a few days
following the meetings.
EXCHANGING YOUR STOCK CERTIFICATES (PAGE 32)
If you are a Galaxy Enterprises stockholder, do not send in your stock
certificates now. After the merger is completed, we will send you written
instructions for exchanging your Galaxy Enterprises stock certificates for
Netgateway stock certificates.
NETGATEWAY'S REASONS FOR THE MERGER; RECOMMENDATION OF NETGATEWAY'S BOARD (PAGES
35 AND 37)
After careful consideration, Netgateway's board of directors has determined
that the terms of the merger are fair to, and in the best interests of,
Netgateway and its stockholders. In reaching its
2
<PAGE>
decision, Netgateway's board of directors identified several potential benefits
of the merger, the most important of which included:
- Netgateway's stockholders will have the opportunity to participate in the
potential growth of the combined company after the merger;
- Netgateway will gain valuable expertise in the Internet marketing and
training workshop industry, which will be a key component to Netgateway's
continued growth and development;
- Being part of a combined company will reduce the risks of continuing as a
relatively small company in an industry that is rapidly consolidating and
increasingly competitive; and
- Combining with Galaxy Enterprises will increase the business services,
advertising and eCommerce relationships and opportunities available to
Netgateway.
NETGATEWAY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER.
GALAXY ENTERPRISES' REASONS FOR THE MERGER; RECOMMENDATION OF GALAXY
ENTERPRISES' BOARD (PAGES 37 AND 40)
After careful consideration, Galaxy Enterprises' board of directors on
March 8, 2000 determined that the terms of the merger are fair to, and in the
best interests of, Galaxy Enterprises and its stockholders. In reaching its
decision, Galaxy Enterprises' board of directors identified several potential
benefits of the merger, the most important of which included:
- Galaxy Enterprises' stockholders will have the opportunity to participate
in the potential growth of the combined company after the merger;
- Being part of a combined company will reduce the risks of continuing as a
relatively small company in an industry that is rapidly consolidating and
increasingly competitive;
- Combining with Netgateway will increase the financial resources, business
services, advertising and eCommerce relationships and opportunities
available to Galaxy Enterprises;
- Combining with Netgateway will give Galaxy Enterprises the opportunity to
expand its channels of distribution by giving it access to Netgateway's
Internet Commerce Center infrastructure, existing cable partners and other
eCommerce business relationships;
- The anticipated exchange ratio in the merger represented a premium of
approximately 217% over the average closing price for Galaxy Enterprises
common stock over the 20-day trading period ending on December 10, 2000,
the last trading day before the letter of intent between Netgateway and
Galaxy Enterprises was publicly announced; and
- Galaxy Enterprises stockholders will be afforded substantially increased
trading liquidity for their investment.
Between March 8, 2000, the day the board of directors of Galaxy Enterprises
voted to approve the merger and recommend it to its stockholders, and May 23,
2000, the price of Netgateway's common stock has fallen from $9.19 to $2.13.
During this period it has also become increasingly difficult for companies such
as Galaxy Enterprises and Netgateway to obtain new financing. Galaxy Enterprises
has not requested an update to the fairness opinion originally received by it on
March 10, 2000, which opinion does not reflect the impact of these developments
which occurred after the date of the opinion. Accordingly, undue reliance should
not be placed on the fairness opinion. Although the price of Netgateway's common
stock has declined significantly and the market for equity financings is not as
favorable as it was when the merger was approved, the board of directors of
Galaxy Enterprises continues to believe that the merger is fair to and in the
best interests of Galaxy Enterprises and its stockholders for the reasons noted
above. Stockholders are urged to consider carefully all factors before returning
their proxy.
GALAXY ENTERPRISES' BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER.
3
<PAGE>
OPINION OF FINANCIAL ADVISOR TO NETGATEWAY (PAGE 40 AND APPENDIX C)
In deciding to approve the merger, Netgateway's board of directors
considered the opinion of Roth Capital Partners, its financial advisor, that, as
of the date of the merger agreement, the exchange ratio was fair, from a
financial point of view, to the holders of Netgateway common stock. The opinion
was provided for the information and assistance of Netgateway's board of
directors in connection with the merger and does not constitute a recommendation
as to how any stockholder of Netgateway should vote with respect to the merger.
The full text of the written opinion of Roth Capital Partners, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached as Appendix C. You are urged to read
the Roth Capital Partners opinion in its entirety.
OPINION OF FINANCIAL ADVISOR TO GALAXY ENTERPRISES (PAGE 41 AND APPENDIX D)
In deciding to approve the merger, Galaxy Enterprises' board of directors
considered the opinion of Houlihan Lokey Howard & Zukin, its financial advisor,
that, as of the date of the merger agreement, the consideration to be received
in the merger by Galaxy Enterprises' public stockholders was fair to them from a
financial point of view. The opinion was provided for the information and
assistance of Galaxy Enterprises' board of directors in connection with the
merger and does not constitute a recommendation as to how any stockholder of
Galaxy Enterprises should vote with respect to the merger. The full text of the
written opinion of Houlihan Lokey, which sets forth assumptions made, matters
considered and limitations on the review undertaken in connection with the
opinion, is attached as Appendix D. You are urged to read the Houlihan Lokey
opinion in its entirety.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 44)
In considering the Galaxy Enterprises' board of directors' recommendation
that you vote to approve the merger, you should note that certain officers and
directors of Galaxy Enterprises have interests in the merger that are different
from, or in addition to, your interests. These interests relate to, among other
things, employment agreements, which include stock option grants and increases
in salary, assurance that certain loans made by Netgateway to Galaxy Enterprises
will be repaid and indemnification rights. As a result, directors and officers
may be more likely to vote to approve the merger than Galaxy Enterprises'
stockholders generally.
RIGHTS OF DISSENTING STOCKHOLDERS (PAGE 46)
Holders of Galaxy Enterprises common stock on May 18, 2000 are entitled to
exercise dissenters' rights of appraisal pursuant to Section 92A.300 ET SEQ. of
the Nevada Revised Statutes. A holder of Galaxy Enterprises common stock who
complies with the provisions of applicable law relating to dissenters' rights
will be entitled to object to the merger and make written demand that Netgateway
pay in cash the fair value of the shares of Galaxy Enterprises common stock held
by such holder as determined in accordance with statutory provisions.
Stockholders wishing to exercise dissenters' rights of appraisal must follow
exactly all requirements for the exercise of those rights as set forth in
Section 92A.300 ET SEQ. of the Nevada Revised Statutes, a copy of which is
attached as Appendix B to this joint proxy statement/prospectus.
CONDITIONS TO THE MERGER (PAGE 58)
Netgateway and Galaxy Enterprises will complete the merger only if the
conditions specified in the merger agreement are either satisfied or waived,
some of which include:
- the representations and warranties of the respective parties made in the
merger agreement remain accurate;
4
<PAGE>
- the parties perform their respective covenants and obligations in the
merger agreement;
- the Galaxy Enterprises stockholders and Netgateway stockholders approve
the merger;
- there are no restraining orders, injunctions or administrative actions or
proceedings preventing completion of the merger;
- the SEC has declared this registration statement effective; and
- the shares of Netgateway common stock to be issued in the merger are
authorized for listing on The Nasdaq National Market.
NO SOLICITATION (PAGE 56)
Galaxy Enterprises has agreed not to initiate or, subject to certain limited
exceptions, engage in discussions with another party regarding any business
combination while the proposed merger with Netgateway is pending.
TERMINATION OF THE MERGER AGREEMENT (PAGE 58)
The boards of directors of both companies may mutually agree to terminate
the merger agreement at any time without completing the merger. Either
Netgateway or Galaxy Enterprises may terminate the merger agreement if:
(1) the merger is not completed by July 31, 2000;
(2) the Galaxy Enterprises stockholders or Netgateway stockholders do not
approve the merger;
(3) a governmental authority or legal action permanently prohibits the
merger;
(4) the other company breaches any representations or warranties, or any of
the representations or warranties become inaccurate, in either case such
that the other company is unable to satisfy certain conditions to the
completion of the merger, and the breach or inaccuracy is not cured; or
(5) Galaxy Enterprises' board of directors withholds, withdraws, amends or
modifies its recommendation with respect to the merger after it receives
an unsolicited acquisition offer from a third party that Netgateway does
not match.
In addition, Netgateway may terminate the merger agreement if:
(6) Galaxy Enterprises intentionally breaches its obligations under the "no
solicitation" section of the merger agreement and Netgateway is in
compliance with the merger agreement.
TERMINATION FEE AND EXPENSES (PAGE 58)
Galaxy Enterprises will be required to pay Netgateway a termination fee of
$1.5 million plus up to $500,000 of Netgateway's expenses incurred in connection
with the merger if the merger agreement is terminated in the circumstances
described in paragraphs (5) or (6) above or if Netgateway terminates the merger
agreement because (a) the Galaxy Enterprises stockholders did not approve the
merger, (b) a third party announced and did not withdraw a proposal to acquire
Galaxy Enterprises before the vote to approve the merger and (c) Galaxy
Enterprises enters into a definitive agreement to be acquired within 12 months
of the termination of the merger agreement.
Except as provided above, all fees and expenses incurred in connection with
the merger agreement and the merger will be paid by the party incurring such
expenses, whether or not the merger is consummated.
5
<PAGE>
NETGATEWAY STOCK OPTION (PAGE 60)
In connection with the merger agreement, John J. Poelman, president, chief
executive officer and a principal stockholder of Galaxy Enterprises, granted
Netgateway an option to purchase up to 980,213 shares of Galaxy Enterprises
common stock held by Mr. Poelman at a price per share equal to the product of
(1) the exchange ratio in the merger and (2) the average closing price of one
share of Netgateway common stock for the 20 most recent trading days ending on
March 9, 2000, or $8.6982. The 980,213 shares represented approximately 16% of
Galaxy Enterprises' outstanding shares at the time the merger agreement was
signed. The option is not currently exercisable. However, if the merger
agreement is terminated under circumstances in which Galaxy Enterprises is
required to pay a termination fee, Netgateway may be able to exercise the stock
option.
Netgateway required Mr. Poelman to grant the stock option as a condition to
entering into the merger agreement. The stock option, the voting agreements, the
termination fee and the non-solicitation provisions of the merger agreement may
discourage third parties who are interested in acquiring a significant stake in
Galaxy Enterprises and were required by Netgateway to increase the likelihood
that the merger will be completed.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 48)
Netgateway and Galaxy Enterprises expect that the merger will qualify as a
tax-free reorganization for federal income tax purposes. If the merger qualifies
as a tax-free reorganization, Galaxy Enterprises stockholders will not recognize
any gain or loss for federal income tax purposes upon the exchange of their
Galaxy Enterprises common stock for Netgateway common stock, except with respect
to any cash received instead of a fractional share of Netgateway common stock.
The availability of this tax treatment is not, however, a condition to the
merger.
ANTICIPATED ACCOUNTING TREATMENT (PAGE 50)
Netgateway and Galaxy Enterprises expect that the merger will be accounted
for as a pooling of interests, which means that Netgateway and Galaxy
Enterprises will be treated as if they had always been combined for accounting
and financial reporting purposes. The availability of this accounting treatment
is not, however, a condition to the merger.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 28)
Each of Netgateway and Galaxy Enterprises has made forward-looking
statements in this document that are subject to risks and uncertainties.
Forward-looking statements include expectations concerning matters that are not
historical facts and actual results may differ materially from these
forward-looking statements. Words such as "believes," "expects," "anticipates"
or similar expressions indicate forward-looking statements. For more information
regarding factors that could cause actual results to differ from these
expectations, you should refer to "Risk Factors" on page 13.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have questions about the merger, you should contact:
<TABLE>
<S> <C>
NETGATEWAY STOCKHOLDERS: GALAXY ENTERPRISES STOCKHOLDERS:
Netgateway, Inc. Galaxy Enterprises, Inc.
300 Oceangate, 5(th) Floor 754 E. Technology Avenue
Long Beach, California 90802 Orem, Utah 84097
Telephone: (562) 308-0010 Telephone: (801) 227-0004
Attention: Investor Relations Attention: Investor Relations
</TABLE>
6
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
NETGATEWAY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be read
in conjunction with Netgateway's consolidated financial statements and related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Netgateway" which are included elsewhere in this
document and reflect the acquisitions of Infobahn Technologies, LLC d/b/a
Digital Genesis completed on June 2, 1998 and Spartan Multimedia, Ltd. completed
on January 15, 1999. The consolidated statement of operations data for the
period from March 4, 1998 (inception) through June 30, 1998 and the year ended
June 30, 1999, and the consolidated balance sheet data at June 30, 1998 and 1999
are derived from the consolidated financial statements of Netgateway which have
been audited by KPMG LLP, independent auditors, and are included elsewhere in
this document. The unaudited consolidated statement of operations data for the
nine months ended March 31, 1999 and 2000, and the unaudited consolidated
balance sheet data at March 31, 2000 are derived from the unaudited consolidated
financial statements and are included elsewhere in this document. In the opinion
of management, these statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of these periods. Historical results are not
necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 4,
1998 NINE MONTHS
(INCEPTION) YEAR ENDED
THROUGH ENDED MARCH 31,
JUNE 30, JUNE 30, -------------------
1998 1999 1999 2000
----------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 3 157 122 3,215
Loss from operations........................................ (4,553) (11,449) (7,884) (22,864)
Loss before extraordinary item.............................. (4,572) (12,429) (8,618) (27,499)
Net loss.................................................... (4,572) (10,776) (6,965) (27,499)
Net loss per common share
Basic and diluted......................................... (0.84) (1.21) (0.80) (2.02)
Weighted average common shares outstanding
Basic and diluted......................................... 5,416 8,912 8,660 13,589
<CAPTION>
AT
AT JUNE 30 MARCH 31
---------------------- --------
1998 1999 2000
----------- -------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................ $ 255 569 8,740
Working capital (deficit)................................... (1,960) (1,834) 8,525
Total assets................................................ 872 3,458 15,523
Short-term debt............................................. 2,052 1,698 --
Long-term debt.............................................. 368 -- --
Stockholder's equity (deficit).............................. (1,828) 245 12,373
</TABLE>
Note 1--Netgateway, Inc. was formed on March 4, 1998, as a Nevada corporation.
In June 1998, Video Calling Card, Inc., a Nevada public shell corporation,
acquired 100% of the outstanding common stock of Netgateway. Since the
stockholders of Netgateway received the majority voting interests in the
combined company, Netgateway is the acquiring enterprise for financial reporting
purposes.
7
<PAGE>
Note 2--In November and December 1999, Netgateway sold 3,795,000 shares of
common stock in a public offering generating net proceeds of $23,057,844.
Note 3--Netgateway changed its method of accounting for revenue from the
completed contract method to the percentage-of-completion method in fiscal year
1999. The percentage-of-completion method is preferable according to Statement
of Position 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, issued by the American Institute of Certified Public
Accountants. The new method has been applied retroactively by restating
Netgateway's consolidated financial statements for prior periods in accordance
with Accounting Principles Board Opinion (APB) No. 20.
GALAXY ENTERPRISES SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be read
in conjunction with Galaxy Enterprises' consolidated financial statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Galaxy Enterprises" included elsewhere in
this document. The consolidated statement of operations data for each of the
three years ended December 31, 1997, 1998 and 1999, and the consolidated balance
sheet data at December 31, 1998 and 1999, are derived from the consolidated
financial statements of Galaxy Enterprises which have been audited by Wisan,
Smith, Racker & Prescott, LLP, independent accountants, and are included
elsewhere in this document. The unaudited consolidated statement of operations
data for the nine months ended March 31, 1999 and 2000, are derived from the
unaudited financial records of Galaxy Enterprises. The unaudited consolidated
balance sheet data at March 31, 2000 is derived from the unaudited consolidated
financial statements included elsewhere in this document. In the opinion of
management, these statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results of these
periods. Historical results are not necessarily indicative of the results to be
expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue.................................................... $2,495 11,448 17,934 8,159 17,840
Income (loss) from operations.............................. 126 18 (7,111) (1,485) (6,888)
Net income (loss).......................................... 87 35 (12,639) (6,628) (6,927)
Net income (loss) per common share
Basic.................................................... 0.02 0.01 (2.23) (1.23) (1.20)
Diluted.................................................. 0.02 0.01 (2.23) (1.23) (1.20)
Weighted average common shares outstanding
Basic.................................................... 5,272 5,272 5,676 5,390 5,768
Diluted.................................................. 5,272 5,725 5,676 5,390 5,768
</TABLE>
<TABLE>
<CAPTION>
AT
AT DECEMBER 31 MARCH 31
------------------- --------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................ $ 25 133 81
Working capital (deficit)................................... (800) (11,330) (12,834)
Total assets................................................ 1,335 3,231 4,473
Short-term debt............................................. 115 162 543
Long-term debt.............................................. -- 4 5
Stockholder's equity (deficit).............................. 256 (10,594) (12,481)
</TABLE>
8
<PAGE>
Note 1--In calendar year 1999, Galaxy Enterprises acquired substantially all of
the assets of Impact Media, LLC. The operations of Impact Media, LLC are
included in the consolidated statement of operations of Galaxy Enterprises since
the date of acquisition.
Note 2--In calendar year 1997, Galaxy Enterprises purchased all of the assets of
both Profit Education Systems, Inc. (PES) and CO-OP Business Services (CO-OP).
Galaxy Enterprises agreed to assume the liabilities of PES and CO-OP in exchange
for their assets.
Note 3--As of December 31, 1999, Galaxy Enterprises recorded a charge of
$5.45 million ($.96 per share), which represents the cumulative effect of a
change in accounting principle regarding revenue recognition. Upon evaluation of
the accounting requirements of Staff Accounting Bulletin (SAB) 101, Galaxy
Enterprises determined that it is required to adopt the provisions and that
revenue recognition will more closely parallel the time period over which the
revenue is earned. The adoption of this modification in revenue recognition
policy is reflected in the 1999 financial statements as of and for the year
ended December 31, 1999.
Note 4--During 1999, Galaxy Enterprises' board of directors granted an
additional 788,750 options pending the approval of Galaxy Enterprises'
shareholders. Shareholder approval is necessary in order to expand the number of
shares authorized under the plan from 1,000,000 to 2,000,000. As shareholder
approval had not been obtained as of March 31, 2000 all options granted in
excess of the original 1,000,000 shares authorized are not considered
outstanding and have not been included in the preceding analysis. Shareholder
approval was obtained at the annual meeting held on May 17, 2000. For accounting
purposes the options were deemed to have been granted on that date. The fair
market value of the stock at the closing of the market on May 16, 2000 was $1.69
per share. The difference between the option grant price given to employees and
$1.69 gives rise to compensation expense which affects the net income (loss) for
the period over which the options become exercisable under the vesting schedule
in the plan. As a result, approximately $24,000 of compensation expense will be
recognized each fiscal year. Compensation expense recognized under these options
will be added to the amortization of previously issued options resulting in an
approximate $60,000 annual increase in compensation expense. These amounts will
be recognized over the vesting period of five years adjusted for exercises and
cancellations.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The selected unaudited pro forma combined financial data give effect to the
proposed merger of Netgateway and Galaxy Enterprises on a pooling of interests
basis. The Netgateway and Galaxy Enterprises unaudited pro forma combined
financial data are based on the historical consolidated financial statements of
Netgateway and the historical consolidated financial statements of Galaxy
Enterprises, which are included elsewhere in this document. The Netgateway and
Galaxy Enterprises unaudited pro forma combined balance sheet data assumes that
the merger of Netgateway and Galaxy Enterprises took place on March 31, 2000 and
combines Netgateway's historical consolidated balance sheet with Galaxy
Enterprises' historical consolidated balance sheet as of that date. The
Netgateway and Galaxy Enterprises unaudited pro forma combined statements of
operations data assume that the merger of Netgateway and Galaxy Enterprises took
place as of the beginning of the periods presented. The unaudited pro forma
combined statement of operations combines Netgateway's audited historical
statement of operations for the period ended June 30, 1997 and 1998 with Galaxy
Enterprises audited historical statement of operations for the years ended
December 31, 1997 and 1998. As Netgateway had no operations in 1997, these
unaudited pro forma statement of operations consist solely of Galaxy
Enterprises. The unaudited pro forma combined statement of operations for the
year ended June 30, 1999 combines Netgateway's audited historical statement of
operations for the year ended June 30, 1999 with Galaxy Enterprises statement of
operations for the period July 1, 1998 through June 30, 1999 which was derived
from Galaxy Enterprises financial records. The unaudited pro forma combined
statement of operations for the nine months end March 31, 2000 was derived from
Netgateway and Galaxy Enterprises unaudited statements of operations for the
same period included elsewhere in the document. This presentation is consistent
with the periods expected to be combined after the date of the closing of the
merger.
9
<PAGE>
The unaudited pro forma combined financial data are not necessarily
indicative of the combined financial position or results of operations of future
periods or the results that actually would have been realized had the entities
been a single entity during these periods. The unaudited pro forma combined
financial data for each of the three years in the three-year period ended
June 30, 1999, and for the nine months ended March 31, 2000, are derived from
the unaudited pro forma combined financial statements included elsewhere in this
document and should be read in conjunction with those statements and notes
thereto.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
----------------------------------- ENDED
JUNE 30, JUNE 30, JUNE 30, MARCH 31,
1997 1998 1999 2000
----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Revenue.................................................. $ 493 7,151 10,775 20,376
Cost of sales............................................ 144 386 1,345 7,577
-------- ------ ------- --------
Gross profit............................................. 349 6,765 9,430 12,799
Product development...................................... 150 275 1,694 4,218
License fees............................................. -- 3,822 -- --
Selling and marketing.................................... 1,769 8,952 11,645 18,550
General and administrative............................... 292 1,858 10,755 20,009
Depreciation and amortization............................ 48 164 457 762
-------- ------ ------- --------
Total operating expenses................................. 2,259 15,071 24,551 43,539
-------- ------ ------- --------
Loss from operations..................................... (1,910) (8,306) (15,121) (30,740)
Loss on sale of equity securities........................ -- -- (55) --
Other income (expense)................................... -- 5 15 (25)
Interest expense......................................... -- (23) (933) (4,646)
-------- ------ ------- --------
Net loss................................................. (1,910) (8,324) (16,094) (35,411)
Net loss per common share
Basic and diluted...................................... $ (0.49) $(0.89) $ (1.25) $ (2.02)
======== ====== ======= ========
Weighted average common shares outstanding............. 3,924 9,340 12,836 17,513
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT
MARCH 31,
2000
-----------
<S> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash........................................................................................ $ 8,821
Working capital............................................................................. (5,259)
Total assets................................................................................ 18,480
Short-term debt............................................................................. 93
Long-term debt.............................................................................. 5
Stockholder's equity (deficit).............................................................. (1,174)
</TABLE>
COMPARATIVE PER SHARE DATA
The following tables reflect (a) the historical net income (loss) and book
value per share of Netgateway common stock and the historical net loss and book
value per share of Galaxy Enterprises common stock in comparison with the
unaudited pro forma net loss and book value per share after giving effect to the
proposed merger of Netgateway with Galaxy Enterprises on a pooling of interests
basis and (b) the equivalent historical net loss and book value per share
attributable to the estimated 0.63217 of a share of Netgateway common stock
which will be received for each share of Galaxy Enterprises common stock. The
information presented in the following tables should be read in conjunction with
the unaudited pro forma combined financial statements included in this document,
the historical consolidated financial statements and related notes of Netgateway
and the historical
10
<PAGE>
consolidated financial statements and related notes of Galaxy Enterprises that
are included elsewhere in this document.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 4, 1998
(INCEPTION) NINE MONTHS
THROUGH YEAR ENDED ENDED
JUNE 30, 1998 JUNE 30, MARCH 31,
-------------- ---------- -------------------
NETGATEWAY PER SHARE DATA 1998 1999 1999 2000
- ------------------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C>
Netgateway supplementary historical per
common share:
Net loss per common share--basic and
diluted(2).......................... (0.84) (1.21) (0.80) (2.02)
Book value per share(1)................. (0.34) 0.03 (0.00) 0.91
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31 ENDED MARCH 31,
------------------------------ -------------------
GALAXY ENTERPRISES PER SHARE DATA 1997 1998 1999 1999 2000
- --------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Galaxy Enterprises historical per common
share:
Net income (loss) per common share--
basic(2)............................ 0.02 0.01 (2.23) (1.23) (1.20)
Net income (loss) per common share--
diluted(2).......................... 0.02 0.01 (2.23) (1.23) (1.20)
Book value per share(1)................. 0.04 0.05 (1.87) (0.81) (2.16)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS
JUNE 30 ENDED MARCH 31,
------------------------------ -------------------
PRO FORMA COMBINED PER SHARE DATA 1997 1998 1999 1999 2000
- --------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Pro forma combined per common share:
Net loss per Netgateway share--basic
and diluted(2)..................... (0.49) (0.89) (1.25) (2.02)
Net loss per equivalent Galaxy
Enterprises share--basic and
diluted(2)......................... (0.31) (0.56) (0.79) (1.28)
Book value per Netgateway share(1)..... (0.07)
Book value per Galaxy Enterprises
share(3)............................. (0.04)
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing stockholders'
equity (deficit) by the number of shares of common stock outstanding for
that period. The pro forma combined book value per share is computed by
dividing pro forma stockholders' equity (deficit) by the pro forma number of
shares of Netgateway common stock outstanding as of March 31, 2000 assuming
the merger had occurred as of that date.
(2) Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent
shares consist of the incremental common shares issuable upon the exercise
of stock options and warrants (using the treasury stock method). Common
equivalent shares are excluded from the computations if their effect is
antidilutive.
(3) The pro forma combined book value per Galaxy Enterprises shares is
calculated by dividing the pro forma combined share amounts by the exchange
ratio of 0.63217 shares of Netgateway common stock for each share of Galaxy
Enterprises common stock.
11
<PAGE>
RECENT SHARE PRICES
The following table sets forth the closing sales prices per share of
Netgateway common stock on The Nasdaq National Market and the closing sales
prices per share of the Galaxy Enterprises common stock on the Nasdaq OTC
Bulletin Board on (1) December 10, 1999, the last full trading date prior to the
public announcement of the merger, and (2) May 22, 2000, the latest practicable
trading day before the printing of this proxy statement/prospectus. The
equivalent Galaxy Enterprises per share price as of any given date, including
the dates indicated, is determined by multiplying the price of one share of
Netgateway common stock as of such date by 0.63, the estimated exchange ratio
set forth in the merger agreement, and represents what the market value of one
share of Galaxy Enterprises' common stock would have been if the merger had been
consummated on or prior to such day.
<TABLE>
<CAPTION>
GALAXY EQUIVALENT GALAXY
NETGATEWAY ENTERPRISES ENTERPRISES PER
COMMON STOCK COMMON STOCK SHARE
------------ ------------ -----------------
<S> <C> <C> <C>
December 10, 1999................. $10.125 $5.062 $6.379
May 22, 2000...................... $2.4375 $1.50 $1.536
</TABLE>
No assurance can be given as to the market prices of Netgateway common stock
or Galaxy Enterprises common stock at any time before the closing of the merger
or as to the market price of Netgateway common stock at any time thereafter. The
exchange ratio will not be adjusted to compensate Galaxy Enterprises
stockholders for decreases in the market price of Netgateway common stock which
could occur before the merger becomes effective. If the market price of
Netgateway common stock decreases or increases prior to the effective time of
the merger, the market value of Netgateway common stock to be received in the
merger in exchange for Galaxy Enterprises common stock will correspondingly
decrease or increase.
Stockholders of Galaxy Enterprises and Netgateway are urged to obtain
current market quotations of Galaxy Enterprises common stock and Netgateway
common stock.
12
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER THESE RISK FACTORS IN EVALUATING WHETHER TO APPROVE THE
MERGER. THESE FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE OTHER
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, THE APPENDICES
HERETO AND THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF EITHER OR BOTH OF
NETGATEWAY AND GALAXY ENTERPRISES MAY BE SERIOUSLY HARMED. IN THAT CASE, THE
TRADING PRICE OF NETGATEWAY COMMON STOCK MAY DECLINE, AND YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT.
RISKS RELATED TO THE MERGER
EXPECTED BENEFITS OF THE MERGER MAY NOT BE REALIZED
If we are not able to effectively integrate our technology, operations and
personnel in a timely and efficient manner, then the benefits of the merger will
not be realized. In particular, if the integration is not successful:
- our operating results may be adversely affected;
- we may lose key personnel; and
- we may not be able to retain Netgateway's and Galaxy Enterprises'
customers.
In addition, the attention and effort devoted to the integration of the two
companies will significantly divert management's attention from other important
issues, and could have a material adverse impact on the business of the combined
company. In addition, anticipated synergies from the merger may not materialize.
THE MERGER COULD ADVERSELY AFFECT COMBINED FINANCIAL RESULTS
If the benefits of the merger do not exceed the costs associated with the
merger, including transaction costs and the dilution to Netgateway's
stockholders resulting from the issuance of shares in connection with the
merger, Netgateway's financial results, including earnings per share, could be
adversely affected. Specifically, Netgateway and Galaxy Enterprises estimate
that they will incur direct transaction costs of approximately $700,000 and
$550,000, respectively, in connection with the proposed merger, which will be
charges to operations in the quarter in which the merger is consummated. These
amounts are preliminary estimates and could change. Netgateway may incur
additional charges in subsequent quarters to reflect costs associated with the
proposed merger.
GALAXY ENTERPRISES STOCKHOLDERS WILL RECEIVE APPROXIMATELY 0.63 SHARES OF
NETGATEWAY COMMON STOCK FOR EACH SHARE OF GALAXY ENTERPRISES COMMON STOCK
THEY HOLD, DESPITE CHANGES IN THE MARKET VALUE OF EITHER OR BOTH OF GALAXY
ENTERPRISES COMMON STOCK AND NETGATEWAY COMMON STOCK.
The specific dollar value of Netgateway common stock to be received by
Galaxy Enterprises stockholders depends on the market value of Netgateway at the
time of completion of the merger. Between March 8, 2000, the day the Galaxy
Enterprises board of directors voted to approve the merger, and May 23, 2000,
the value of Netgateway's common stock has fallen from $9.19 to $2.13. The value
of Netgateway common stock may decrease further from the date that any Galaxy
Enterprises stockholder submits a proxy. Each share of Galaxy Enterprises common
stock will be exchanged for approximately 0.63 of a share of Netgateway common
stock upon completion of the merger. The actual exchange ratio will be
calculated by dividing five million by the sum of the number of outstanding
shares of Galaxy Enterprises common stock and the outstanding unexercised Galaxy
Enterprises employee stock options at the time of the merger. This exchange
ratio will not be adjusted for changes in the market price of either Galaxy
Enterprises common stock or Netgateway common stock. Neither party is permitted
to terminate the merger agreement solely because of changes in the market price
of Netgateway common stock or Galaxy Enterprises common stock. Stockholders are
urged to obtain
13
<PAGE>
recent market quotations for Netgateway common stock and Galaxy Enterprises
common stock. We cannot predict or give any assurances as to the market price of
Netgateway common stock at any time before or after the merger and stockholders
of Galaxy Enterprises are urged to monitor this price and to consider carefully
developments with respect to the market for Netgateway's common stock through
the time of the stockholders meeting to approve the merger.
THE MARKET PRICE OF NETGATEWAY COMMON STOCK MAY DECLINE AS A RESULT OF THE
MERGER
The market price of Netgateway common stock may decline as a result of the
merger, if:
- the integration of Netgateway and Galaxy Enterprises is unsuccessful;
- we do not achieve the perceived benefits of the merger as rapidly or to
the extent anticipated by financial analysts or investors; or
- the effect of the merger on our financial results is not consistent with
the expectations of financial analysts or investors.
FAILURE OF THE MERGER TO QUALIFY AS A POOLING OF INTERESTS WOULD NEGATIVELY
AFFECT COMBINED FINANCIAL RESULTS
Netgateway intends to account for the merger as a pooling of interests, but
availability of this treatment is not a condition to the merger. The failure of
the merger for any reason to qualify for pooling of interests accounting
treatment for financial reporting purposes would materially and adversely affect
Netgateway's reported earnings and, likely, the price of Netgateway common
stock.
If the merger does not qualify for pooling of interests accounting
treatment, the purchase method of accounting would apply. Under that method,
Netgateway would record the estimated fair value of common stock issued in the
merger as the cost of acquiring the business of Galaxy Enterprises. That cost
would be allocated to the net assets acquired.
The availability of pooling of interests accounting treatment for the merger
depends upon circumstances and events occurring after the effective time of the
merger. For example, there must not be any significant changes in the business
of the combined company, including significant dispositions of assets, for a
period of two years following the effective time of the merger. Further,
affiliates of Netgateway and Galaxy Enterprises must not sell any shares of
either Netgateway or Galaxy Enterprises capital stock, except certain limited
amounts, until Netgateway publicly announces financial results covering at least
30 days of combined operations of Netgateway and Galaxy Enterprises after the
merger. If the effective time of the merger occurs prior to August 31, 2000, we
expect that such combined financial results would be published in November 2000.
If affiliates of Netgateway or Galaxy Enterprises sell shares of Netgateway
common stock in excess of the limited exception prior to that time, despite a
contractual obligation not to do so, the merger may not qualify for pooling of
interests accounting for financial reporting purposes.
GALAXY ENTERPRISES MAY LOSE AN OPPORTUNITY TO ENTER INTO A MERGER OR
BUSINESS COMBINATION WITH ANOTHER PARTY ON MORE FAVORABLE TERMS BECAUSE OF
PROVISIONS IN THE MERGER AGREEMENT
While the merger agreement is in effect, Galaxy Enterprises is prohibited
from entering into or soliciting, initiating or encouraging any inquiries or
proposals that may lead to a proposal or offer for a merger, with any person
other than Netgateway. As a result of this prohibition, Galaxy Enterprises may
lose an opportunity to enter into a transaction with another potential partner
on more favorable terms.
SOME OF GALAXY ENTERPRISES' DIRECTORS AND OFFICERS HAVE INTERESTS THAT
DIFFER IN SEVERAL RESPECTS FROM GALAXY ENTERPRISES STOCKHOLDERS
In considering the recommendation of the Galaxy Enterprises board of
directors to approve the merger agreement and the merger, you should consider
that some of these directors and officers have
14
<PAGE>
interests that differ from, or are in addition to, their interests as Galaxy
Enterprises stockholders generally. These interests may include the receipt of
Netgateway stock options, benefits provided to them by Netgateway under
employment agreements, the continuation of certain indemnification arrangements,
indemnification with respect to personal guarantees given by them of certain
obligations of Galaxy Enterprises and the agreement of Netgateway that it will
cause Galaxy Enterprises to repay the $450,000 of loans made to it by Netgateway
with respect to which John J. Poelman is the co-obligor and for which he has
personally provided collateral immediately following the merger.
DEVELOPMENTS AFTER THE DATE OF THE FAIRNESS OPINION
The fairness opinion that the board of directors of Galaxy Enterprises
received does not reflect recent developments in the market for the stock of
Netgateway and Galaxy Enterprises and Galaxy Enterprises has not requested an
update to this opinion. Stockholders should not put undue reliance on the
fairness opinion. Between March 10, 2000, the date of the fairness opinion, and
May 23, 2000, the price of Netgateway's common stock has fallen from $11.75 to
$2.13. The board of directors of Galaxy Enterprises continues to believe that
the merger is fair to and in the best interests of Galaxy Enterprises and its
stockholders. See "The Merger--Board Recommendation of Galaxy Enterprises Board
of Directors."
RISKS SPECIFIC TO NETGATEWAY
NETGATEWAY'S AUDITORS HAVE QUALIFIED THEIR REPORT ON NETGATEWAY'S FINANCIAL
STATEMENTS WITH RESPECT TO NETGATEWAY'S ABILITY TO CONTINUE AS A GOING
CONCERN
The report of KPMG LLP, Netgateway's independent auditors, with respect to
Netgateway's financial statements and the related notes, indicate that at the
date of their report, Netgateway had generated minimal revenues since inception
and was continuing to incur losses. Accordingly, KPMG LLP qualified their report
as of that date to indicate that these matters raise substantial doubt about
Netgateway's ability to continue as a going concern. Netgateway's financial
statements do not include any adjustments that might result from this
uncertainty.
NETGATEWAY HAS HAD A DEFICIT IN STOCKHOLDERS' EQUITY AND ANTICIPATES FUTURE
LOSSES
Netgateway has incurred substantial losses since its inception and
anticipates incurring substantial losses for the foreseeable future. As of
June 30, 1999 and March 31, 2000, Netgateway had a working capital deficit of
$1,834,107 and $8,525,052, respectively, and stockholders' equity of $244,917
and $12,372,775 at June 30, 1999 and March 31, 2000, respectively. Netgateway
generated revenues of $157,282 for the year ended June 30, 1999 and $3,214,997
for the nine months ended March 31, 2000. For the year ended June 30, 1999 and
the nine months ended March 31, 2000, Netgateway incurred net losses of
$10,775,703, and $27,498,958, respectively. Netgateway may never achieve
profitability. For the year ended June 30, 1999 and the nine months ended
March 31, 2000 Netgateway recorded negative cash flows from operations of
$4,552,912 and $9,901,178, respectively.
To succeed, Netgateway must leverage its existing relationships and develop
new relationships to substantially increase its revenue by providing more
comprehensive eCommerce services. Netgateway has expended and will continue to
expend significant resources to build its internal systems, to grow its
infrastructure, to add new clients and employees, and to establish access to the
Internet Commerce Center platform for clients, directly through systems
integrators, who may act as resellers of Netgateway's products. Most of these
development expenses must be incurred well in advance of the recognition of
revenue. Netgateway intends to continue to invest heavily in infrastructure,
development and marketing. As a result, Netgateway may not be able to achieve or
sustain profitability.
15
<PAGE>
IF NETGATEWAY IS UNABLE TO UPGRADE ITS INFRASTRUCTURE, NETGATEWAY MAY BE
UNABLE TO PROCESS AN INCREASED VOLUME OF TRANSACTIONS
Netgateway may be unable to effectively upgrade and expand its hardware and
software infrastructure or to integrate smoothly any newly developed or
purchased software with its existing systems. A key element of Netgateway's
business strategy is to provide a cost-effective means by which its clients can
generate a high volume of eCommerce transactions through the use of Netgateway's
hardware and software infrastructure. If the volume of transactions through
Netgateway's infrastructure substantially increases, Netgateway will have to
expand and further upgrade its technology, transaction processing systems and
hardware and software infrastructure to accommodate these increases or
Netgateway's systems may suffer from:
- unanticipated system disruptions;
- slower response times;
- degradation in levels of customer service;
- impaired quality and speed of transaction processing; and
- delays in reporting accurate financial information.
RISKS SPECIFIC TO GALAXY ENTERPRISES
GALAXY HAS ACHIEVED ONLY LIMITED PROFITABILITY AND ANTICIPATES FUTURE LOSSES
Since inception, Galaxy Enterprises has achieved only limited profitability
and anticipates incurring substantial losses for the foreseeable future. Galaxy
Enterprises may not achieve or maintain profitability in the future.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of Galaxy Enterprises common stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in Galaxy Enterprises quarterly operating
results, announcements of technological innovations, or new services by Galaxy
Enterprises or its competitors, changes in financial estimates by securities
analysts, conditions or trends in the Internet and on-line commerce industries,
changes in the market valuations of other Internet or on-line service companies,
announcements by Galaxy Enterprises or its competitors of significant
acquisitions, strategic partnerships, joint ventures or capital commitments,
additions or departures of key personnel, sales of Galaxy Enterprises common
stock in the open market, a termination of the merger agreement with Netgateway
and other events or factors, many of which are beyond Galaxy Enterprises
control. Further, the stock markets in general, and The Nasdaq Stock Market and
the market for Internet-related and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of those companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect valuations substantially above historical levels. There can be no
assurance that these trading prices and valuations will be sustained. These
broad market and industry factors may materially adversely affect the market
price of Galaxy Enterprises common stock, regardless of Galaxy Enterprises
operating performance. Market fluctuations, as well as general political and
economic conditions such as recession or interest rate or currency rate
fluctuations, may also adversely affect the market price of Galaxy Enterprises
common stock. 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 that company.
FAILURE TO CLOSE THE MERGER COULD ADVERSELY AFFECT GALAXY ENTERPRISES
If the proposed merger with Netgateway does not close, Galaxy Enterprises'
business, results of operations and financial condition will be seriously harmed
because the announcement of the merger and Galaxy's efforts to close the merger
have:
- disrupted Galaxy Enterprises' sales and marketing efforts;
16
<PAGE>
- diverted the attention of Galaxy Enterprises' management; and
- delayed certain strategic initiatives of Galaxy.
Further, under certain circumstances Galaxy Enterprises will be required to
pay Netgateway a termination fee of $1.5 million plus expenses up to $500,000.
If the merger agreement terminates under these circumstances, then Netgateway
may exercise its option to purchase 980,213 shares of Galaxy Enterprises common
stock currently held by John J. Poelman.
RISK RELATED TO NETGATEWAY AND GALAXY ENTERPRISES AS A COMBINED COMPANY
The following risk factors assume that the merger is successfully completed
and describe the risks of the ongoing operations relating to the combined
company.
THE COMBINED COMPANY WILL HAVE A LIMITED OPERATING HISTORY AND MAY NOT BE
ABLE TO IMPLEMENT ITS GROWTH STRATEGY
Netgateway began its operations in March 1998 and did not begin generating
significant revenues until October 1, 1999. Galaxy Enterprises was incorporated
in March 1994 and has only achieved limited profitability on a quarterly or
annual basis to date. Therefore, we have limited operating histories and our
prospects are subject to the risks, expenses and uncertainties frequently
encountered by young companies that operate exclusively in the new and rapidly
evolving markets for Internet products and services. Successfully achieving the
combined company's growth plan depends on our ability to:
- continue to develop and extend our brands;
- develop new media properties;
- maintain and increase the levels of traffic on our Internet sites;
- develop or acquire competitive services or products;
- effectively generate revenues through sponsored services and placements;
- effectively integrate businesses or technologies into our operations;
- successfully develop Web-based services to meet the specific requirements
of our customers; and
- continue to identify, attract, retain and motivate qualified personnel.
Furthermore, the growth of the combined company depends on factors outside
our control, including:
- adoption by the market of the Internet, and more specifically, the
combined company, as an effective Internet business;
- relative price stability for Internet-based advertising, despite
competition and other factors that could reduce market prices for
advertising; and
- acceptance of Netgateway's basic outsourcing business model.
IF THE COMBINED COMPANY IS NOT ABLE TO COMPETE EFFECTIVELY IN THE INTERNET
INDUSTRY, ITS BUSINESS WILL BE ADVERSELY AFFECTED
Our target market is rapidly evolving and subject to continuous
technological change. Our competitors may be better positioned to address new
developments or react more favorably to changes, which could have a material
adverse effect on our business, prospects, financial condition, and results of
operations. The market for eCommerce services is relatively new, but it is
already highly competitive and characterized by an increasing number of
entrants. Some of these entrants have introduced or developed products and
services similar to those offered by the combined company. We believe that
competition will intensify and increase in the future.
We compete on the basis of a number of factors, including the attractiveness
of the eCommerce 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
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eCommerce services that provide significant technological, creative,
performance, price or other advantages over the services offered by the combined
company.
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;
- on-line malls and
- strategic consulting firms.
We may also compete with telecommunications companies. Although most of
these types of competitors have not offered a full range of Internet
professional services to date, many 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, The Internet Mall, iMall Cybreash, Clean Commerce and other smaller
Internet services providers.
Additionally, in pursuing acquisition opportunities, we may compete with
other companies with similar growth strategies. Some of these 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 no
patented, and only a limited amount of other proprietary, technology that would
preclude or inhibit competitors from entering the eCommerce services market.
Therefore, we must rely on the skill of our personnel and the quality of our
client services. The costs to develop and provide eCommerce services are
relatively low. Therefore, we expect that we will continually face additional
competition from new entrants into the market in the future. There is also the
risk that our employees may leave 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.
THE COMBINED COMPANY'S ABILITY TO MEET ITS WORKING CAPITAL NEEDS WILL BE
LIMITED IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING WHEN NEEDED
We will require additional financing in the near future to meet our working
capital needs. Our working capital requirements in the foreseeable future will
depend on a variety of factors including our ability to implement our business
plan. We may not be able to successfully negotiate or obtain additional
financing on favorable terms, or at all. Our ability to obtain additional
capital depends on market conditions, the national economy and others factors
beyond our control.
FLUCTUATIONS IN THE COMBINED COMPANY'S OPERATING RESULTS MAY AFFECT ITS
STOCK PRICE AND ABILITY TO RAISE CAPITAL
As a result of our limited operating history and the emerging nature of the
markets in which it will compete, our operating results may fluctuate
materially. As a result, quarter-to-quarter comparisons of our results of
operations may not be meaningful. If, in some future quarter, whether as a
result of those fluctuations or otherwise, our results of operations fall below
the expectations of financial analysts and investors, the trading price of our
common stock would likely be materially and adversely
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affected and our ability to raise capital could be impaired. You should not rely
on Netgateway's or Galaxy Enterprises' results for any interim period as an
indication of future performance. Additionally, our quarterly results of
operations may fluctuate significantly 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, to attract new clients and partner
with eCommerce systems integrators at a steady rate and to maintain client
satisfaction;
- the announcement or introduction of new services and products by us or our
competitors;
- price competition or higher prices in the industry;
- pricing of hardware and software required for the transaction of
eCommerce;
- Internet and online services usage levels and the rate of market
acceptance of these 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;
- 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 eCommerce.
INCREASED COMPETITION MAY EXERT DOWNWARD PRICING PRESSURE ON ECOMMERCE
SERVICES
We believe that the number of companies selling eCommerce services has
recently increased substantially. Accordingly, we may face increased pricing
pressure for the sale of our services and products, which could reduce our
revenues. In addition, our sales may be adversely affected to the extent that
our competitors offer superior services that better target users.
THE COMBINED COMPANY'S SUCCESS WILL DEPEND ON CONTINUED GROWTH IN THE USE OF
ECOMMERCE
The eCommerce industry must achieve widespread acceptance by a broad base of
customers for the combined company to attain success. If the Internet does not
prove to be a viable commercial marketplace, the combined company's business
will be adversely affected.
THE MARKET FOR THE COMBINED COMPANY'S PRODUCTS IS NEW, AND THE GROWTH IN
MARKET ACCEPTANCE FOR THESE PRODUCTS IS UNCERTAIN
The markets for our products and services have only recently begun to
develop, are rapidly evolving and are increasingly competitive. Demand and
market acceptance for recently introduced products and services are subject to a
high level of uncertainty and risk. We could be adversely affected if the market
develops more slowly than expected or becomes saturated with competitors, or if
our products and services do not sustain market acceptance.
THE COMBINED COMPANY MUST ATTRACT AND EXPAND ITS USER AND ADVERTISER BASE TO
BE SUCCESSFUL
We must develop and maintain a brand identity for the Netgateway and Galaxy
Enterprises products. The failure to establish and maintain the Netgateway and
Galaxy Enterprises brands could adversely affect our efforts to attract and
expand our user and advertiser base. We also believe that the importance of
brand recognition will increase due to the growing number of eCommerce services
providers and the relatively low barriers to entry. Promotion and enhancement of
our brands will depend largely on our success in providing high-quality products
and services. To attract and retain Internet users and to promote and maintain
our brands, we may need to increase expenditures for
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creating and maintaining brand loyalty. If there is a breach or alleged breach
of security or privacy involving our services, or if any third party undertakes
illegal or harmful actions using our community, communications or eCommerce
services, our brands and reputation could suffer substantial adverse publicity
and impairment.
THE COMBINED COMPANY MUST SUCCESSFULLY MANAGE ITS GROWTH AND THE INTEGRATION
OF RECENTLY ACQUIRED COMPANIES TO ACHIEVE ITS DESIRED RESULTS
Our recent growth has placed a significant strain on our managerial,
operational and financial resources. To manage our growth, we must continue to
implement and improve our operational and financial systems and to expand, train
and manage our employee base. Further, we will need to maintain relationships
with various merchants and other third parties to be successful.
The process of managing advertising within large, high traffic Web sites
such as Netgateway's StoresOnline.com is an increasingly important and complex
task. Netgateway relies on both internal and licensed third-party advertising
inventory management and analysis systems. To the extent that any extended
failure of its advertising management system results in incorrect advertising
insertions, Netgateway may be exposed to "make good" obligations, which, by
displacing advertising inventory, could defer advertising revenues. Failure of
Netgateway's advertising management systems to effectively scale to higher
levels of use or to effectively track and provide accurate and timely reports on
advertising results also could negatively affect its relationships with
advertisers.
As part of their business strategies, Netgateway and Galaxy Enterprises have
completed several recent acquisitions, including Netgateway's acquisition of
Spartan Multimedia, Ltd., and Galaxy Enterprises' acquisitions of Galaxy
Malls, Inc. and IMI, Inc. Furthermore, Netgateway expects to enter into
additional business combinations and acquisitions. Acquisition transactions are
accompanied by a number of risks, including:
- the difficulty of assimilating the operations and personnel of the
acquired companies;
- the potential disruption of its ongoing business and distraction of
management;
- the difficulty of incorporating acquired technology or content and rights
into its products and media properties;
- the negative impact on reported earnings if any of these transactions
which are expected to qualify for pooling of interests accounting
treatment for financial reporting purposes fail to so qualify;
- the correct assessment of the relative percentages of in-process research
and development expense which can be immediately written off as compared
to the amount which must be amortized over the appropriate life of the
asset;
- the failure to successfully develop an acquired in-process technology
resulting in the impairment of amounts currently capitalized as intangible
assets;
- unanticipated expenses related to technology integration;
- the maintenance of uniform standards, controls, procedures and policies;
- the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
- the potential unknown liabilities associated with acquired businesses.
We may not be successful in addressing these risks or any other problems
encountered in connection with such acquisitions.
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THE COMBINED COMPANY'S OPERATIONS COULD BE SIGNIFICANTLY HINDERED BY THE
OCCURRENCE OF A NATURAL DISASTER OR OTHER CATASTROPHIC EVENT
Our operations will be susceptible to outages due to fire, floods, power
loss, telecommunications failures, break-ins and similar events. In addition,
substantially all of Netgateway's network infrastructure is located in southern
California, an area susceptible to earthquakes. Netgateway does not have
multiple site capacity in the event of any catastrophic event and, although
Netgateway does have a redundant network instructive system, this system does
not guarantee continued reliability if a catastrophic event occurs. Despite
implementation of network security measures, our servers may be vulnerable to
computer viruses, break-ins and similar disruptions from unauthorized tampering
with its computer systems. Netgateway does not carry sufficient business
interruption insurance at this time to compensate it for losses that may occur
as a result of any of these events.
THE COMBINED COMPANY'S INTELLECTUAL PROPERTY RIGHTS ARE COSTLY AND DIFFICULT
TO PROTECT
We regard our copyrights, trademarks, trade dress, trade secrets and similar
intellectual property as critical to our success. We rely upon trademark and
copyright law, trade secret protection and confidentiality or license agreements
with our employees, customers, partners and others to protect our proprietary
rights. Effective trademark, copyright and trade secret protection may not be
available in every country in which our products and media properties are
distributed or made available through the Internet. In addition, while we
attempt to ensure that the quality of our brand is maintained by our licensees,
our licensees may take actions that could materially and adversely affect the
value of our proprietary rights or the reputation of our products and media
properties. We are aware that third parties have, from time to time, copied
significant portions of our directory listings for use in competitive Internet
navigational tools and services. Protection of our distinctive elements may not
be available under copyright law. We cannot guarantee that the steps we have
taken to protect our proprietary rights will be adequate.
THE COMBINED COMPANY MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT
CLAIMS, WHICH ARE COSTLY TO DEFEND AND COULD LIMIT ITS ABILITY TO USE
CERTAIN TECHNOLOGIES IN THE FUTURE
Many parties are actively developing search, indexing, eCommerce and other
Web-related technologies. We believe that these parties will continue to take
steps to protect these technologies, including seeking patent protection. As a
result, we believe that disputes regarding the ownership of these technologies
are likely to arise in the future. For example, we are aware that a number of
patents have been issued in the areas of:
- eCommerce;
- online auctions;
- Web-based information indexing and retrieval, including patents recently
issued to one of its direct competitors;
- online direct marketing;
- fantasy sports;
- common Web graphics formats;
- mapping technologies; and
- custom cut CDs.
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WE MAY INCUR SUBSTANTIAL EXPENSES IN DEFENDING AGAINST THIRD-PARTY
INFRINGEMENT CLAIMS REGARDLESS OF THE MERIT OF SUCH CLAIMS
The combined company anticipates that additional third-party patents will be
issued in the future. From time to time, parties may assert patent infringement
claims against the combined company in the form of letters, lawsuits and other
forms of communications. Third parties may also assert claims against the
combined company alleging infringement of copyrights, trademark rights, trade
secret rights or other proprietary rights or alleging unfair competition. If we
decide to license patents or other proprietary rights, we cannot guarantee that
we will be able to do so on reasonable terms or at all. If there is a
determination that we have infringed third-party proprietary rights, we could
incur substantial monetary liability and be prevented from using the rights in
the future.
We are aware of lawsuits filed against two of our competitors regarding the
presentment of advertisements in response to search requests on "keywords" that
may be trademarks of third parties. It is not clear what, if any, impact an
adverse ruling in these recently filed lawsuits would have on us.
THE COMBINED COMPANY WILL DEPEND ON KEY PERSONNEL THAT IT MAY NOT BE ABLE TO
RETAIN
If we do not succeed in attracting new personnel, or retaining and
motivating existing personnel, our business will be adversely affected.
Netgateway depends on the continued services of its key personnel, including its
founders, chief executive officer, president and chief operating officer, chief
financial officer, chief information officer, executive vice president--sales
and marketing and senior engineers. Galaxy Enterprises also substantially
depends upon the continued services of its key personnel, including its
president and chief executive officer, executive vice president--sales and
marketing, vice president and chief operating officer and vice president and
chief financial officer, as well as the chief executive officer and chief
financial officer of its wholly owned subsidiary, IMI.
Each of these individuals has acquired specialized knowledge and skills with
respect to Netgateway, Galaxy Enterprises and IMI, and their respective
operations. As a result, if any of these individuals were to leave Netgateway or
Galaxy Enterprises following the merger, we could face substantial difficulty in
hiring qualified successors and could experience a loss in productivity while
any such successor obtains the necessary training and experience. We expect that
we will need to hire additional personnel in all areas. The competition for
qualified personnel is intense, and has particularly intensified in the Los
Angeles area, where Netgateway's corporate headquarters is located. At times,
Netgateway has experienced difficulties in hiring personnel with the necessary
training or experience, particularly in technical areas.
THE COMBINED COMPANY WILL BE SUBJECT TO U.S. AND FOREIGN GOVERNMENT
REGULATION OF THE INTERNET, THE IMPACT OF WHICH IS DIFFICULT TO PREDICT
Any existing or new legislation applicable to the combined company could
expose it to substantial liability, including significant expenses necessary to
comply with such laws and regulations. There are currently few laws or
regulations directly applicable to the Internet. The application of new or
existing laws and regulations to the combined company relating to issues such as
user privacy, defamation, pricing, advertising, taxation, gambling, sweepstakes,
promotions, content regulation, quality of products and services, and
intellectual property ownership and infringement is unclear.
Other nations, including Germany, have taken actions to restrict the free
flow of material deemed to be objectionable on the Internet. The European Union
has recently adopted privacy and copyright directives that may impose additional
burdens and costs on the combined company's international operations. In
addition, several telecommunications carriers, including America's Carriers'
Telecommunications Association, are seeking to have telecommunications over the
Web regulated by the FCC in the same manner as other telecommunications
services. Many areas with high Internet use have begun to experience
interruptions in phone service, and local telephone carriers, such as Pacific
Bell, have petitioned the FCC to regulate ISPs and OSPs and to impose access
fees. A number of
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proposals have been made at the federal, state and local level that would impose
additional taxes on the sale of goods and services through the Internet.
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 eCommerce. 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
eCommerce 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 eCommerce 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 products and 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.
IF ANY GOVERNMENT PROPOSALS FOR REGULATING THE INTERNET ARE ADOPTED, THEY
COULD SUBSTANTIALLY IMPAIR THE GROWTH OF THE INTERNET AND ADVERSELY AFFECT
THE COMBINED COMPANY
Several recently passed federal laws could have an impact on our business.
The Digital Millennium Copyright Act is intended to reduce the liability of
online service providers for listing or linking to third-party Internet sites
that include materials that infringe copyrights or other rights of others. The
Children's Online Protection Act and the Children's Online Privacy Protection
Act are intended to restrict the distribution of certain materials deemed
harmful to children and impose additional restrictions on the ability of online
services to collect user information from minors. In addition, the Protection of
Children From Sexual Predators Act of 1998 requires online service providers to
report evidence of violations of federal child pornography laws under certain
circumstances. We cannot currently predict the effect, if any, that this
legislation will have on our business. The legislation may impose significant
additional costs on our business or subject it to additional liabilities.
We post policies concerning the use and disclosure of user data. Any of our
failures to comply with our posted privacy policies could adversely affect our
business, results of operations and financial condition. Due to the global
nature of the Internet, it is possible that the governments of other states and
foreign countries might attempt to regulate its transmissions or prosecute the
combined company for violations of their laws. We might unintentionally violate
such laws. Such laws may be modified, or new laws enacted, in the future. Any
such developments could have a material adverse effect on our business, results
of operations and financial condition.
THE COMBINED COMPANY MAY BE SUBJECT TO LEGAL LIABILITY FOR ITS ONLINE
SERVICES
We host a wide variety of services that enable individuals to exchange
information, generate content, conduct business and engage in various online
activities, including services relating to online
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auctions and homesteading with and without our prior review of the content of
such activities. The law relating to the liability of providers of these online
services for activities of their users is currently unsettled. Claims could be
made against us for defamation, negligence, copyright or trademark infringement,
unlawful activity, tort, including personal injury, fraud or other theories
based on the nature and content of information that we provide links to or that
may be posted online or generated by our users or with respect to materials
bought and sold by our users. These types of claims have been brought, and
sometimes successfully pressed, against online service providers in the past. In
addition, we are aware that governmental agencies are currently investigating
the conduct of online auctions.
It is also possible that, if any information we provide contains errors or
is otherwise negligently provided to users, third parties could make claims
against us. For example, Netgateway offers Web-based e-mail services, which
expose Netgateway to potential risks, such as liabilities or claims resulting
from unsolicited email, lost or misdirected messages, illegal or fraudulent use
of email, or interruptions or delays in email service. Investigating and
defending any of these types of claims is expensive, even to the extent that the
claims do not result in liability.
ECOMMERCE ACTIVITIES MAY EXPOSE THE COMBINED COMPANY TO UNCERTAIN LEGAL
RISKS AND POTENTIAL LIABILITIES
As part of our business, we enter into agreements with sponsors, content
providers, service providers and merchants under which we are entitled to
receive a share of revenue from the purchase of goods and services by users of
our online properties. In addition, we provide hosting and other services to
online merchants. These types of arrangements may expose us to additional legal
risks and uncertainties, including potential liabilities relating to the
products and services offered by those third parties.
Although we maintain liability insurance, insurance may not cover these
claims or may not be adequate. Even to the extent these types of claims do not
result in material liability, investigating and defending the claims is
expensive.
INTERNET SECURITY POSES RISKS TO THE BUSINESS OF THE COMBINED COMPANY
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. The processing of eCommerce
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. 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, 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.
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WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF ECOMMERCE CONTINUES TO
GROW
Our future revenues and any future profits depend substantially upon the
widespread acceptance and use of the Internet and other online services as an
effective medium of commerce by merchants and consumers. If Internet use and
other online services do not continue to grow or grow more slowly than we
expect, our business, prospects, financial condition, and results of operations
could be materially adversely affected. Our business could also be adversely
impacted 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.
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.
THE COMBINED COMPANY MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ECOMMERCE,
THE ECOMMERCE SERVICES INDUSTRY AND CUSTOMER 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 the combined
company's business, prospects, financial condition and results of operations.
The Internet, eCommerce and the eCommerce 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.
The combined company's success will depend, in part, on its ability to:
- enhance and improve the responsiveness and functionality of our online
transaction processing services;
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- 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;
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis; and
- provide services and products on a timely and acceptable basis and meet
the customer support expectation of its customers.
INVESTMENT RISKS
SOME PROVISIONS OF NETGATEWAY'S CERTIFICATE OF INCORPORATION AND BYLAWS MAY
DETER TAKEOVER ATTEMPTS WHICH MAY LIMIT THE OPPORTUNITY OF OUR STOCKHOLDERS TO
SELL THEIR SHARES AT A FAVORABLE PRICE
Some of the provisions of Netgateway's certificate of incorporation and
bylaws could make it more difficult for a third party to acquire Netgateway,
even if doing so might be beneficial to Netgateway's stockholders by providing
them with the opportunity to sell their shares at a premium to the then market
price. Netgateway's bylaws contain provisions regulating the introduction of
business at annual stockholders' meetings by anyone 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 or
a change in control in Netgateway.
In addition, the Netgateway board of directors has approved a proposal to
amend Netgateway's bylaws to create a classified board. The proposal will be
submitted to Netgateway stockholders for their consideration at a special
meeting to be held on May 24, 2000. If the proposal is approved by Netgateway
stockholders, Netgateway's board of directors will be divided into two classes.
The term of the first class will expire at the annual meeting following
Netgateway's fiscal year 2000 and the term of the second class will expire at
the annual meeting following Netgateway's fiscal year 2001. At each annual
meeting following this initial classification and election, the terms of
one-half of the directors will expire, and new directors will be elected to
serve two years. This proposed amendment will extend the time required to effect
a change in control of the board of directors and may discourage hostile
takeover bids for Netgateway. Currently, a change in control of the board of
directors can be made by stockholders holding a plurality of the votes cast at a
single annual meeting. If Netgateway successfully implements a classified board
of directors, it will take at least two annual meetings to effectuate a change
in control of the board of directors because a majority of the directors cannot
be elected at a single meeting. These effects are somewhat mitigated by the fact
that a majority of the stockholders can remove any or all directors, with cause,
at a special meeting of stockholders or by written consent.
Further, Netgateway's certificate incorporation authorizes the board of
directors to issue up to 5,000,000 shares 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 Netgateway has 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 Netgateway common stock,
and therefore could reduce its value. In addition, specific rights granted to
future holders of preferred stock could be used to restrict Netgateway'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 or change in control of Netgateway, thereby preserving the current
stockholders' control of Netgateway.
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NETGATEWAY'S STOCK PRICE HAS HISTORICALLY BEEN VOLATILE, WHICH MAY MAKE IT
MORE DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU WANT AT PRICES YOU FIND
ATTRACTIVE
The trading price of Netgateway common stock has been, and may continue to
be, subject to wide fluctuations. For the period from November 18, 1999 (the
date on which Netgateway's stock began trading on The Nasdaq National Market)
through May 22, 2000, the closing sale prices of Netgateway common stock on The
Nasdaq National Market ranged from $2.4375 to $12.25. The stock price may
fluctuate in response to a number of events and factors, such as quarterly
variations in operating results, announcements of technological innovations or
new products and services by Netgateway or its competitors, changes in financial
estimates and recommendations by financial analysts, the operating and stock
price performance of other companies that investors may deem comparable, and
news reports relating to trends in its markets. In addition, the stock market in
general, and the market prices for Internet-related companies in particular,
have experienced extreme volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of Netgateway's stock, regardless of
its operating performance.
AFTER THE MERGER, MANAGEMENT WILL BENEFICIALLY OWN APPROXIMATELY 22.1% OF
NETGATEWAY'S COMMON STOCK AND THEIR INTERESTS COULD CONFLICT WITH YOURS
Following the merger, Netgateway's directors and executive officers will
beneficially own approximately 22.1% of Netgateway's outstanding common stock,
assuming approximately 3.9 million shares are issued in the merger. As a result
of their ownership, the directors and executive officers of Netgateway
collectively are able to substantially influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control of Netgateway.
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY
AFFECT OUR STOCK PRICE
The market price of Netgateway's common stock could decline as a result of
sales of a large number of shares of its common stock in the market after the
merger is completed, or the perception that these sales could occur. These sales
also might make it more difficult for Netgateway to sell equity securities in
the future at a time and at a price that it deems appropriate. As of May 18,
2000, Netgateway had outstanding 17,683,043 shares of common stock. As of
May 18, 2000, 8,356,602 of these shares are freely tradeable. Giving effect to
applicable legal restrictions, the number of shares of common stock and the
dates when the remainder these shares will become freely tradeable in the market
is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- --------------------------------------------------------
<S> <C>
8,790,991 Within six months from the date of this prospectus
535,450 Between six and twelve months from the date of
this prospectus
</TABLE>
As of the date of this joint proxy statement/prospectus, we have reserved an
aggregate of 3,133,402 shares of common stock issuable upon the exercise of
outstanding warrants and convertible or exchangeable securities. Netgateway has
filed a registration statement to register for issuance and resale 9,877,002
shares of common stock reserved for issuance under our existing stock option
plans, warrants and stock grants. Shares issued upon the exercise of stock
options granted under 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.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Netgateway and Galaxy Enterprises have each made forward-looking statements
in this document, all of which are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future business success or financial results. The forward-looking statements
include, but are not limited to, statements as to expectations regarding:
- future revenue opportunities;
- the integration of Galaxy Enterprises;
- the development of the business-to-business eCommerce market and the
future growth of our customer base;
- future expense levels, including research and development, selling,
general and administrative expenses, and amortization of goodwill and
other tangibles;
- strategic relationships and distribution relationships;
- future capital needs;
- the emergence of new technologies;
- expansion of marketing and sales forces;
- investment in new product development and enhancements;
- expansion into new markets;
- new distribution and customer acquisition models;
- acquisition of complementary products, technologies and businesses; and
- future financial pronouncements.
When Netgateway or Galaxy Enterprises use words like "believe," "expect,"
"anticipate" or similar words or terms, they are making forward-looking
statements.
You should note that an investment in Netgateway common stock involves risks
and uncertainties that could affect our future business success or financial
results. Netgateway actual results could differ materially from those
anticipated expressly or implicitly in these forward-looking statements as a
result of many factors, including those set forth in "Risk Factors" and
elsewhere in this document.
Netgateway believes that it is important to communicate its expectations to
its investors. However, there may be events in the future that Netgateway is not
able to predict accurately or over which Netgateway has no control. You should
be aware that the occurrence of the events described in the risk factors and
elsewhere in this document could materially and adversely affect the business,
financial condition and operating results of Netgateway. Netgateway undertakes
no obligation to publicly update any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
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THE NETGATEWAY, INC. SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
The special meeting will be held on June 21, 2000, at 9:00 a.m., California
time, at the Hilton Hotel--Long Beach, Two World Trade Center, Long Beach,
California. This joint proxy statement/ prospectus is being furnished in
connection with the solicitation by the Netgateway board of directors of proxies
to be used at the special meeting and at all adjournments and postponements of
the special meeting.
MATTERS TO BE CONSIDERED AT SPECIAL MEETING
At the special meeting, stockholders of Netgateway will be asked to approve
the merger and to transact such other business as may properly come before the
special meeting or any postponements or adjournments thereof.
RECORD DATE FOR VOTING ON THE MERGER; STOCKHOLDERS ENTITLED TO VOTE
Only stockholders of record of Netgateway common stock at the close of
business on May 18, 2000 are entitled to notice of and to vote at the special
meeting. As of the close of business on that date, there were 17,683,043 shares
of Netgateway common stock outstanding and entitled to vote, held of record by
380 stockholders. A majority of those shares, present in person or represented
by proxy, will constitute a quorum for the transaction of business. If a quorum
is not present, it is expected that the special meeting will be adjourned or
postponed to solicit additional proxies. Each Netgateway stockholder is entitled
to one vote for each share of Netgateway common stock held as of the record
date.
VOTING AND REVOCATION OF PROXIES
The proxy accompanying this document is solicited on behalf of Netgateway's
board of directors. Stockholders are requested to complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Netgateway. If your shares are held in "street name" by
your broker, your broker will vote your shares for you only if you provide
instructions on how to vote. Your broker will provide directions regarding how
to instruct your broker to vote your shares. All properly executed proxies
received by Netgateway prior to the special meeting that are not revoked will be
voted at the special meeting in accordance with the instructions indicated on
the proxies or, if no direction is indicated, to approve the merger.
Netgateway's board of directors does not presently intend to bring any other
business before the special meeting and, so far as is known as of the date of
this document, no other matters are to be brought before the special meeting.
Any other business that properly comes before the special meeting, will be voted
in accordance with the judgment of the persons voting such proxies.
A Netgateway stockholder who has given a proxy may revoke it at any time
before it is exercised at the special meeting by (1) delivering a written
notice, dated later than the date of the proxy, stating that the proxy is
revoked, (2) signing and delivering a proxy relating to the same shares with a
later date than the date of the previous proxy or (3) attending the special
meeting and voting in person. Attendance at the special meeting does not in
itself constitute the revocation of a proxy. Any written notice of revocation or
subsequent proxy should be sent to Netgateway, Inc., 300 Oceangate, 5th Floor,
Long Beach, California 90802, Attention: Secretary, or hand delivered to the
secretary of Netgateway at or before the taking of the vote at the special
meeting. Stockholders that have instructed a broker to vote their shares must
follow directions received from that broker in order to change their vote or to
vote at the special meeting.
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STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER
Approval of the merger by Netgateway's stockholders is required by The
Nasdaq National Market rules because the number of shares of Netgateway common
stock to be issued in the merger potentially represents more than 20% of
Netgateway's outstanding shares of common stock. Approval requires the
affirmative vote of the holders of a majority of the shares of Netgateway common
stock constituting a quorum at the Netgateway special meeting, by attendance in
person or by proxy.
BOARD RECOMMENDATION
NETGATEWAY'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AND BELIEVES THAT
THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN THE
BEST INTERESTS OF, NETGATEWAY AND ITS STOCKHOLDERS AND THEREFORE RECOMMENDS THAT
THE HOLDERS OF NETGATEWAY COMMON STOCK VOTE FOR APPROVAL OF THE MERGER.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF NETGATEWAY. ACCORDINGLY, NETGATEWAY'S STOCKHOLDERS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT
AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
THE GALAXY ENTERPRISES, INC. SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
The special meeting will be held on June 21, 2000, at 10:00 a.m., Utah time,
at the offices of Galaxy Enterprises, 754 E. Technology Avenue, Orem, Utah. This
joint proxy statement/prospectus is being furnished in connection with the
solicitation by the Galaxy Enterprises board of directors of proxies to be used
at the special meeting and at all adjournments and postponements of the special
meeting.
MATTERS TO BE CONSIDERED AT SPECIAL MEETING
At the special meeting, stockholders of Galaxy Enterprises will be asked to
approve the merger and to transact such other business as may properly come
before the special meeting or any postponements or adjournments thereof.
RECORD DATE FOR VOTING ON THE MERGER; STOCKHOLDERS ENTITLED TO VOTE
Only stockholders of record of Galaxy Enterprises common stock at the close
of business on May 18, 2000 are entitled to notice of and to vote at the special
meeting. As of the close of business on that date, there were 6,218,449 shares
of Galaxy Enterprises common stock outstanding and entitled to vote, held of
record by 145 stockholders. A majority of those shares, present in person or
represented by proxy, will constitute a quorum for the transaction of business.
If a quorum is not present, it is expected that the special meeting will be
adjourned or postponed to solicit additional proxies. Each Galaxy Enterprises
stockholder is entitled to one vote for each share of Galaxy Enterprises common
stock held as of the record date.
VOTING AND REVOCATION OF PROXIES
The proxy accompanying this document is solicited on behalf of Galaxy
Enterprises' board of directors. Stockholders are requested to complete, date
and sign the accompanying proxy and promptly return it in the accompanying
envelope or otherwise mail it to Galaxy Enterprises. If your shares are held in
"street name" by your broker, your broker will vote your shares for you only if
you provide instructions on how to vote. Your broker will provide directions
regarding how to instruct your broker to vote your shares. All properly executed
proxies received by Galaxy Enterprises prior to the special
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meeting that are not revoked will be voted at the special meeting in accordance
with the instructions indicated on the proxies or, if no direction is indicated,
to approve the merger.
Galaxy Enterprises' board of directors does not presently intend to bring
any other business before the special meeting and, so far as is known as of the
date of this document, no other matters are to be brought before the special
meeting. Any other business that properly comes before the special meeting, will
be voted in accordance with the judgment of the persons voting such proxies.
A Galaxy Enterprises stockholder who has given a proxy may revoke it at any
time before it is exercised at the special meeting by (1) delivering a written
notice, dated later than the date of the proxy, stating that the proxy is
revoked, (2) signing and delivering a proxy relating to the same shares with a
later date than the date of the previous proxy or (3) attending the special
meeting and voting in person. Attendance at the special meeting does not in
itself constitute the revocation of a proxy. Any written notice of revocation or
subsequent proxy should be sent to Galaxy Enterprises Inc., 754 E. Technology
Avenue, Orem, Utah 84097, Attention: Secretary, or hand delivered to the
secretary of Galaxy Enterprises at or before the taking of the vote at the
special meeting. Stockholders that have instructed a broker to vote their shares
must follow directions received from that broker in order to change their vote
or to vote at the special meeting.
STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER
Approval of the merger by Galaxy Enterprises' stockholders is required by
the Nevada General Corporation Law. Such approval requires the affirmative vote
of the holders of a majority of the shares of Galaxy Enterprises common stock
outstanding and entitled to vote at the special meeting. Abstentions and broker
non-votes are not affirmative votes and will have the same effect as votes
against approval of the merger. ACCORDINGLY, THE REQUIRED VOTE OF THE
STOCKHOLDERS OF GALAXY ENTERPRISES IS BASED UPON THE NUMBER OF OUTSTANDING
SHARES OF GALAXY ENTERPRISES COMMON STOCK RATHER THAN UPON THE SHARES ACTUALLY
VOTED IN PERSON OR BY PROXY AT THE SPECIAL MEETING. THEREFORE, IF THE HOLDERS OF
ANY SUCH SHARES FAIL TO EITHER SUBMIT A PROXY OR VOTE IN PERSON AT THE SPECIAL
MEETING, SUCH FAILURE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF
THE MERGER.
THE ACTION PROPOSED IN THIS JOINT PROXY STATEMENT/PROSPECTUS CANNOT BE VOTED
ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS' SPECIFIC
INSTRUCTIONS. ACCORDINGLY, YOU ARE URGED TO RETURN THE ENCLOSED PROXY CARD
MARKED TO INDICATE YOUR VOTE.
As of May 18, 2000, directors, executive officers and affiliates of Galaxy
Enterprises as a group beneficially owned approximately 16% of the outstanding
shares of Galaxy Enterprises common stock. On the day the merger agreement was
signed, two stockholders of Galaxy Enterprises who collectively own
approximately 19% of Galaxy Enterprises' outstanding common stock entered into
voting agreements with Netgateway, agreeing to vote their shares of Galaxy
Enterprises common stock in favor of the merger and granting Netgateway a proxy
to vote all of their shares of Galaxy Enterprises stock for approval of the
merger. As of the record date and the date of this joint proxy statement/
prospectus, Netgateway beneficially owns 980,213 shares of Galaxy Enterprises
common stock pursuant to an option to purchase shares owned by John J. Poelman.
BOARD RECOMMENDATION
GALAXY ENTERPRISES' BOARD OF DIRECTORS HAS APPROVED THE MERGER AND BELIEVES
THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN
THE BEST INTERESTS OF, GALAXY ENTERPRISES AND ITS STOCKHOLDERS AND THEREFORE
RECOMMENDS THAT GALAXY ENTERPRISES STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF GALAXY ENTERPRISES. ACCORDINGLY, GALAXY ENTERPRISES'
STOCKHOLDERS ARE URGED TO READ AND CAREFULLY
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CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT AND TO COMPLETE, DATE, SIGN
AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
SOLICITATION OF PROXIES; EXPENSES
All expenses of Galaxy Enterprises solicitation of proxies will be borne by
Galaxy Enterprises. The cost of preparing and mailing this joint proxy
statement/prospectus to Galaxy Enterprises stockholders will be shared equally
by Galaxy Enterprises and Netgateway. In addition to solicitation by the use of
the mails, proxies may be solicited from Galaxy Enterprises stockholders by
directors, officers and employees of Galaxy Enterprises in person or by
telephone, facsimile or other means of communication. These directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with this solicitation.
Arrangements will also be made with brokerage houses, custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of shares held of record by such brokerage houses, custodians, nominees and
fiduciaries. Galaxy Enterprises will reimburse these brokerage houses,
custodians, nominees and fiduciaries for their reasonable expenses incurred in
forwarding such materials.
YOU SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARD. A
transmittal form with instructions for the surrender of your Galaxy Enterprises
stock certificates will be mailed to you as soon as practicable after completion
of the merger. For more information regarding the procedures for exchanging your
Galaxy Enterprises stock certificates for Netgateway stock certificates, please
see the section entitled "The Merger Agreement--Procedures for Exchanging Stock
Certificates" on page 52 of this joint proxy statement/prospectus.
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THE MERGER
THIS SECTION OF THE JOINT PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN
ASPECTS OF THE PROPOSED MERGER THAT WE CONSIDER IMPORTANT. THE DISCUSSION OF THE
MERGER IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE DESCRIPTION OF THE
PRINCIPAL TERMS OF THE MERGER AGREEMENT ARE ONLY SUMMARIES OF THE MATERIAL TERMS
OF THE PROPOSED MERGER. YOU CAN OBTAIN A MORE COMPLETE UNDERSTANDING OF THE
MERGER BY READING THIS ENTIRE JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING THE
MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS DOCUMENT AS APPENDIX A AND
CERTAIN PROVISIONS OF NEVADA LAW RELATING TO THE RIGHTS OF DISSENTING
STOCKHOLDERS, A COPY OF WHICH IS ATTACHED HERETO AS APPENDIX B. YOU ARE
ENCOURAGED TO READ THE MERGER AGREEMENT AND THE OTHER APPENDICES TO THIS
DOCUMENT IN THEIR ENTIRETY.
BACKGROUND OF THE MERGER
In August 1999, John Wendel, a former employee of Netgateway, contacted
John J. Poelman, Galaxy Enterprises' chief executive officer, to introduce
himself and Netgateway to Galaxy Enterprises. Their meeting did not include the
exchange of confidential information, lead to any further discussions or include
a proposal for an acquisition of Galaxy Enterprises by Netgateway. The parties
had no further direct or indirect contact with respect to a merger or other
business combination until on or about November 18, 1999.
On November 12, 1999, Donald Danks, a stockholder of Netgateway, contacted
Red Rock Capital LLC on behalf of Netgateway to ask Red Rock Capital to contact
Galaxy Enterprises to inquire if Galaxy Enterprises had any interest in
exploring whether Galaxy Enterprises and Netgateway could better execute their
respective business plans by working together through a merger, joint venture or
other relationship. Thereafter, Kirby Cochran of Red Rock Capital contacted Mr.
Poelman to determine if Galaxy Enterprises had any interest in exploring whether
Netgateway and Galaxy Enterprises could better execute their respective business
plans by working together through a merger, joint venture or other relationship.
Messrs. Poelman and Cochran met on November 18, 1999. At that meeting,
Mr. Poelman indicated that Galaxy Enterprises was interested in pursuing this
possibility. Mr. Cochran reported Galaxy Enterprises' interest to Mr. Danks.
Between November 18, 1999 and December 3, 1999, Mr. Poelman and Mr. Cochran
spoke telephonically on several occasions with respect to the possible terms of
such a transaction. The management of Netgateway also met to discuss the
possible form and terms of a business relationship between Netgateway and Galaxy
Enterprises.
On December 3, 1999, Alex Chaffetz, Netgateway's senior
vice-president--cable, and the head of its CableCommerce division, flew to Orem,
Utah to meet with Mr. Poelman and Frank Heyman, Galaxy Enterprises' chief
financial officer, at the offices of Galaxy Enterprises, to begin discussions
concerning a potential business combination between Netgateway and Galaxy
Enterprises. The meetings began in the morning and lasted throughout the day. It
was Mr. Chaffetz's intent to gather as much information as possible about Galaxy
Enterprises' business so that he could then review it with Netgateway
executives, and a decision could be made as to whether or not a business
combination was feasible. After Mr. Chaffetz's visit, he reported his findings
to Netgateway's management. Management considered and evaluated the benefits and
risks attendant to a business combination with Galaxy Enterprises.
On December 6, 1999, at approximately 11 a.m., California time,
Mr. Chaffetz called Mr. Poelman to inform him that Netgateway was interested in
moving forward with discussions concerning a possible business combination, and
that Roy W. Camblin III and Donald M. Corliss, Jr., Netgateway's chief executive
officer and president, respectively, would contact Mr. Poelman to continue
discussions.
On December 6, 1999, at approximately 2 p.m., California time,
Messrs. Camblin and Corliss initiated a call with Mr. Poelman to discuss a
possible business transaction and the terms of a letter of intent. The parties
also scheduled a meeting in Orem, Utah for the following morning. Thereafter,
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Craig S. Gatarz, Netgateway's general counsel, drafted a letter of intent for
submission to Mr. Poelman the following day.
On December 7, 1999, at 10:00 a.m., Utah time, Messrs. Danks, Camblin and
Corliss met in Orem, Utah with Mr. Poelman and various other Galaxy Enterprises
employees and consultants to discuss Galaxy Enterprises' business, Netgateway's
business, the terms of a proposed business combination and the proposed letter
of intent. The meeting lasted all day.
From December 8 through December 11, 2000, negotiations between the parties
concerning the letter of intent continued in earnest. There were several
telephone conferences and meetings between the parties and their respective
financial and legal advisors. The letter of intent was executed on December 12,
1999.
On December 13, 1999, the parties issued a press release announcing the
signing of the letter of intent.
During the week of December 13, 1999, a team of Netgateway management
representatives and employees, an attorney from Nida & Maloney and a
representative of KPMG met at Galaxy Enterprises' offices to begin a due
diligence review of Galaxy Enterprises. This due diligence review continued
through the signing of the merger agreement on March 10, 2000.
On December 13, 1999, Messrs. Corliss and Gatarz flew to Salt Lake City to
begin negotiations on a definitive merger agreement with Mr. Poelman and his
attorneys at the offices of Parsons Biehle & Latimer. They were joined on
December 14, 1999 by C. Thomas Hopkins, Netgateway's outside counsel, and by
Mr. Camblin later in the day.
On December 13, 1999, Netgateway retained Roth Capital Partners to act as
its financial advisor in connection with the merger.
On December 15, 1999, the board of directors of Netgateway met to consider
the merger. At this meeting, representatives of Nida & Maloney discussed with
the Netgateway board their fiduciary duties as directors under Delaware law with
respect to the merger and other legal matters. In addition, they made a
presentation to the board of directors concerning the status of negotiations
with Galaxy Enterprises, the terms of the proposed merger agreement and the
financial performance of Galaxy Enterprises during 1999. No action was taken at
this meeting to vote on or approve the merger.
On January 5, 2000, Netgateway's board of directors agreed to provide up to
$300,000 of bridge financing to Galaxy Enterprises to allow Galaxy Enterprises
to fund costs associated with the merger and for working capital. On January 17,
2000 Galaxy Enterprises retained Houlihan Lokey Howard & Zukin as its financial
advisor. On February 4, 2000, Netgateway's board of directors agreed to provide
an additional $150,000 of bridge financing to fund costs associated with the
merger and for working capital.
After the letter of intent was signed, negotiations and discussions
regarding the transaction continued on a daily basis between the parties, their
counsel and other professional advisors. The issues included:
- providing a fiduciary out in the merger agreement for Galaxy Enterprises;
- the amount of the termination fee and circumstances under which it would
be payable;
- the elimination of Netgateway's requirement that the former stockholders
of Galaxy Enterprises indemnify Netgateway for breaches of representations
and warranties in the merger agreement by Galaxy Enterprises;
- the treatment of employee stock options;
- the termination of management's existing employment agreements and
replacement of those agreements with agreements acceptable to Netgateway;
- Netgateway's requirement that Mr. Poelman and Sue Ann Cochran agree to
vote in favor of the merger; and
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- Netgateway's requirement that Mr. Poelman grant Netgateway an option to
purchase his shares of Galaxy Enterprises common stock in certain
circumstances.
On January 28, 2000, the board of directors of Galaxy Enterprises met to
consider the merger. At this meeting, representatives of Parsons, Behle &
Latimer discussed with the Galaxy Enterprises board their fiduciary duties as
directors under Nevada law with respect to the merger and other legal matters
and the board received presentations concerning the status of negotiations with
Netgateway, the terms of the proposed merger agreement and the financial
performance of Galaxy Enterprises during 1999. No action was taken at this
meeting to vote on or approve the merger.
On February 18, 2000, the board of directors of Galaxy Enterprises met to
receive a presentation from representatives of Houlihan Lokey concerning the
fairness of the merger from a financial point of view. At this meeting, Houlihan
Lokey delivered its oral opinion to the Galaxy Enterprises board of directors,
subsequently confirmed in writing, that as of that date, and based on the
assumptions made, matters considered and the scope of review as set forth in
such letter, the consideration to be received in the merger was fair to the
public stockholders of Galaxy Enterprises from a financial point of view.
On February 16, 2000, Mr. Poelman and Darryl Clark conducted a due diligence
review of Netgateway at Netgateway's offices. This review included meetings with
Messrs. Freadhoff, Camblin and Corliss of Netgateway.
On March 2, 2000, the board of directors of Netgateway met to consider the
merger. At this meeting, Roth Capital delivered its oral opinion to the
Netgateway board of directors, subsequently confirmed in writing, that as of
that date, and based on the assumptions made, matters considered and the scope
of review as set forth in such letter, the exchange ratio in the merger was fair
to the stockholders of Netgateway from a financial point of view. At the
meeting, the board also reviewed developments in the negotiation of, and open
issues on, the merger agreement as well as the reasons for the merger. At this
meeting, the board approved the merger and authorized the execution of the
merger agreement subject to the satisfactory resolution of the open issues.
On March 8, 2000, the board of directors of Galaxy Enterprises met to
consider the merger. At the meeting, the board reviewed developments in the
negotiation of, and open issues on, the merger agreement as well as the reasons
for the merger. The board members were also informed that Houlihan Lokey
continued to believe that the consideration to be received in the merger was
fair to the public stockholders of Galaxy Enterprises from a financial point of
view. At this meeting, the board approved the merger and authorized the
execution of the merger agreement subject to the satisfactory resolution of the
open issues.
The merger agreement was signed on March 10, 2000.
NETGATEWAY'S REASONS FOR THE MERGER
Netgateway's board of directors has determined that the terms of the merger
and the merger agreement are fair to, and in the best interests of, Netgateway
and its stockholders. Accordingly, Netgateway's board of directors has approved
the merger agreement and the consummation of the merger and recommends that you
vote FOR approval of the merger agreement and the merger.
In reaching its decision, Netgateway's board of directors identified several
potential benefits of the merger, the most important of which included:
- Netgateway's stockholders will have the opportunity to participate in the
potential growth of the combined company after the merger.
- Netgateway will gain valuable expertise in the Internet marketing and
training workshop industry which will be a key component to Netgateway's
continued growth and development.
- Being part of a combined company will reduce the risks of continuing as a
relatively small independent company in an industry that is rapidly
consolidating and increasingly competitive.
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- Combining with Galaxy Enterprises will allow Netgateway to share synergies
with respect to business services, advertising and eCommerce relationships
in addition to opportunities available to Netgateway.
- Combining with Galaxy Enterprises will give Netgateway the opportunity to
expand the channels of distribution for its products, particularly with
respect to its CableCommerce products and offerings.
Netgateway's Board considered a number of potentially negative factors in
its deliberation of the merger, including:
- The risk that the synergies and opportunities in the merger will not be
achieved.
- The limited operating history of Galaxy Enterprises.
- The risk that the merger will not be completed and the potential adverse
effects of the public announcement of the merger on:
- Netgateway's sales and operating results;
- Netgateway's ability to attract and retain key employees;
- the progress of certain strategic initiatives; and
- Netgateway's overall competitive position.
- The risk that key technical, sales and management personnel might not
remain employees of Netgateway or Galaxy Enterprises after the merger
closes.
- The transaction costs expected to be incurred in connection with the
merger.
- The other risks described under "Risk Factors--Risks Related to the
Merger" beginning on page 13.
Netgateway's board of directors consulted with Netgateway's senior
management, as well as its legal counsel, independent accountants and financial
advisers, in reaching its decision to approve the merger. Among the factors
considered by Netgateway's board in its deliberations were the following:
- Historical information concerning Netgateway's and Galaxy Enterprises'
respective financial performance, results of operations, assets,
liabilities, operations, technology, brand development, management and
competitive position, including public reports covering the most recent
fiscal year and fiscal quarter for each company filed with the SEC.
- Netgateway's management's view of the financial condition, results of
operations, assets, liabilities, businesses and prospects of Netgateway
and Galaxy Enterprises after giving effect to the merger.
- Current market conditions and historical trading information with respect
to Netgateway and Galaxy Enterprises common stock.
- Comparable merger transactions in Netgateway's market and alternatives to
the transaction proposed by Galaxy Enterprises available to Netgateway.
- Current industry, market and economic conditions.
- The impact the merger might be expected to have on customers, suppliers
and employees.
- The possibility of other strategic alternatives to the merger for
enhancing stockholder value.
- The opinion of Roth Capital Partners dated March 2, 2000, including their
related financial analyses, to the effect that, as of the date of the
merger agreement and based upon and subject to the facts and assumptions
set forth in their opinion (as described more fully in the text of the
entire opinion attached as Appendix C to this document), the consideration
to be paid in the merger by Netgateway was fair from a financial point of
view.
After due consideration, Netgateway's board of directors concluded that the
risks associated with the proposed merger were outweighed by the potential
benefits of the merger.
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Netgateway's board of directors does not intend the foregoing discussion of
information and factors to be exhaustive but believes the discussion includes
all of the material factors that it considered. In view of the complexity and
wide variety of information and factors, both positive and negative, that it
considered, Netgateway's board of directors did not find it practical to
quantify or otherwise assign relative or specific weights to the specific
factors it considered in making its determination. The determination was made
after taking into consideration all of the factors as a whole. In addition,
individual members of the Netgateway board may have given different weights to
the different factors.
BOARD RECOMMENDATION OF NETGATEWAY'S BOARD OF DIRECTORS
NETGATEWAY'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AND BELIEVES THAT
THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN THE
BEST INTERESTS OF, NETGATEWAY AND ITS STOCKHOLDERS AND THEREFORE RECOMMENDS THAT
NETGATEWAY'S STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER.
GALAXY ENTERPRISES' REASONS FOR THE MERGER
Galaxy Enterprises' board of directors on March 8, 2000 determined that the
terms of the merger and the merger agreement are fair to, and in the best
interests of, Galaxy Enterprises and its stockholders. Accordingly, Galaxy
Enterprises' board of directors has approved the merger agreement and the
consummation of the merger and recommends that you vote FOR approval of the
merger agreement and the merger.
In reaching its decision, Galaxy Enterprises' board of directors identified
several potential benefits of the merger, the most important of which included:
- Galaxy Enterprises' stockholders will have the opportunity to participate
in the potential growth of the combined company after the merger.
- The balance of the benefits of being part of a combined company and the
risks of continuing to be an independent company, especially in light of
trends with respect to consolidation and competition in the Internet and
eCommerce industries and particularly in light of Galaxy Enterprises
relatively small and increasingly, in relative terms, smaller size.
- Increasing the financial resources available to Galaxy Enterprises and
allowing it to share synergies with respect to business services,
advertising and eCommerce relationships in addition to opportunities
available to Galaxy Enterprises.
- Giving Galaxy Enterprises the opportunity to expand its channels of
distribution of its products by giving it access to Netgateway's Internet
Commerce Center infrastructure and Netgateway's existing cable and other
eCommerce business relationships. Galaxy Enterprises' board of directors
considered favorably that the former Galaxy Enterprises stockholders, as
stockholders of Netgateway, would share these synergies and opportunities.
- The anticipated exchange ratio in the merger represented a premium of
approximately 217% over the average closing price for Galaxy Enterprises
common stock over the 20-day trading period ending on December 10, 1999,
the last trading day prior to the day the letter of intent between Galaxy
Enterprises and Netgateway was publicly announced.
- Galaxy Enterprises' stockholders will be afforded substantially increased
trading liquidity for their investment.
Galaxy Enterprises' board of directors considered a number of potentially
negative factors in its deliberation of the merger, including:
- The risk to Galaxy Enterprises' stockholders that the value to be received
in the merger could decline significantly due to the fixed exchange ratio.
- The risk that the synergies and opportunities in the merger will not be
achieved.
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- The limited operating history of Netgateway.
- The risk that the merger will not be completed, including the
circumstances under which Netgateway could terminate the merger agreement
and the circumstances under which Galaxy Enterprises could be required to
pay a termination fee to Netgateway.
- The potential adverse effects of the public announcement of the merger on:
- Galaxy Enterprises' sales and operating results;
- Galaxy Enterprises' ability to attract and retain key employees;
- the progress of certain strategic initiatives; and
- Galaxy Enterprises' overall competitive position.
- The risk that key technical, sales and management personnel might not
remain employees of Netgateway or Galaxy Enterprises after the merger
closes.
- The loss of control over the future operations of Galaxy Enterprises
following the merger.
- The impact of the loss of Galaxy Enterprises' status as an independent
company on Galaxy Enterprises' stockholders, employees, Web site visitors,
business services clients, advertisers and sponsors.
- The transaction costs expected to be incurred in connection with the
merger.
- The other risks described under "Risk Factors--Risks Related to the
Merger" beginning on page 13.
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Galaxy Enterprises' board of directors consulted with Galaxy Enterprises'
senior management, as well as its legal counsel, independent accountants and
financial advisers, in reaching its decision to approve the merger. Among the
factors considered by Galaxy Enterprises' board of directors in its
deliberations were the following:
- Historical information concerning Netgateway's and Galaxy Enterprises'
respective financial performance, results of operations, assets,
liabilities, operations, technology, brand development, management and
competitive position, including public reports covering the most recent
fiscal year and fiscal quarter for each company filed with the SEC.
- Galaxy Enterprises' management's view of the financial condition, results
of operations, assets, liabilities, businesses and prospects of Netgateway
and Galaxy Enterprises after giving effect to the merger.
- Current market conditions and historical trading information with respect
to Netgateway and Galaxy Enterprises common stock.
- Comparable merger transactions in Galaxy Enterprises' market and strategic
alternatives to the transaction proposed by Netgateway available to Galaxy
Enterprises.
- The opinion of Houlihan Lokey Howard and Zukin Financial Advisors, Inc.
dated March 10, 2000, including their related financial analyses, to the
effect that, as of the date of the merger agreement and based upon and
subject to the facts and assumptions set forth in their opinion (as
described more fully in the text of the entire opinion attached as
Appendix D to this document) the consideration to be received in the
merger by Galaxy Enterprises' public stockholders was fair to them from a
financial point of view.
- The high costs that Galaxy Enterprises had experienced in acquiring
customers and the long term viability of certain of those methods and the
experience to date with other methods of acquiring customers.
- The difficulties Galaxy Enterprises experienced in attracting needed
capital.
- The expected tax-free treatment to Galaxy Enterprises' stockholders.
- The ability of Galaxy Enterprises' board of directors to enter into
discussions with another party in response to an unsolicited superior
offer to the merger if Galaxy Enterprises' board of directors believed in
good faith, after consultation with its legal counsel, that such action
was required in order to comply with its fiduciary obligations.
- Galaxy Enterprise's prospects if it were to continue as an independent
company.
- Current industry, market and economic conditions.
- The impact the merger might be expected to have on customers, suppliers
and employees.
- The principal terms of the merger agreement.
After due consideration, Galaxy Enterprises' board of directors concluded
that the risks associated with the proposed merger were outweighed by the
potential benefits of the merger.
Between March 8, 2000, the day the board of directors of Galaxy Enterprises
voted to approve the merger and recommend it to its stockholders, and May 23,
2000, the price of Netgateway's common stock has fallen from $9.19 to $2.13.
During this period it has also become increasingly difficult for companies such
as Galaxy Enterprises and Netgateway to obtain new financing. Galaxy Enterprises
has not requested an update to the fairness opinion originally received by it on
March 10, 2000, which opinion does not reflect the impact of these developments
which occurred after the date of the opinion. Accordingly, undue reliance should
not be placed on the fairness opinion. Although the price of Netgateway's common
stock has declined significantly and the market for equity financings is not as
favorable as it was when the merger was approved, the board of directors of
Galaxy Enterprises continues to believe that the merger is fair to and in the
best interests of Galaxy Enterprises and its
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stockholders for the reasons noted above. Stockholders are urged to consider
carefully all factors before returning their proxy.
Galaxy Enterprises' board of directors does not intend the foregoing
discussion of information and factors to be exhaustive but believes the
discussion to include all of the material factors that it considered. In view of
the complexity and wide variety of information and factors, both positive and
negative, that it considered, Galaxy Enterprises' board of directors did not
find it practical to quantify or otherwise assign relative or specific weights
to the specific factors it considered in making its determination. The
determination was made after taking into consideration all of the factors as a
whole. In addition, individual members of Galaxy Enterprises' board of directors
may have given different weights to the different factors.
BOARD RECOMMENDATION OF GALAXY ENTERPRISES BOARD OF DIRECTORS
GALAXY ENTERPRISES' BOARD OF DIRECTORS HAS APPROVED THE MERGER AND BELIEVES
THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN
THE BEST INTERESTS OF, GALAXY ENTERPRISES AND ITS STOCKHOLDERS AND THEREFORE
RECOMMENDS THAT GALAXY ENTERPRISES STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER.
OPINION OF ROTH CAPITAL PARTNERS
Netgateway engaged Roth Capital Partners to render an opinion as to the
fairness, from a financial point of view, of the consideration to be received in
the merger, to Netgateway's stockholders. Roth Capital is a nationally
recognized investment banking firm that provides financial advisory services in
connection with mergers and acquisitions, leveraged buyouts, business valuations
for a variety of regulatory and planning purposes, recapitalizations, financial
restructurings, and private placements of debt and equity securities.
Netgateway agreed to pay Roth Capital a fee of $210,000 for its preparation
and delivery of the fairness opinion. No portion of Roth Capital's fee is
contingent upon the successful completion of the merger. Netgateway retained
Roth Capital solely to deliver its fairness opinion. Netgateway agreed to
indemnify Roth Capital and its affiliates against certain liabilities, including
liabilities under federal securities laws that arise out of the engagement of
Roth Capital. Netgateway's board of directors did not limit Roth Capital in any
way in the investigations it made or the procedures it followed in rendering its
opinion.
The full text of Roth Capital's opinion, which sets forth the assumptions
made, general procedures followed, factors considered and limitations on the
review undertaken by Roth Capital in rendering its opinion is attached as
Appendix C and is incorporated herein by reference. We urge you to read the
opinion in its entirety.
Roth Capital did not, and was not requested by Netgateway to, make any
recommendations as to the form or amount of consideration to be paid by
Netgateway, the public market values or realizable value of Netgateway's common
stock given as consideration in the merger or the prices at which Netgateway's
common stock may trade in the future following the merger, and does not express
any opinion as to the fairness of any aspect of the merger not expressly
addressed in its fairness opinion.
In arriving at its opinion, among other things, Roth Capital:
- reviewed certain interim reports of Netgateway and Galaxy Enterprises to
their respective stockholders and Quarterly Reports on Form 10-Q of
Netgateway and Galaxy Enterprises;
- reviewed certain internal financial analyses and forecasts for Netgateway
and Galaxy Enterprises prepared by their respective management;
- reviewed certain publicly available documents relating to Netgateway and
Galaxy Enterprises;
- reviewed internal budgets and projections, marketing materials and press
releases provided by Netgateway;
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- reviewed a draft copy of the agreement and plan of merger in the form
provided by Netgateway;
- held discussions with members of the senior management of Netgateway and
Galaxy Enterprises regarding the strategic rationale for, and potential
benefits of, the transaction contemplated by the agreement and plan of
merger, and the past and current business operations, financial condition
and future prospects of their respective companies and of the combined
operations of Netgateway and Galaxy Enterprises;
- reviewed available research reports for companies that it determined to be
comparable to Netgateway and Galaxy Enterprises;
- reviewed the financial terms of other recent business combinations;
- reviewed publicly available data and information for companies that it
deemed to be comparable to Netgateway and Galaxy Enterprises; and
- conducted such other financial analysis as Roth Capital deemed
appropriate.
OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN
Galaxy Enterprises engaged Houlihan Lokey to render an opinion as to the
fairness, from a financial point of view, of the consideration to be received in
the merger, to Galaxy Enterprises' public stockholders. Houlihan Lokey is a
nationally recognized investment banking firm that provides financial advisory
services in connection with mergers and acquisitions, leveraged buyouts,
business valuations for a variety of regulatory and planning purposes,
recapitalizations, financial restructurings, and private placements of debt and
equity securities. Galaxy Enterprises selected Houlihan Lokey as its financial
advisor because of its reputation and experience. At the meeting of Galaxy
Enterprises board of directors on February 18, 2000, Houlihan Lokey presented
its analysis and valuation methodology and an oral opinion with respect to the
merger. Houlihan Lokey delivered its written opinion on March 10, 2000.
Galaxy Enterprises agreed to pay Houlihan Lokey a fee of $160,000 for its
preparation and delivery of the fairness opinion. No portion of Houlihan Lokey's
fee is contingent upon the successful completion of the merger. Galaxy
Enterprises retained Houlihan Lokey solely to deliver its fairness opinion.
Galaxy Enterprises agreed to indemnify Houlihan Lokey and its affiliates against
certain liabilities, including liabilities under federal securities laws that
arise out of the engagement of Houlihan Lokey. Galaxy Enterprises' board of
directors did not limit Houlihan Lokey in any way in the investigations it made
or the procedures it followed in rendering its opinion. Houlihan Lokey was not
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of Galaxy Enterprises.
The full text of Houlihan Lokey's opinion, which sets forth the assumptions
made, general procedures followed, factors considered and limitations on the
review undertaken by Houlihan Lokey in rendering its opinion is attached as
Appendix D and is incorporated herein by reference. We urge you to read the
opinion in its entirety.
Houlihan Lokey did not, and was not requested by Galaxy Enterprises to, make
any recommendations as to the form or amount of consideration to be received by
the Galaxy Enterprises public stockholders, the public market values or
realizable value of Galaxy Enterprises' common stock given as consideration in
the merger or the prices at which Netgateway's common stock may trade in the
future following the merger, and does not express any opinion as to the fairness
of any aspect of the merger not expressly addressed in its fairness opinion.
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In arriving at its opinion, among other things, Houlihan Lokey:
- reviewed Galaxy Enterprises' annual report on Form 10-KSB for the fiscal
year ended December 31, 1998 and quarterly report on Form 10-QSB for the
period ended September 30, 1999;
- reviewed Netgateway's Form S-1 dated November 18, 1999;
- reviewed the draft Agreement and Plan of Merger by and among
Netgateway, Inc., Galaxy Acquisition Corp. and Galaxy Enterprises, Inc.
dated as of March 8, 2000;
- reviewed the draft Registration Statement of Netgateway on Form S-4 dated
February , 2000;
- met with certain members of the senior management of Galaxy Enterprises
and Netgateway to discuss the merger, the operations, financial condition,
future prospects and projected operations and performance of Galaxy
Enterprises and Netgateway;
- visited the headquarters and operating facilities of both Galaxy
Enterprises and Netgateway in Orem, Utah and Long Beach, California,
respectively;
- reviewed the Galaxy Enterprises Business Plan dated February 16, 1999;
- reviewed financial projections for Galaxy Enterprises prepared by CSK
Securities Research and approved by Galaxy Enterprises' management for the
years ending December 31, 2001;
- reviewed Netgateway's pro-forma projections provided by management for the
two years ending December 31, 2002;
- analyzed historical stock performance and trading volume of both Galaxy
Enterprises' and Netgateway's common stock;
- reviewed various industry and research reports for the Internet--eBusiness
industry;
- reviewed transcripts of chat rooms of Galaxy Enterprises and Netgateway
during the period before the merger announcement date;
- reviewed certain other publicly available financial data for certain
companies that it deemed comparable to Galaxy Enterprises and Netgateway;
and
- conducted such other studies, analyses and inquiries as Houlihan Lokey
deemed appropriate.
Houlihan Lokey used various methodologies to assess the fairness, from a
financial point of view, of the consideration to be received in the merger to
Galaxy Enterprises' public stockholders.
COMPARISON OF GALAXY ENTERPRISES' VALUE TO CONSIDERATION
Houlihan Lokey employed methodologies that provided estimates as to the
aggregate value of Galaxy Enterprises. The analyses required studies of the
overall market, economic and industry conditions in which Galaxy Enterprises
operates and the operating results of Galaxy Enterprises. Each methodology
provided an estimate as to the value of Galaxy Enterprises and thus provided a
basis of comparison to the merger consideration to be received by the
stockholders in connection with the merger.
The primary methodologies Houlihan Lokey used to estimate the value of
Galaxy Enterprises' operations were the discounted cash flow approach and the
comparable transaction approach. The discounted cash flow analysis considered
the projected income stream of Galaxy Enterprises, as provided by Galaxy
Enterprises' management, and then discounted that stream to the present using a
market-based, risk-adjusted discount rate. Galaxy Enterprises' terminal value,
which represents the on-going value of the entity past the time frame of the
projected income stream, was determined by
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capitalizing 2001 projected revenues by an appropriate "exit" multiple. This
multiple was based mainly on the implied multiples observed in similar
transactions. Houlihan Lokey also analyzed certain financial performance
measures for numerous merger and acquisition transactions, which we deemed to be
most comparable to the transaction, involving companies in the
eCommerce/Internet enabling industry, including Houlihan Lokey clients whose
transactions were not publicly disclosed.
Houlihan Lokey also considered a public trading price value analysis of
Galaxy Enterprises' common stock. However, given that (1) there is no investment
analyst coverage for Galaxy Enterprises, (2) there are no institutional
stockholders and (3) Galaxy Enterprises' common stock is thinly traded relative
to the comparable public companies, Houlihan Lokey did not rely on the public
valuation of Galaxy Enterprises.
PRO FORMA ACCRETION ANALYSIS
In addition to the valuation analysis of Galaxy Enterprises described above,
Houlihan Lokey performed a similar valuation of Netgateway on a pro forma basis
reflecting the merger. This pro forma valuation analysis consisted of a
discounted cash flow approach and comparable transaction approach, as described
above, using the projected performance of the combined entities, which was
provided by Netgateway's management, as the basis for the valuation. Houlihan
Lokey also considered a comparative market multiple approach, which considers
the trading multiples for certain income and cash flows of a peer group of
companies. Based on a comparative financial analysis of Netgateway and the peer
group of companies, an appropriate multiple was selected and applied to future
revenues of Netgateway, since Netgateway is not projecting to generate positive
cash flows or earnings. In the comparable company analysis, Houlihan Lokey
analyzed the trading statistics of (1) Internet enablers, such as Agency.com,
iXL Enterprises, Galaxy Enterprises, Razorfish, USWeb/CKS and Viant, and
(2) Internet software companies, such as Broadvision, CheckFree Holdings,
Harbinger, HNC Software, Inktomi, Net Perceptions and Vignette.
Houlihan Lokey also considered a public trading price value analysis of
Netgateway's common stock. The common stock price of Netgateway was $9.188 as of
March 8, 2000 and was $8.698 per share based upon a 20-day moving average as of
March 8, 2000. Netgateway common stock is traded in volumes similar to the
comparable public companies, however, there is limited investment analyst
coverage of Netgateway.
FAIRNESS OF CONSIDERATION
In the opinion, Houlihan Lokey made its determination as to the fairness,
from a financial point of view, as of the date of the merger agreement, of the
consideration to be received in the merger by Galaxy Enterprises' public
stockholders.
Houlihan Lokey has advised Galaxy Enterprises' board of directors that it
used several methodologies to assess the fairness, from a financial point of
view, of the merger consideration. In each of the analyses, the estimated value
of Galaxy Enterprises' common stock was lower than the merger consideration,
leading Houlihan Lokey to conclude that the merger consideration was fair to the
Galaxy Enterprises public stockholders, from a financial point of view.
CONDITIONS AND LIMITATIONS
The aforementioned analyses required studies of the overall market, and the
economic and industry conditions in which Galaxy Enterprises and Netgateway
operate. Research into, and consideration of, these conditions were incorporated
into the analyses. The opinion is based on the business, economic, market and
other conditions as they existed as of March 9, 2000. Specifically, Houlihan
Lokey relied upon the assurances of both Galaxy Enterprises and Netgateway that
the financial projections and pro forma statements and adjustments provided to
Houlihan Lokey were
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reasonably prepared reflecting the best currently available estimates and good
faith judgments, and that there have been no material changes in the information
reviewed between the date the information was provided and the date of the
opinion or in the assets, financial condition, business or prospects of Galaxy
Enterprises or Netgateway. Houlihan Lokey did not independently verify the
accuracy or completeness of the information supplied to it with respect to
Galaxy Enterprises or Netgateway and does not assume responsibility for the
accuracy or completeness of such information. Additionally, Houlihan Lokey
relied without independent verification upon the accuracy and completeness of
all of the financial and other information reviewed by them for purposes of the
fairness opinion.
The summary set forth above describes the material points of more detailed
analyses performed by Houlihan Lokey in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan Lokey has advised Galaxy Enterprises' board
of directors that it did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgements as to the
significance and relevance of each analysis and factor. Accordingly, Houlihan
Lokey believes that its analyses and the summary set forth herein must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, or portions of this summary, without considering all
factors and analyses, could create an incomplete view of the processes
underlying the analyses undertaken by it in connection with the opinion.
Houlihan Lokey has advised Galaxy Enterprises' board of directors that in
its analyses, Houlihan Lokey made numerous assumptions with respect to Galaxy
Enterprises' and Netgateway's industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond
Galaxy Enterprises' and Netgateway's control. The estimates contained in such
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be more or less favorable than suggested by such
analyses. Additionally, analyses relating to the value of businesses or
securities are not appraisals. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Galaxy Enterprises' board of directors
with respect to the merger, you should be aware that some members of Galaxy
Enterprises' board of directors and management have interests in the merger that
are in addition to, and that may be different from, your interests as a holder
of Galaxy Enterprises common stock generally. Galaxy Enterprises' board of
directors was aware of these interests and considered the following matters,
among others, in approving the merger.
EMPLOYMENT AGREEMENTS
In connection with the merger, John J. Poelman, Brandon Lewis, Frank Heyman
and David Wise entered into employment agreements with Galaxy Enterprises. In
addition, Robert Green and Benjamin Roberts entered into employment agreements
with Galaxy Enterprises' wholly owned subsidiary IMI, Inc. These employment
agreements will become effective upon consummation of the merger. At that time,
Messrs. Poelman, Lewis, Heyman, Wise, Green and Roberts' current employment
agreements will be terminated.
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The following table summarizes the key provisions of the Galaxy Enterprises
employment agreements.
<TABLE>
<CAPTION>
PER ANNUM
NAME/POSITION TERM SALARY ADDITIONAL OPTIONS BONUS ARRANGEMENTS
- ------------- -------- ---------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
John J. Poelman........... 2 years $143,000 30,440, pursuant to $21,450 if still in employ
President of Galaxy Netgateway's 1999 Stock on September 1, 2000; then
Enterprises Option Plan for Senior entitled to participate
Executives in bonus plan
Frank C. Heyman........... 2 years $ 90,000 12,500, pursuant to $13,605 if still in employ
Chief Financial Officer of Netgateway's 1999 Stock on September 1, 2000; then
Galaxy Enterprises Option Plan for Non- entitled to participate
Executives in bonus plan
Brandon B. Lewis.......... 2 years $114,125 20,000, pursuant to $17,119 if still in employ
Vice President--Sales and Netgateway's 1999 Stock on September 1, 2000; then
Marketing of Galaxy Option Plan for Non- entitled to participate
Enterprises Executives in bonus plan
David Wise................ 2 years $110,650 15,000, pursuant to $16,598 if still in employ
Vice President--Operations Netgateway's 1999 Stock on September 1, 2000; then
of Galaxy Enterprises Option Plan for Non- entitled to participate
Executives in bonus plan
Robert Green.............. 2 years $104,100 12,500, pursuant to $15,615 if still in employ
President of IMI, Inc. Netgateway's 1999 Stock on September 1, 2000; then
Option Plan for Non- entitled to participate
Executives in bonus plan
Benjamin Roberts.......... 2 years $ 94,000 11,000, pursuant to $14,115 if still in employ
Executive Vice President Netgateway's 1999 Stock on September 1, 2000; then
of IMI, Inc. Option Plan for Non- entitled to participate
Executives in bonus plan
</TABLE>
BRIDGE LOAN AND PLEDGE AGREEMENT
In connection with the merger, on January 7, 2000 Netgateway advanced
$300,000 in bridge financing to Galaxy Enterprises for working capital purposes
and for the payment of certain professional fees incurred by Galaxy Enterprises
in connection with the merger. On February 4, 2000, Netgateway advanced an
additional $150,000 to Galaxy Enterprises for working capital purposes and for
the payment of certain professional fees incurred by Galaxy Enterprises in
connection with the merger.
Each loan is evidenced by a promissory note between Galaxy Enterprises, John
J. Poelman, the chief executive officer and largest stockholder of Galaxy
Enterprises (as co-obligor), and Netgateway. The notes bear interest at 9.5% and
are due and payable on the earlier of June 1, 2000 or the effective time of the
merger.
In addition, on the date of each loan, Mr. Poelman entered into a pledge
agreement whereby Mr. Poelman pledged as collateral for the loans a total of
300,000 of his shares of Galaxy Enterprises common stock. If Galaxy Enterprises
fails to repay the loans on time, Netgateway has the option, among other things,
to sell the stock Mr. Poelman pledged as collateral.
INDEMNIFICATION
The merger agreement provides that following the merger, Netgateway will
indemnify the directors and officers of Galaxy Enterprises with respect to any
litigation with respect to the merger and all personal guarantees of Galaxy
Enterprises obligations they have given and cause such persons to be released
from such guarantees. In addition, for six years after the effective time of the
merger,
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Netgateway will cause the surviving corporation to fulfill and honor Galaxy
Enterprises' obligations under any indemnification agreements with its directors
and officers that existed as of the effective time of the merger and any
indemnification provisions under Galaxy Enterprises' organizational documents
that were in effect on the date of the merger agreement.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Under Section 92A.300 ET SEQ. of the Nevada Revised Statutes, Galaxy
Enterprises stockholders are entitled to exercise the rights of a dissenting
stockholder to object to the merger and make written demand that Netgateway pay
in cash the fair value of the shares of Galaxy Enterprises common stock held as
determined in accordance with all pertinent provisions of Galaxy Enterprises'
articles of incorporation, bylaws and statutory provisions.
In order to exercise dissenters' rights, a dissenting stockholder of Galaxy
Enterprises must strictly comply with the statutory procedures of
Section 92A.300 ET SEQ. of the Nevada Revised Statutes, which are summarized
below. A copy of the text provisions of these statutes is attached hereto as
Appendix B. Stockholders of Galaxy Enterprises are urged to read these statutes
in their entirety and to consult with their legal advisors. Nevada law requires
that holders of Galaxy Enterprises common stock follow certain prescribed
procedures in the exercise of their statutory right to dissent in connection
with the merger. The failure to follow such procedures on a timely basis and in
the precise manner required by Nevada law may result in a loss of a
stockholder's dissenters' rights.
Section 92A.320 of the Nevada Revised Statutes provides that a dissenting
stockholder will be entitled to receive for each share of Galaxy Enterprises
common stock as to which dissenters' rights are perfected, the fair value
thereof. "Fair value" is defined as the value of the shares immediately before
the special meeting approving the merger, excluding any appreciation or
depreciation in anticipation of the merger unless exclusion would be
inequitable, Section 92A.340 of the Nevada Revised Statutes further provides
that the fair value be paid together with interest computed from the effective
date of the merger until the date of payment, at the average rate currently paid
by Galaxy Enterprises on its loans or at a rate that is fair and equitable under
all the circumstances. The following summary does not purport to be a complete
statement of the dissenters rights provision of Nevada law and is qualified in
its entirety by reference to the full text provisions of the of the Nevada
Revised Statutes pertaining to dissenters' rights attached hereto as
Appendix B.
OVERVIEW
Holders of Galaxy Enterprises common stock have the right under Nevada law
to dissent from the merger and obtain payment of the fair value of his or her
shares. Fair value means the value of the shares immediately before the special
meeting, excluding any appreciation or depreciation in anticipation of the
corporate action unless exclusion would be inequitable. If Netgateway and a
dissenting stockholder are not able to agree on a fair value, Netgateway must
petition a court for a determination of fair value.
PROCEDURE FOR DISSENTING
A stockholder wishing to dissent from the merger must deliver to Galaxy
Enterprises, before the Galaxy Enterprises special meeting, written notice of
his or her intent to demand payment for his or her shares if the merger is
consummated. The written notice should be sent to Galaxy Enterprises at
754 E. Technology Avenue, Orem Utah 84097; Attn: Investor Relations. A
stockholder wishing to dissent may not vote in favor of the merger. If a
stockholder's written notice of intent to demand payment is not received by
Galaxy Enterprises before the Galaxy Enterprises special meeting, or if the
stockholder votes in favor of the merger, that stockholder will not have the
right to dissent and will be required to participate in the merger.
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Within 10 days after the special meeting, Galaxy Enterprises will deliver to
each dissenting stockholder a written notice instructing the dissenting
stockholder to demand payment and send his or her Galaxy Enterprises common
stock certificates to Galaxy Enterprises. The notice will include a copy of
Section 92A.300 ET SEQ. of the Nevada Revised Statutes and a form for demanding
payment. The notice will show the deadline for submitting the payment demand
form and the Galaxy Enterprises common stock certificates. The form will also
show the date that the merger was first announced to the news media or the
stockholders and the dissenting stockholder will be required to state whether or
not he or she acquired his or her shares before that date.
The dissenting stockholder must then properly complete and sign the payment
demand form and submit it to Galaxy Enterprises along with his or her Galaxy
Enterprises common stock certificates by the deadline shown in the notice from
Galaxy Enterprises. If the payment demand form and the Galaxy Enterprises common
stock certificates are not submitted by the deadline, the stockholder will no
longer be a dissenting stockholder and will not be entitled to receive payment
of the fair value of his or her shares. Instead, that stockholder will be
required to participate in the merger. The payment demand form and Galaxy
Enterprises common stock certificates should be sent to Galaxy Enterprises at
754 E. Technology Avenue, Orem, Utah 84097; Attn.: Investor Relations.
PAYMENT FOR SHARES
Within 30 days after receiving a dissenting stockholder's payment demand
form and Galaxy Enterprises common stock certificates, Netgateway will pay such
dissenting stockholder, in accordance with Nevada law, Netgateway's estimate of
the fair value of the Galaxy Enterprises common stock for which certificates
were submitted, plus accrued interest. Accompanying the payment will be
financial information for Galaxy Enterprises as of the end of a fiscal year
ending not more than 16 months before the date of payment, and for the year then
ended, as well as the latest available interim financial information. Also
accompanying the payment will be a statement of Netgateway's estimate of the
fair value of the shares, an explanation of how the interest was calculated, a
statement of the dissenting stockholder's rights to demand additional payment
and a copy of the relevant Nevada statutes. Netgateway's obligation to pay fair
value may be enforced by a court. However, if the dissenting stockholder did not
own the shares before the date the merger was first announced to the news media
or to the stockholders, Netgateway will have the right to withhold payment, and
instead to offer to pay Netgateway's estimate of the fair value of the shares.
An offer will be accompanied by a statement of Netgateway's estimate of the
fair value of the shares, an explanation of how the interest was calculated and
a statement of the dissenting stockholder's rights to demand payment.
If a dissenting stockholder estimates the fair value of his or her shares
and the amount of accrued interest to be higher than the amount paid by
Netgateway, the dissenting stockholder may send a notice to Netgateway demanding
payment of the difference between the dissenting stockholder's estimate and the
amount paid by Netgateway. Or, if the dissenting stockholder was only entitled
to receive Netgateway's offer to pay fair value, the dissenting stockholder may
reject the offer and demand payment of the dissenting stockholder's estimate of
the fair value of his or her shares and accrued interest. If a dissenting
stockholder does not send a notice demanding payment within 30 days after
Netgateway has made its payment or offer, the dissenting stockholder will not
have the right to receive any amount in excess of the fair value plus interest
already paid or offered by Netgateway.
COURT PROCEEDING TO DETERMINE FAIR VALUE.
If a demand for payment remains unsettled for 60 days following Galaxy
Enterprises' receipt of the demand, Netgateway will petition a court to
determine the fair value of the shares and accrued interest. Court costs will be
paid by Netgateway unless the court finds that one or more dissenting
stockholders
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acted arbitrarily, vexatiously or not in good faith in demanding payment, in
which case, some or all court costs may be allocated to such dissenting
stockholder or stockholders. Attorneys' and experts' fees may be assessed
against Netgateway if the court finds that Netgateway did not comply with the
applicable statute or acted arbitrarily, vexatiously or not in good faith, or
such fees may be assessed against one or more dissenting stockholders if those
stockholders acted arbitrarily, vexatiously or not in good faith.
Holders of Galaxy Enterprises common stock considering seeking appraisal by
exercising their dissenters' rights should be aware that the fair value of their
Galaxy Enterprises common stock determined pursuant to Nevada law could be more
than, the same as, or less than the value of the securities that they are
entitled to receive pursuant to the merger agreement if they do not seek
appraisal of their Galaxy Enterprises common stock.
THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES
TO BE FOLLOWED BY HOLDERS OF GALAXY ENTERPRISES COMMON STOCK DESIRING TO
EXERCISE DISSENTERS' RIGHTS, AND, IN VIEW OF THE FACT THAT EXERCISE OF SUCH
RIGHTS REQUIRES STRICT ADHERENCE TO THE RELEVANT PROVISIONS OF THE NEVADA
REVISED STATUTES, EACH STOCKHOLDER WHO MAY DESIRE TO EXERCISE APPRAISAL RIGHTS
IS ADVISED INDIVIDUALLY TO CONSULT THE LAW (AS SET FORTH IN APPENDIX B HERETO)
AND COMPLY WITH THE PROVISIONS THEREOF.
The foregoing discussion is only a summary of the provisions of Nevada law,
does not purport to be complete and is qualified in its entirety by reference to
Section 92A.300 ET SEQ. of the Nevada Revised Statutes, which is attached hereto
as Appendix B. Any stockholder who intends to dissent from the merger should
review the text of Section 92A.300 ET SEQ. of the Nevada Revised Statutes,
carefully and should also consult with his or her own legal counsel. Any
stockholder who fails to follow strictly the procedures set forth in said
statute will forfeit his or her dissenters' rights.
Any dissenting stockholder who perfects his or her right to be paid the
value of his or her shares will recognize gain or loss, if any, for federal
income tax purposes upon the receipt of cash for such shares. The amount of gain
or loss and its character as ordinary or capital gain or loss will be determined
in accordance with applicable provisions of the Internal Revenue Code.
BECAUSE OF THE COMPLEXITY OF THE PROVISIONS OF THE NEVADA LAW RELATING TO
DISSENTERS' APPRAISAL RIGHTS, STOCKHOLDERS WHO ARE CONSIDERING DISSENTING FROM
THE MERGER ARE URGED TO CONSULT THEIR OWN LEGAL ADVISORS TO ENSURE THAT THEY
FULLY AND PROPERLY COMPLY WITH THE REQUIREMENTS OF NEVADA LAW.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material federal income tax
considerations of the merger that are generally applicable to holders of Galaxy
Enterprises common stock.
This discussion does not deal with all income tax considerations that may be
relevant to particular Galaxy Enterprises stockholders in light of their
particular circumstances, those stockholders who are dealers in securities,
foreign persons, banks, insurance companies or tax-exempt entities, stockholders
who hold their shares as part of a hedging, straddle, conversion or other risk
reduction transaction, stockholders who acquired their shares in connection with
stock option or stock purchase plans or in other compensatory transactions, or
stockholders who exercise their dissenters' rights under Nevada law. In
addition, the following discussion does not address the tax consequences of
transactions effectuated prior to or after the merger, whether or not such
transactions are in connection with the merger, including transactions in which
shares of Galaxy Enterprises common stock were or are acquired or in which
shares of Netgateway common stock were or are disposed of. Furthermore, no
foreign, state or local tax considerations are addressed in this joint proxy
statement/prospectus. The discussion is based on federal income tax law in
effect as of the date of this joint proxy statement/ prospectus, which could
change at any time, possibly with retroactive effect. Accordingly, Galaxy
Enterprises stockholders are urged to consult their own tax advisors as to the
specific tax consequences
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of the merger, including the applicable federal, state, local and foreign tax
consequences to them of the merger and applicable tax return reporting
requirements.
Although it is not a condition to the closing of the merger that the merger
constitute a "reorganization" within the meaning of Section 368 of the Internal
Revenue Code or that either Netgateway or Galaxy Enterprises receive an opinion
from its tax advisor to that effect, they each intend to seek such opinions. If
the merger qualifies as a reorganization, the following federal income tax
consequences will result:
- No gain or loss will be recognized by holders of Galaxy Enterprises common
stock solely upon their receipt of Netgateway common stock in the merger,
except as described below with respect to cash received instead of a
fractional share of Netgateway common stock;
- The aggregate tax basis of the Netgateway common stock received in the
merger by a Galaxy Enterprises stockholder, including any fractional share
not actually received, will be the same as the aggregate tax basis of the
Galaxy Enterprises common stock surrendered in exchange for such
Netgateway common stock;
- The holding period of the Netgateway common stock received in the merger
by a Galaxy Enterprises stockholder will include the period during which
the stockholder held the Galaxy Enterprises common stock surrendered in
exchange for such Netgateway common stock, so long as the Galaxy
Enterprises common stock is held as a capital asset at the time of the
merger;
- Cash payments received by holders of Galaxy Enterprises common stock
instead of a fractional share of Netgateway common stock will be treated
as if the fractional share of Netgateway common stock had been issued in
the merger and then repurchased by Netgateway; a Galaxy Enterprises
stockholder receiving such cash will generally recognize gain or loss upon
such payment, equal to the difference between such stockholder's basis in
the fractional share and the amount of cash received; and
- None of Netgateway, the merger subsidiary or Galaxy Enterprises will
recognize gain or loss solely as a result of the merger.
The opinions of the independent auditors that the merger will qualify as a
reorganization will be subject to the limitations and qualifications referred to
in this document. In addition, the opinions will (1) rely upon the truth and
accuracy of representations and covenants set forth in the merger agreement and
in certificates to be delivered prior to the effective time by Netgateway, the
merger subsidiary and Galaxy Enterprises and (2) assume that the merger will be
consummated in accordance with the terms of the merger agreement. The parties
are not requesting a ruling from the Internal Revenue Service in connection with
the merger. The opinions of the independent auditors referred to above do not
bind the IRS or prevent the IRS from adopting a contrary position. Netgateway
and Galaxy Enterprises undertake to recirculate these proxy materials and
resolicit proxies in the event that either Netgateway or Galaxy Enterprises is
unable to obtain an opinion from its respective tax advisor that the merger will
be a reorganization for federal income tax purposes.
A successful IRS challenge to the "reorganization" status of the merger
would result in a Galaxy Enterprises stockholder recognizing gain or loss with
respect to each share of Galaxy Enterprises common stock surrendered equal to
the difference between the stockholder's basis in such share and the fair market
value, as of the effective time of the merger, of the Netgateway common stock
received in exchange therefor. In such event, a stockholder's aggregate basis in
the Netgateway common stock so received would equal its fair market value and
his holding period for such stock would begin the day after the merger.
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COMPLETION AND EFFECTIVENESS OF THE MERGER
The merger will be completed when all of the conditions to completion of the
merger are satisfied or waived, including approval and adoption of the merger
agreement by the stockholders of Galaxy Enterprises and the approval of the
issuance of shares by the stockholders of Netgateway. The merger will become
effective upon the filing of certificates of merger with the States of Delaware
and Nevada.
We are working to complete the merger as quickly as possible. We hope to
complete the merger during the second quarter of calendar year 2000, however, we
cannot predict the exact completion date at this time.
ANTICIPATED ACCOUNTING TREATMENT
The merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting principles,
which means that we will treat our companies as if they had always been combined
for accounting and financial reporting purposes. The availability of this
accounting treatment is not a condition to the merger.
DELISTING AND DEREGISTRATION OF GALAXY ENTERPRISES COMMON STOCK
If the merger is consummated, Galaxy Enterprises common stock will be
delisted from the Nasdaq OTC Bulletin Board and will be deregistered under the
Securities Exchange Act of 1934.
LISTING OF NETGATEWAY COMMON STOCK TO BE ISSUED IN THE MERGER
It is a condition to the consummation of the merger that the shares of
Netgateway common stock to be issued in the merger and the shares of Netgateway
common stock to be reserved for issuance in connection with the assumption of
outstanding Galaxy Enterprises stock options be approved for listing on The
Nasdaq National Market.
RESTRICTION ON RESALES OF NETGATEWAY COMMON STOCK
The Netgateway common stock to be issued in the merger will have been
registered under the Securities Act, thereby allowing such shares to be freely
traded without restriction by all former stockholders of Galaxy Enterprises who
are not "affiliates," as such term is defined in Rule 144 of the Securities Act,
of Galaxy Enterprises or Netgateway at the time of the special meeting. Persons
who may be deemed to be affiliates of Netgateway or Galaxy Enterprises generally
include individuals or entities that control, are controlled by or are under
common control with, such party and may include certain officers and directors
of Netgateway and Galaxy Enterprises, as well as significant stockholders.
Shares of Netgateway common stock received by those stockholders of Galaxy
Enterprises who are deemed to be affiliates of Galaxy Enterprises or Netgateway
at the time of the special meeting may be resold without additional registration
under the Securities Act only in the manner permitted by Rule 145 under the
Securities Act or as otherwise permitted under the Securities Act.
Netgateway's registration statement on Form S-4, of which this joint proxy
statement/prospectus forms a part, does not cover resales of Netgateway common
stock received by any person who may be deemed to be an affiliate of Netgateway
or Galaxy Enterprises.
OPERATIONS AFTER THE MERGER
After completion of the merger, Galaxy Enterprises will continue its
operations as a wholly owned subsidiary of Netgateway. The stockholders of
Galaxy Enterprises will become stockholders of Netgateway and their rights as
stockholders will be governed by Netgateway's certificate of incorporation,
bylaws and the laws of the State of Delaware.
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THE MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. STOCKHOLDERS OF NETGATEWAY AND GALAXY ENTERPRISES ARE
URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY FOR A MORE COMPLETE
DESCRIPTION OF THE MERGER. IN THE EVENT OF ANY DISCREPANCY BETWEEN THE TERMS OF
THE MERGER AGREEMENT AND THE FOLLOWING SUMMARY, THE MERGER AGREEMENT WILL
CONTROL.
THE MERGER
Following the approval and adoption of the merger and the merger agreement
by the stockholders of Galaxy Enterprises and Netgateway, and the satisfaction
or waiver of the other conditions to the merger, a wholly owned subsidiary of
Netgateway will merge with and into Galaxy Enterprises and Galaxy Enterprises
will continue as the surviving corporation and a wholly owned subsidiary of
Netgateway.
THE EFFECTIVE TIME
As soon as practicable on or after the closing of the merger, the parties
will cause the merger to become effective by filing certificates of merger with
the Nevada and Delaware Secretaries of State. The parties anticipate that this
will occur in the third quarter of calendar year 2000.
DIRECTORS AND OFFICERS OF GALAXY ENTERPRISES AFTER THE MERGER
After the merger, the following persons will hold the positions indicated
with Galaxy Enterprises:
<TABLE>
<CAPTION>
NAME POSITION
- ---- -------------------------------------------
<S> <C>
Keith D. Freahhoff................................ Director
Roy W. Camblin III................................ Director
Donald M. Corliss, Jr............................. Director
John J. Poelman................................... Director and president
Brandon Lewis..................................... Executive vice president, sales & marketing
Frank C. Heyman................................... Controller
David Wise........................................ Vice president, operations
</TABLE>
CONVERSION OF SHARES IN THE MERGER
At the effective time, each share of Galaxy Enterprises common stock will be
automatically canceled and converted into the right to receive approximately
0.63 of a share of Netgateway common stock. The actual exchange ratio will be
calculated by dividing five million by the sum of the number of outstanding
unexercised Galaxy Enterprises employee stock options at the time of the merger
and the number of shares of Galaxy Enterprises common stock that are then
outstanding. Accordingly, the exchange ratio will vary to the extent that Galaxy
Enterprises employee stock options lapse or terminate prior to the time of the
merger or there are changes in the number of shares of Galaxy Enterprises'
common stock that are outstanding other than as a result of the exercise of
employee stock options. Shares of Galaxy Enterprises common stock held
immediately prior to the effective time by Galaxy Enterprises, Netgateway or
Netgateway's merger subsidiary will be cancelled. In addition, the exchange
ratio will be further adjusted to reflect the effect of any stock split, stock
dividend, reorganization, recapitalization, reclassification or other like
change with respect to either Netgateway common stock or Galaxy Enterprises
common stock that may occur on or after the date of this joint proxy
statement/prospectus.
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GALAXY ENTERPRISES' STOCK OPTION AND STOCK PURCHASE PLANS
At the effective time, each outstanding option to purchase shares of Galaxy
Enterprises common stock under Galaxy Enterprises' 1997 Employee Stock Option
Plan will be assumed by Netgateway, whether or not vested and exercisable.
At the effective time, outstanding warrants to purchase 250,000 shares of
Galaxy Enterprises common stock at a price of $2.84 per share under the Invest
Linc Emerging Growth Fund I Warrant dated January 18, 1999, and warrants to
purchase 50,000 shares of Galaxy Enterprises common stock at a price of $7.05
per share under the Bridgewater Corporation Warrants, dated as of January 12,
1999, will be assumed by Netgateway regardless of whether they are exercisable.
Each Galaxy Enterprises stock option and warrant that is assumed by
Netgateway will continue to have, and be subject to, the same terms and
conditions that were applicable to the stock option or warrant immediately prior
to the effective time, except that:
- each Galaxy Enterprises stock option or warrant will be exercisable for
shares of Netgateway common stock, and the number of shares of Netgateway
common stock issuable upon exercise of any given option or warrant will be
determined by multiplying the exchange ratio in the merger by the number
of shares of Galaxy Enterprises common stock underlying such option or
warrant; and
- the per share exercise price of any such option or warrant will be
determined by dividing the exercise price of the option immediately prior
to the effective time by the exchange ratio in the merger.
THE EXCHANGE AGENT
Within ten days after the effective time, Netgateway is required to deposit
with a bank or trust company certificates representing the shares of Netgateway
common stock to be exchanged for shares of Galaxy Enterprises common stock and
cash to pay for fractional shares.
PROCEDURES FOR EXCHANGING STOCK CERTIFICATES
Promptly after the effective time, Netgateway will cause the exchange agent
to mail to the holders of record of Galaxy Enterprises common stock certificates
(1) a letter of transmittal and (2) instructions on how to surrender Galaxy
Enterprises common stock certificates in exchange for certificates representing
shares of Netgateway common stock and cash for any fractional shares.
HOLDERS OF GALAXY ENTERPRISES COMMON STOCK SHOULD NOT SURRENDER THEIR GALAXY
ENTERPRISES STOCK CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL
FROM THE EXCHANGE AGENT
Upon surrendering their Galaxy Enterprises common stock certificates to the
exchange agent for cancellation, together with the letter of transmittal and any
other document required by the exchange agent, the holders of Galaxy Enterprises
common stock certificates will be entitled to receive a certificate representing
that number of whole shares of Netgateway common stock which that holder has the
right to receive, cash for fractional shares of Netgateway common stock and cash
for any dividends or other distributions to which the holder is entitled under
the merger agreement. Until surrendered to the exchange agent, outstanding
Galaxy Enterprises common stock certificates will be deemed from and after the
effective time to evidence (1) only the right to receive the number of full
shares of Netgateway common stock into which the shares of Galaxy Enterprises
common stock have converted and (2) the right to receive an amount in cash for
any fractional shares.
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DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES
Until each Galaxy Enterprises stockholder surrenders his or her Galaxy
Enterprises common stock certificate in exchange for a Netgateway stock
certificate, that stockholder will not receive any dividends or other
distributions declared or made by Netgateway after the effective time of the
merger. However, once that stockholder surrenders his or her Galaxy Enterprises
stock certificate to the exchange agent, he or she will receive (1) a Netgateway
stock certificate, (2) cash as payment for fractional shares and (3) cash,
without interest, as payment for any dividends or other distributions declared
or made by Netgateway after the effective time of the merger.
NO FRACTIONAL SHARES
No fractional shares of Netgateway common stock will be issued in the
merger. Instead, Galaxy Enterprises stockholders who would be entitled to a
fractional share of Netgateway common stock will receive cash. The amount of
cash to be received by those Galaxy Enterprises stockholders will be determined
by multiplying the fraction of the share that those stockholders would have
received by the average closing sale price of one share of Netgateway common
stock over the 20 trading days prior to the day before the effective time of the
merger.
DISSENTING SHARES
Any shares of Galaxy Enterprises common stock outstanding immediately prior
to the effective time that were not voted in favor of the merger and which are
held by stockholders who have complied with the applicable provisions of Nevada
law with regard to dissenters' rights shall not be converted into or represent
the right to receive Netgateway common stock and cash in lieu of any fractional
shares or dividends or distributions holders of such stock would be entitled to
receive. Instead, each dissenter shall be entitled only to those rights as are
provided to holders of dissenting shares under Nevada law.
REPRESENTATIONS AND WARRANTIES
In the merger agreement, Galaxy Enterprises made a number of representations
and warranties in favor of Netgateway that relate to a number of matters,
including:
- the authorization, execution, delivery and enforceability of the merger
agreement;
- Galaxy Enterprises' due organization and good standing;
- Galaxy Enterprises' capital structure and rights or obligations relating
to Galaxy Enterprises' capital stock;
- identification of subsidiaries of Galaxy Enterprises;
- the absence of conflict with or violation of any agreement, law or charter
or bylaw provision and the absence of the need for filings, consents,
approvals or actions in order to consummate the merger;
- the accuracy of information supplied by Galaxy Enterprises with respect to
its books and records;
- documents filed by Galaxy Enterprises with the SEC;
- the absence of certain material changes, events, litigation or
investigations since December 31, 1998;
- the absence of undisclosed liabilities;
- identification of legal proceedings;
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- Galaxy Enterprises' compliance with laws;
- Galaxy Enterprises' employee benefit plans and labor relations;
- Galaxy Enterprises' title to, or valid leasehold interests in, material
properties and assets;
- Galaxy Enterprises' ownership of or right to use, and non-infringement of
others' rights to, intellectual property;
- matters relating to contracts;
- identification of and transactions with affiliates of Galaxy Enterprises;
- matters relating to Galaxy Enterprises employees;
- Galaxy Enterprises accounts and notes receivable and inventory;
- the payment of broker's or advisor's fees;
- disclosure of all material information concerning Galaxy Enterprises;
- the effect of Year 2000;
- change of control payments to officers and directors of Galaxy
Enterprises;
- the receipt of a fairness opinion from Houlihan Lokey;
- approval of the merger by Galaxy Enterprises' board of directors;
- the filing of tax returns and the payment of taxes; and
- pooling of interests accounting treatment for the merger.
The merger agreement also includes representations and warranties made by
Netgateway in favor of Galaxy Enterprises that relate to a number of matters,
including the following:
- the authorization, execution, delivery and enforceability of the merger
agreement;
- Netgateway's due organization and good standing;
- Netgateway's capital structure;
- the absence of conflict with or violation of any agreement, law or charter
or bylaw provision and the absence of the need for filings, consents,
approvals or actions in order to consummate the merger;
- documents filed by Netgateway with the SEC;
- the accuracy of information supplied by Netgateway with respect to books
and records;
- the absence of material changes or events since September 30, 1999;
- the absence of undisclosed liabilities;
- the absence of material litigation or investigations;
- Netgateway's compliance with laws;
- the payment of broker's or advisor's fees;
- the filing of tax returns and the payment of taxes; and
- disclosure of all material information concerning Netgateway.
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CONCEPT OF MATERIAL ADVERSE EFFECT
Many of the representations and warranties contained in the merger agreement
are qualified by the concept of "material adverse effect." This concept also
applies to some of the covenants and conditions to the merger described under
"--Conduct of Business of Galaxy Enterprises Pending Completion of the Merger,"
"Conduct of Business of Netgateway Pending Completion of the Merger" and
"--Conditions to the Merger" below, as well as to termination of the merger
agreement for breaches of representations and warranties as described under
"--Termination of the Merger Agreement." For purposes of the merger agreement,
the concept of "material adverse effect" means any change, effect, event or
condition that has a material adverse effect on the business, results of
operations or financial condition of Netgateway or Galaxy Enterprises, as the
case may be, taken as a whole, or would prevent or materially delay its ability
to complete the merger, other than any such change, effect, event or condition
that arises as a result of the merger or from changes in general economic
conditions. A material adverse effect includes a determination by KPMG LLP that
Galaxy Enterprises' revenues for fiscal year 1999 did not exceed $13 million and
a determination by Netgateway, in its sole discretion, that a certain threatened
patent infringement action involving certain IMI, Inc. intellectual property or
a certain U.S. design patent for a shaped CD product issued on January 18, 2000
may result in a significant patent infringement claim against IMI, Netgateway or
any of its affiliates. Changes in the market price of Netgateway or Galaxy
Enterprises common stock, in and of itself, does not constitute a material
adverse effect.
The representations and warranties of Galaxy Enterprises and Netgateway will
terminate at the effective time. The representations and warranties in the
merger agreement are complicated and not easily summarized. You are urged to
read carefully the relevant articles of the merger agreement.
CONDUCT OF BUSINESS OF GALAXY ENTERPRISES PENDING COMPLETION OF THE MERGER
Galaxy Enterprises has agreed that, during the period from the date of the
merger agreement until the earlier of the termination of the merger agreement or
the effective time, it will carry on its business in the ordinary course
consistent with past practices. Galaxy Enterprises has also agreed that, prior
to the effective time or the termination of the merger agreement, without
Netgateway's consent, it will and will cause its subsidiaries to, refrain from:
- amending their articles of incorporation or bylaws or taking any action
with respect to any such amendment or any recapitalization,
reorganization, liquidation or dissolution of any such corporation;
- authorizing, issuing or modifying any securities;
- declaring or paying any dividend or repurchasing any of its securities;
- acquiring or disposing of, or incurring any lien on, its assets other than
in the ordinary course of business;
- entering into, modifying or terminating any material contract or license;
- breaching or defaulting in any material respect any material license or
any contract;
- incurring indebtedness in excess of $50,000;
- engaging with any person in any other acquisition proposal subject to
certain limited exceptions;
- making capital expenditures in excess of $100,000;
- writing off or writing down any of its assets; and
- engaging in any action that would prevent the merger from qualifying as a
tax free "reorganization" or from being accounted for as a pooling of
interests.
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CONDUCT OF BUSINESS OF NETGATEWAY PENDING COMPLETION OF THE MERGER
Netgateway has agreed that, during the period from the date of the merger
agreement until the earlier of the termination of the merger agreement or the
effective time, it will carry on its business in the ordinary course consistent
with past practices. Netgateway has agreed that, during the period from the date
of the merger agreement until the earlier of the termination of the merger
agreement or the effective time, it will refrain from:
- declaring or paying any dividend; and
- engaging in any action that would prevent the merger from qualifying as a
tax free "reorganization".
All of Galaxy Enterprises' and Netgateway's covenants will terminate at the
effective time of the merger, except those that by their terms survive the
effective time of the merger.
NO SOLICITATION
The merger agreement provides that, except for discussions, negotiations and
due diligence with a specified placement agent for a financing, Galaxy
Enterprises will not authorize or permit any of its officers, directors,
affiliates or employees or any investment banker, attorney or other advisor or
representative retained by it to:
- solicit or induce the making or announcement of any acquisition proposal;
- participate in any discussions regarding, or furnish to any person any
nonpublic information with respect to, or otherwise facilitate any
inquiries or the making of any proposal that constitutes or may reasonably
be expected to lead to, any acquisition proposal;
- engage in discussions with any person with respect to any acquisition
proposal;
- approve or recommend any acquisition proposal; or
- enter into any letter of intent or similar document or any contract,
agreement or commitment relating to any acquisition proposal.
However, the merger agreement does not prohibit the Galaxy Enterprises board
from withholding, withdrawing, amending or modifying its unanimous
recommendation in favor of the merger if:
- Galaxy Enterprises has not violated any of the restrictions set forth
above;
- A superior offer (as defined below) is made to Galaxy Enterprises and is
not withdrawn;
- Galaxy Enterprises has provided written notice to Netgateway advising it
that Galaxy Enterprises has received a superior offer, specifying the
material terms and conditions of the superior offer and identifying the
person or entity making such superior offer;
- Netgateway has not, within three business days of Netgateway's receipt of
the notice of superior offer, made an offer that the Galaxy Enterprises
board of directors by a majority vote determines in its good faith
judgment to be at least as favorable to the Galaxy Enterprises'
stockholders as the superior offer;
- Galaxy Enterprises' board of directors concludes in good faith, after
consultation with its outside counsel, that, in light of the superior
offer, the withholding, withdrawal, amendment or modification of
recommendation of the merger is required in order for it to properly
discharge its fiduciary obligations to Galaxy Enterprises' stockholders.
56
<PAGE>
In addition, Galaxy Enterprises has agreed to provide Netgateway with prior
written notice of any meeting of Galaxy Enterprises' board of directors at which
the board is expected to consider a superior offer.
The merger agreement defines a "superior offer" as an unsolicited bona fide
offer or proposal relating to any transaction, other than the transactions
contemplated by the merger agreement, involving:
- a merger or consolidation pursuant to which the stockholders of Galaxy
Enterprises immediately preceding such transaction hold less than 50% of
the equity interest in the surviving or resulting entity of such
transaction;
- the acquisition by any person or group (including by way of a tender offer
or an exchange offer or a two step transaction involving a tender offer or
exchange offer followed with reasonable promptness by a cash-out merger
involving Galaxy Enterprises), directly or indirectly, of ownership of
100% of the then outstanding shares of capital stock of Galaxy
Enterprises; or
- the sale or disposition of all or substantially all the assets of Galaxy
Enterprises to a third party;
on terms that Galaxy Enterprises board of directors determines to be more
favorable to Galaxy Enterprises' stockholders than this merger.
DIRECTOR AND OFFICER INDEMNIFICATION AND RELEASE OF PERSONAL GUARANTEES
From and after the effective time of the merger, Netgateway will cause the
surviving corporation to fulfill and honor Galaxy Enterprises' obligations under
any indemnification agreements with its directors and officers that existed as
of the effective time of the merger and any indemnification provisions under
Galaxy Enterprises' organizational documents that were in effect on the date of
the merger agreement.
The certificate of incorporation and bylaws of Galaxy Enterprises following
the merger will contain provisions relating to indemnification that are at least
as favorable to the indemnified directors and officers as those contained in
Galaxy Enterprises' organizational documents that were in effect on the date of
the merger agreement. These indemnification provisions will not be amended,
repealed or otherwise modified for six years after the effective time of the
merger if such modification would adversely affect the rights of individuals who
were directors, officers, employees or agents of Galaxy Enterprises immediately
prior to the effective time of the merger, unless such modification is required
by law.
For six years after the effective time of the merger, Netgateway will cause
the surviving corporation to use its commercially reasonable efforts to maintain
directors' and officers' liability insurance covering those persons who are
currently covered by Galaxy Enterprises' directors' and officers' liability
insurance policy, on comparable terms to such policy. However, neither
Netgateway nor the surviving corporation will be required to expend more than
150% of the annual premium currently paid by Galaxy Enterprises for such
coverage.
Netgateway has also agreed to indemnify Galaxy Enterprises' directors and
officers with respect to litigation and proceedings arising from the merger or
any personal guarantee those directors and officers have given on behalf of
Galaxy Enterprises or any of its subsidiaries and to use its best efforts to
obtain a release of any such personal guarantee.
57
<PAGE>
CONDITIONS TO THE MERGER
The obligations of Netgateway and Galaxy Enterprises to effect the merger
are subject to the satisfaction of the following conditions, among others:
- Galaxy Enterprises' stockholders and Netgateway's stockholders approval of
the merger;
- the shares of Netgateway common stock to be issued in the merger are
approved for listing on The Nasdaq National Market;
- the respective representation and warranties of Galaxy Enterprises and
Netgateway must be true and correct subject to certain exceptions;
- Galaxy Enterprises and Netgateway have complied with their respective
obligations in the merger agreement;
- no judgment, order, statute or rule may be in effect that would prohibit
the merger or make it illegal or which could reasonably be expected to
result in a material diminution of its benefits to Netgateway and no
action or proceeding which could reasonably be expected to result in the
issuance of any such judgement or order or promulgation of any such
statute or rule shall be pending; and
- all necessary governmental consents must be obtained in a satisfactory
form.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated by mutual consent or by either
Netgateway or Galaxy Enterprises under certain circumstances as summarized
below:
- if the merger is not completed, without fault of the terminating party, by
July 31, 2000;
- if either Galaxy Enterprises' or Netgateway's stockholders do not approve
the merger at their respective special meeting;
- if a governmental entity permanently prohibits the merger and the
prohibition is not appealable;
- if either party is in material breach of its obligations under the merger
agreement, the terminating party is not in default of its obligations
under this agreement, and the breach is not resonably likely to be cured
prior to July 31, 2000;
- a governmental entity has determined not to issue a necessary governmental
consent and such determination has become final and non-appealable; and
- if the board of directors of Galaxy Enterprises exercizes its right to
withhold, withdraw, amend or modify its recommendation of the merger.
In addition, the merger agreement may be terminated by Netgateway if
Netgateway is in substantial compliance with its obligations under the merger
agreement and Galaxy Enterprises has breached its obligation not to solicit,
encourage, facilitate or endorse any proposal or offer by a third party to
acquire Galaxy Enterprises.
FEES AND EXPENSES
Except as set forth below, all fees and expenses incurred in connection with
the merger agreement and the merger will be paid by the party incurring such
expenses, whether or not the merger is consummated.
If Netgateway terminates the merger agreement because Galaxy Enterprises
breached its obligation not to solicit, encourange, facilitate or endorse
another acquisition proposal, or if Netgateway or Galaxy
58
<PAGE>
Enterprises terminates the merger agreement because the board of directors of
Galaxy Enterprises withheld, withdrew, amended, or modified its recommendation
of the merger agreement, Galaxy Enterprises must, within one day after the date
of such termination, pay Netgateway a termination fee of $1.5 million, plus up
to $500,000 of expenses incurred by Netgateway in connection with the merger. In
addition, if Netgateway terminates the merger agreement because (1) the Galaxy
Enterprises stockholders did not approve the merger and (2) a third party
announced and did not withdraw a proposal to acquire Galaxy Enterprises, before
the vote to approve the merger, then, if Galaxy Enterprises enters into a
definitive agreement to be acquired within 12 months of the termination of the
merger agreement, Galaxy Enterprises will be required to pay Netgateway a
termination fee of $1.5 million plus up to $500,000 of Netgateway's expenses
incurred in connection with the merger.
Failure to pay such amounts promptly will subject Galaxy Enterprises to
additional payments of interest on such amounts.
AMENDMENT OR WAIVER OF THE MERGER AGREEMENT
The merger agreement may be amended at any time in a writing signed by
Netgateway and Galaxy Enterprises; provided, that any amendment made after the
special meeting that would otherwise require stockholder approval under
applicable law must be submitted to the stockholders of Galaxy Enterprises. At
any time prior to the effective time of the merger, any party to the merger
agreement may, to the extent legally allowed:
- extend the time for the performance of any of the obligations or other
acts of the other parties to the merger agreement;
- waive any inaccuracies in the representations and warranties of the other
party contained in the merger agreement; and
- waive compliance by the other party with any of the agreements or
conditions for the benefit of such party as contained in the merger
agreement.
59
<PAGE>
NETGATEWAY STOCK OPTION AGREEMENT
Concurrently with the execution of the merger agreement, John J. Poelman,
the chief executive officer and principal stockholder of Galaxy Enterprises, and
Netgateway entered into a stock option agreement under which Mr. Poelman granted
Netgateway an irrevocable option to purchase up to 980,213 of his shares of
Galaxy Enterprises common stock at a cash exercise price equal to the product of
(1) the exchange ratio in the merger, or approximately 0.63, and (2) the average
closing price of one share of Netgateway common stock for the 20 most recent
days that Netgateway common stock traded ending on March 9, 2000, or $8.6982 per
share of Galaxy Enterprises common stock. Based on the number of Galaxy
Enterprises shares outstanding on March 10, 2000, as represented by Galaxy
Enterprises in the merger agreement, the option may be exercisable for
approximately 16% of Galaxy Enterprises' outstanding shares. The option was
granted to Netgateway for no additional consideration. Netgateway may exercise
this option, in whole or in part, at any time during a 30 calendar day period
beginning on the day on which the merger agreement is terminated by either
Galaxy Enterprises or Netgateway based on Galaxy Enterprises' board's
withdrawal, amendment or modification of its recommendation of the merger in a
manner that is adverse to Netgateway.
VOTING AND AFFILIATE AGREEMENTS
VOTING AGREEMENT
Concurrently with the execution of the merger agreement, John J. Poelman and
Sue Ann Cochran, who collectively own approximately 19% of the outstanding
common stock of Galaxy Enterprises, each entered into a voting agreement with
Netgateway whereby they agreed not to offer to sell, sell or transfer, grant a
proxy or power of attorney with respect to or enter into a voting agreement or
voting trust arrangement with respect to and to vote, or cause their respective
holders of record to vote, all of the shares of Galaxy Enterprises common stock
owned, controlled by or subsequently acquired by them in favor of the merger,
the merger agreement and the transactions contemplated by the merger agreement.
In addition, with respect to all shares owned of record and all shares
acquired by Mr. Poelman and Ms. Cochran at any time prior to the effective time
of the merger, each of Mr. Poelman and Ms. Cochran have appointed Netgateway as
his or her irrevocable proxy and lawful attorney to vote all of their shares in
favor of the merger. The voting agreement terminates upon the earlier of the
30th day after the termination of the merger agreement or the effective time of
the merger.
GALAXY ENTERPRISES AFFILIATE AGREEMENTS
Concurrently with or following the execution of the merger agreement,
John J. Poelman, Frank C. Heyman, Brandon B. Lewis, Benjamin Roberts, David Wise
and Robert Green each entered into affiliate agreements with Netgateway in which
they agreed to not sell, transfer or otherwise dispose of any of their Galaxy
Enterprises common stock or any of the Netgateway common stock issued to them in
connection with the merger until, with certain limited exceptions, the first
market day following the date on which Netgateway publishes financial results
covering at least 30 days of combined operations of Netgateway and Galaxy
Enterprises.
60
<PAGE>
eCOMMERCE SERVICES AGREEMENT
In connection with the merger, and to ease the transition of Netgateway and
Galaxy Enterprises into the combined company from the signing of the merger
agreement until the effective time of the merger, Netgateway and Galaxy
Enterprises entered into an electronic commerce services agreement dated as of
March 1, 2000.
This agreement provides that Netgateway will, among other things, rebuild
and update Galaxy Enterprises' GalaxyMall.com Web site to Netgateway's software.
The services provided by Netgateway will include the conversion of all Galaxy
Mall storefronts, enhancing the look and ease of use and adding new features to
the GalaxyMall.com Web site. In addition, Netgateway will rebuild Galaxy
Enterprise's search engine, Matchsite.com.
The estimated payments to be made by Galaxy Enterprises to Netgateway
include $600,000 for rebuilding the GalaxyMall.com Web site, $75 for the
conversion of each of the approximately 3,200 storefronts on that site and
$50,000 to rebuild the MatchSite.com search engine. Netgateway will also be paid
hosting fees of approximately $2,000 per month.
FUTURE AGREEMENT
Netgateway and Galaxy Enterprises have agreed to enter into an agreement
prior to the merger that will provide for Galaxy Enterprises to develop an
Internet training seminar in which Galaxy Enterprises will instruct Netgateway's
CableCommerce business partners in using the Internet as part of their
businesses. This agreement will provide for the payment of a fee for the
development of the program, as well as fees for each seminar that Galaxy
Enterprises actually conducts.
FINDER'S FEE AGREEMENT
In connection with the merger, Netgateway and Red Rock Capital, LLC, a
Nevada limited liability company, entered into a finder's fee agreement under
which Netgateway agreed to pay to Red Rock a cash fee of 3% of the cash value of
the Netgateway common stock to be distributed to the former Galaxy Enterprises
stockholders in the merger; provided, however, that in no event shall the
purchase price on which the fee is calculated exceed $35,000,000 (i.e., the
maximum fee payable to Red Rock is $1,050,000). Kirby Cochran, a principal of
Red Rock, is the brother of Gary Cochran, a consultant to Galaxy Enterprises and
owner of certain intellectual property licensed to Galaxy Enterprises. Gary
Cochran is the husband of Sue Ann Cochran, a stockholder of Galaxy Enterprises.
61
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On March 10, 2000, Netgateway entered into an agreement to merge with Galaxy
Enterprises in a transaction to be accounted for as a pooling of interests.
Under the terms of the agreement, each issued and outstanding share or common
stock of Galaxy Enterprises will be exchanged for approximately 0.63 shares of
Netgateway common stock. Additionally, Netgateway will assume the obligation to
issue shares upon exercise of approximately 1,800,000 Galaxy Enterprises stock
options which could result in the issuance of approximately 1,137,000 shares of
Netgateway common stock.
The following unaudited pro forma combined financial statements for
Netgateway present the effect of the proposed merger between Netgateway and
Galaxy Enterprises to be accounted for as pooling of interests as if the merger
had been completed on March 31, 2000 for balance sheet purposes and on July 1,
1996 for statement of operations purposes, subject to the assumptions and
adjustments described in the accompanying notes to unaudited pro forma combined
financial statements.
Netgateway uses a June 30 fiscal year end and Galaxy Enterprises uses a
December 31 fiscal year end. For purposes of preparing the unaudited pro forma
combined statement of operations for each of the years in the years ended
June 30, 1997 and 1998, Netgateway's operating results for the period ended
June 30, 1997, and March 4, 1998 (inception) through June 30, 1998 have been
combined with the operating results of Galaxy Enterprises for each of the years
in the two years ended December 31, 1998. Netgateway had no operations for the
year ended June 30, 1997, therefore, the statement of operations for the year
ended June 30, 1997 are based on Galaxy Enterprises statement of operations for
the year ended December 31, 1997. For purposes of preparing the unaudited pro
forma combined statement of operations for the year ended June 30, 1999 and the
nine months ended March 31, 2000, Netgateway's operating results for the period
have been combined with the operating results of Galaxy Enterprises for the same
period.
The unaudited pro forma combined financial statements are based on the
estimates and assumptions set forth in the notes to those statements, which are
preliminary and have been made solely for purposes of developing this pro forma
information. The unaudited pro forma combined financial statements are not
necessarily an indication of the results that would have been achieved had those
transactions been consummated as of the dates indicated or that may be achieved
in the future.
Netgateway and Galaxy Enterprises estimate that they will incur direct
transaction costs of approximately $700,000 and $550,000, respectively, in
connection with the proposed merger which will be charged to operations in the
quarter in which the merger is consummated. These amounts are preliminary
estimates and are therefore subject to change. There can be no assurance that
Netgateway or Galaxy Enterprises will not incur additional charges in subsequent
quarters to reflect costs associated with the proposed merger.
The unaudited pro forma statements have been derived from the historical
consolidated financial statements of Netgateway and Galaxy Enterprises, which
are included elsewhere in this document and are qualified in their entirety by
reference to, and should be read in conjunction with, the historical
consolidated financial statements and related notes thereto.
The unaudited pro forma statements are presented for illustrative purposes
only and do not purport to be indicative of the operating results or financial
position that would have actually occurred if the merger had occurred on the
dates indicated, nor are they necessarily indicative of the future operating
results or financial position of the combined company. The unaudited pro forma
statements do not give effect to any cost savings or synergies which may result
from the integration of the Netgateway and Galaxy Enterprises operations.
62
<PAGE>
NETGATEWAY, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
NETGATEWAY GALAXY ADJUSTMENTS COMBINED
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash.......................................... $ 8,740 $ 81 $ $ 8,821
Net trade receivables......................... 619 2,090 2,709
Related party trade accounts receivable....... -- 136 136
Unbilled receivables.......................... 679 -- (679)(9) --
Notes receivable.............................. 450 -- (450)(9) --
Inventories................................... -- 87 87
Deferred acquisition costs.................... 362 -- 123 (5) 485
Prepaid advertising........................... 290 -- 290
Prepaid expenses and other current assets..... 535 493 (394)(6) 634
Credit card reserves.......................... -- 448 448
-------- -------- ------- --------
Total current assets...................... 11,675 3,335 (1,400) 13,610
Property and equipment, net................... 2,497 263 (41)(4) 2,719
Total intangibles, net........................ 1,324 834 (75)(3) 2,083
Other assets.................................. 27 41 68
-------- -------- ------- --------
Total assets.............................. $ 15,523 $ 4,473 $(1,516) $ 18,480
======== ======== ======= ========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable.............................. $ 813 $ 1,022 $ $ 1,835
Related party trade account payable........... -- 92 92
Bank overdraft................................ -- 420 420
Accrued wages and benefits.................... 1,233 -- 1,233
Accrued interest.............................. -- -- --
Accrued liabilities........................... 988 438 1,426
Income taxes due currently.................... -- 1 1
Notes payable--current portion................ -- 543 (450)(9) 93
Deferred revenue--current portion............. 116 13,120 13,236
Customer deposits............................. -- 533 533
-------- -------- ------- --------
Total current liabilities................. 3,150 16,169 (450) 18,869
Deferred revenue, net of current portion...... -- 780 780
Notes payable, net of current portion......... -- 5 5
-------- -------- ------- --------
Total liabilities......................... 3,150 16,954 (450) 19,654
-------- -------- ------- --------
Stockholders equity (deficit)
Common stock................................ 18 42 (38)(10) 22
Additional-paid-in capital.................. 55,950 2,048 38 (10) 58,036
Deferred compensation....................... (744) (153) (897)
Accumulated other comprehensive loss........ (4) -- (4)
Accumulated deficit......................... (42,847) (14,418) (1,066) (58,331)
-------- -------- ------- --------
Total stockholders' equity (deficit)...... 12,373 (12,481) (1,066) (1,174)
-------- -------- ------- --------
Total liabilities & stockholders' equity...... $ 15,523 $ 4,473 $(1,516) $ 18,480
======== ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
63
<PAGE>
NETGATEWAY, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
NETGATEWAY GALAXY ADJUSTMENTS COMBINED
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue..................................... $ 3,215 $17,840 $ (679)(1) $ 20,376
Cost of sales............................... 1,399 13,780 (7,602)(2) 7,577
-------- ------- ------- --------
Gross profit................................ 1,816 4,060 6,923 12,799
-------- ------- ------- --------
Product development......................... 4,105 -- 113 (2) 4,218
Selling and marketing....................... 3,093 7,461 7,996 (2)(6) 18,550
General and administrative.................. 16,873 2,675 461 (2)(4)(5)(6 20,009
Depreciation and amortization............... 609 137 16 (3)(4) 762
Bad debt expense............................ -- 675 (675)(2) --
-------- ------- ------- --------
Total operating expenses.................. 24,680 10,948 7,911 43,539
-------- ------- ------- --------
Income (loss) from operations............... (22,864) (6,888) (988) (30,740)
-------- ------- ------- --------
Other income (expense):
Other income (expense).................... -- (25) -- (25)
Interest expense............................ (4,635) (11) -- (4,646)
-------- ------- ------- --------
Total other income (expense).............. (4,635) (36) -- (4,671)
-------- ------- ------- --------
Net income (loss) before taxes.............. (27,499) (6,924) (988) (35,411)
Income taxes................................ -- 3 (3 )(7) --
-------- ------- ------- --------
Net income (loss)........................... $(27,499) $(6,927) $ (985) $(35,411)
======== ======= ======= ========
Earnings loss per common share
Basic and diluted(1)...................... $ (2.02) $ (1.20) $ (2.02)
======== ======= ========
Weighted average shares outstanding:
Basic and diluted(1)...................... 13,589 5,768 17,513
======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
64
<PAGE>
NETGATEWAY, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
NETGATEWAY GALAXY ADJUSTMENTS COMBINED
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue........................................ $ 157 $13,448 $ (2,830)(1) $ 10,775
Cost of sales.................................. -- 7,016 (5,671)(2) 1,345
-------- ------- -------- --------
Gross profit................................... 157 6,432 2,841 (2) 9,430
-------- ------- -------- --------
Product development............................ -- -- 1,694 (2) 1,694
Selling and marketing.......................... -- 5,526 6,119 (2)(6) 11,645
General and administrative..................... 11,349 1,955 (2,549)(2)(4)(5) 10,755
Depreciation and amortization.................. 257 182 18 (3)(4) 457
Bad debt expense............................... -- 44 (44)(2) --
-------- ------- -------- --------
Total operating expenses................... 11,606 7,707 5,238 24,551
-------- ------- -------- --------
Income (loss) from operations.................. (11,449) (1,275) (2,397) (15,121)
-------- ------- -------- --------
Other income (expense):
Realized loss-equity securities.............. (55) -- -- (55)
Other income (expense)....................... -- 15 -- 15
Interest expense............................. (925) (8) -- (933)
-------- ------- -------- --------
Total other income (expense)............... (980) 7 -- (973)
-------- ------- -------- --------
Net loss before taxes.......................... (12,429) (1,268) (2,397) (16,094)
Income tax expense (benefit)................... -- (535) 535 (2) --
-------- ------- -------- --------
Net loss....................................... $(12,429) $ (733) $ (2,932) $(16,094)
======== ======= ======== ========
Net (loss) per common share:
Basic and diluted............................ $ (1.39) $ (0.13) $ (1.25)
======== ======= ========
Weighted Average shares outstanding:
Basic........................................ 8,912 5,705 12,836 (8)
======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
65
<PAGE>
NETGATEWAY, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
NETGATEWAY GALAXY ADJUSTMENTS COMBINED
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue........................................ $ 3 $11,448 $(4,300)(1) $ 7,151
Cost of sales.................................. -- 5,105 (4,719)(2) 386
------- ------- ------- -------
Gross profit................................... 3 6,343 419 6,765
------- ------- ------- -------
Product development............................ -- -- 275 (2) 275
Selling and marketing.......................... -- 4,759 4,193 (2) 8,952
General and administrative..................... 721 1,389 (252)(2)(4) 1,858
License fees................................... 3,822 -- -- 3,822
Depreciation and amortization.................. 13 133 18 (3)(4) 164
Bad debt expense............................... -- 44 (44) --
------- ------- ------- -------
Total operating expenses..................... 4,556 6,325 4,190 15,071
------- ------- ------- -------
Income (loss) from operations.................. (4,553) 18 (3,771) (8,306)
------- ------- ------- -------
Other income (expense):
Other income (expense)....................... -- 5 -- 5
Interest expense............................. (19) (4) -- (23)
------- ------- ------- -------
Total other income (expense)................. (19) 1 -- (18)
------- ------- ------- -------
Net income (loss) before taxes................. (4,572) 19 (3,771) (8,324)
Income tax expense (benefit)................... -- (16) 16 (7) --
Net income (loss).............................. $(4,572) $ 35 $(3,787) $(8,324)
======= ======= ======= =======
Earnings (loss) per common share:
Basic........................................ (0.84) 0.01 (0.89)
Diluted...................................... (0.84) 0.01 (0.89)
Weighted average shares outstanding:
Basic........................................ 5,416 5,272 9,340 (3)
======= ======= =======
Diluted...................................... 5,416 5,725 9,340 (8)
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
66
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
NETGATEWAY GALAXY ADJUSTMENTS COMBINED
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue........................................... $ -- $2,495 $(2,002)(1) $ 493
Cost of sales..................................... -- 1,057 (913)(2) 144
------ ------ ------- -------
Gross profit...................................... -- 1,438 (1,089) 349
------ ------ ------- -------
Product development............................... -- -- 150 (2) 150
Selling and marketing............................. -- 856 913 (2) 1,769
General and administrative........................ -- 305 (13)(2)(4) 292
Depreciation and amortization..................... -- 44 4 (3)(4) 48
Merger expenses................................... 108 (108)(2) --
------ ------ ------- -------
Total operating expenses........................ -- 1,313 946 2,259
------ ------ ------- -------
Income (loss) from operations..................... -- 125 (2,035) (1,910)
Income taxes...................................... -- 38 (38)(7) --
------ ------ ------- -------
Net income (loss)................................. $ -- $ 87 $(1,997) $(1,910)
====== ====== ======= =======
Earnings (loss) per common share:
Basic and diluted............................... $ -- $ 0.02 $ (0.49)
====== ====== =======
Weighted average shares outstanding:
Basic and diluted............................... $ -- 5,272 3,924 (8)
====== ====== =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
67
<PAGE>
The following pro forma adjustments have been made to the historical
financial statements of Netgateway and Galaxy Enterprises. These adjustments are
based upon preliminary estimates and assumptions made by management for purposes
of preparing the unaudited pro forma combined financial statements:
(1) Adjustment to decrease Galaxy Enterprises revenue, by $674,134,
$2,829,672, $4,299,735 and $2,001,834, for the nine months ended
March 31, 2000 and for the years ended June 30, 1999, 1998 and 1997,
respectively, to reflect the impact of the adoption of a change in
accounting principle regarding revenue recognition in the financial
statements as if the principle was adopted in the beginning of the
periods presented on July 1, 1996.
(2) Adjustment to reclassify cost of sales and operating expenses recorded
to conform Netgateway and Galaxy Enterprises' presentation.
(3) Adjustment to amortization expenses recorded by Galaxy Enterprises in
all periods presented to conform to Netgateway's policy of amortizing
goodwill over 10 years, including additional amortization expense of
$24,482, $31,188, $28,900 and $7,225 for the nine months ended
March 31, 2000 and in the years ended June 30, 1999, 1998 and 1997,
respectively.
(4) Adjustment to depreciation expenses and administration expense recorded
by Galaxy Enterprises in all periods presented to conform to
Netgateway's capitalization policy, including a decrease in
depreciation expenses at $8,647, $15,293, $10,002 and $2,955 for the
nine months ended March 31, 2000 and in the years ended June 30, 1999,
1998 and 1997, respectively. This also resulted in an increase in
general and administrative expenses of $19,786, $28,736, $11,519 and
$29,060 for the nine months ended March 31, 2000 and the years ended
June 30, 1999, 1998 and 1997, respectively.
(5) Adjustment to general and administrative expenses in the amount of
$123,635 recorded by Galaxy Enterprises for the nine months ended
March 31, 2000 to conform to Netgateway's policy of deferring all
merger expenses until consummation of the merger.
(6) Adjustment to selling and marketing expense in the amount of $393,909
and $141,130 recorded by Galaxy Enterprises for the nine months ended
March 31, 2000 and the year ended June 30, 1999, respectively, to
conform to Netgateway's policy of expensing all advertising costs.
(7) Adjustment to reduce income tax expense to reflect the benefit of net
losses from Netgateway.
(8) Pro forma combined net income (loss) per share represents Netgateway
historical weighted average shares outstanding and Galaxy Enterprises
historical weighted average shares outstanding converted to give effect
to an assumed exchange ratio of 0.63217.
(9) Adjustment to eliminate the intercompany activity between Netgateway
and Galaxy Enterprises.
(10) Adjustment to reflect the amount of outstanding shares of stock of the
combined enterprise at par value.
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<PAGE>
DESCRIPTION OF NETGATEWAY AND GALAXY CAPITAL STOCK
Netgateway is authorized to issue up to 40,000,000 shares of common stock,
par value $0.001 per share. As described in Netgateway's proxy statement on
Schedule 14A filed on April 26, 2000 with the SEC, Netgateway's board is
recommending that Netgateway stockholders approve an amendment to Netgateway's
certificate of incorporation to authorize the issuance of up to
250,000,000 shares of common stock. Holders of shares of Netgateway common stock
are entitled to one vote per share on all matters to be voted on by
stockholders. The holders of Netgateway common stock are entitled to receive
such dividends, if any, as may be declared from time to time by the Netgateway
board of directors out of funds legally available therefor. Upon liquidation or
dissolution of Netgateway, the holders of Netgateway common stock are entitled
to share ratably in the distribution of assets, subject to the rights of the
holders of Netgateway preferred stock, if any. Holders of Netgateway common
stock have no preemptive rights, subscription rights or conversion rights. There
are no redemption or sinking fund provisions with respect to the Netgateway
common stock. As of May 18, 2000, there were approximately 17,683,043 shares of
Netgateway common stock outstanding, held by approximately 380 holders of
record.
In addition, Netgateway is authorized to issue 5,000,000 shares of preferred
stock, $0.001 par value per share, in one or more series as determined by the
Netgateway board of directors. No shares of Netgateway preferred stock are
currently issued or outstanding. The Netgateway board of directors may, without
further action by the stockholders of Netgateway, issue a series of Netgateway
preferred stock and fix the rights and preferences of those shares, including
the dividend rights, dividend rates, conversion rights, exchange rights, voting
rights, terms of redemption, redemption price or prices, liquidation
preferences, the number of shares constituting any series and the designation of
such series. The rights of the holders of Netgateway common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Netgateway preferred stock issued by Netgateway in the future.
Galaxy Enterprises is authorized to issue up to 25,000,000 shares of common
stock, par value $0.007 per share. Holders of shares of Galaxy Enterprises
common stock are entitled to one vote per share on all matters to be voted on by
stockholders. The holders of Galaxy Enterprises common stock are entitled to
receive such dividends, if any, as may be declared from time to time by Galaxy
Enterprises' board of directors out of funds legally available therefor. Upon
liquidation or dissolution of Galaxy Enterprises, the holders of Galaxy
Enterprises common stock are entitled to share ratably in the distribution of
assets, subject to the rights of the holders of Galaxy Enterprises preferred
stock, if any. Holders of Galaxy Enterprises common stock have no preemptive
rights, subscription rights or conversion rights. As of May 18, 2000, there were
approximately 6,218,449 shares of Galaxy Enterprises common stock outstanding,
held by approximately 145 holders of record.
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<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF GALAXY ENTERPRISES COMMON STOCK AND
NETGATEWAY COMMON STOCK
THIS SECTION OF THE JOINT PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN
DIFFERENCES BETWEEN THE RIGHTS OF HOLDERS OF GALAXY ENTERPRISES COMMON STOCK AND
NETGATEWAY COMMON STOCK. WHILE WE BELIEVE THAT THIS DESCRIPTION COVERS THE
MATERIAL DIFFERENCES BETWEEN THE TWO, THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THIS ENTIRE
DOCUMENT AND THE OTHER DOCUMENTS WE REFER TO FOR A MORE COMPLETE UNDERSTANDING
OF THE DIFFERENCES BETWEEN BEING A STOCKHOLDER OF GALAXY ENTERPRISES AND BEING A
STOCKHOLDER OF NETGATEWAY.
COMPARISON OF RIGHTS OF NETGATEWAY'S STOCKHOLDERS AND GALAXY ENTERPRISES'
STOCKHOLDERS
The rights of Galaxy Enterprises stockholders are currently governed by the
Nevada Business Corporation Act and Galaxy Enterprises' articles of
incorporation and bylaws. The rights of Netgateway stockholders are currently
governed by the Delaware General Corporation Law and Netgateway's certificate of
incorporation and bylaws. As a Delaware corporation with significant operations
in California, Netgateway may also be subject to certain provisions of the
California Corporations Code. Upon completion of the merger, the rights of
Netgateway stockholders, and of Galaxy Enterprises stockholders who become
Netgateway stockholders as a result of the merger, will be governed by the
Delaware General Corporation Law and Netgateway's certificate of incorporation
and bylaws. Although the rights of stockholders of Netgateway and Galaxy
Enterprises are in many instances comparable, there are also differences.
INDEMNIFICATION
<TABLE>
<CAPTION>
GALAXY ENTERPRISES NETGATEWAY
- --------------------------------------------- ---------------------------------------------
<S> <C>
- - Organizational documents require - Organizational documents require
indemnification to the fullest extent of indemnification to the fullest extent of
Nevada law. Delaware law.
- - Under the Nevada Business Corporations - Under the General Corporation Law of the
Act, a corporation has the power to State of Delaware a corporation has the
indemnify a director or officer, except no power to indemnify its directors,
indemnification shall be allowed on officers, employees and agents for
account of: (1) acts or omissions of the expenses, judgments or settlements
director or officer which involve actually and reasonably incurred by them
intentional misconduct, fraud, or a in connection with suits and other legal
knowing violation of law; (2) the payment actions or proceedings if they acted in
of distributions in violation of Nevada good faith and in a manner reasonably
Revised Statutes Section78.300, which sets believed to be in or not opposed to the
forth the circumstances under which best interests of the corporation and,
distributions to stockholders may be made; with respect to any criminal action or
or (3) any matter in which the director or proceeding, had no reasonable cause to
officer has been finally adjudged to be believe their conduct was unlawful.
liable to the corporation or for amounts - Any indemnification in any suit or action
paid in settlement to the corporation, brought by or on behalf of the corporation
unless the adjudicating court determines is limited to expenses reasonably incurred
that the director or officer is entitled in defense or settlement of the suit or
to indemnity. action.
- The Delaware General Corporation Law
permits corporations to purchase and
maintain insurance against liability for
expenses, judgments or settlements whether
or not the corporation would have the
power to indemnify such persons therefor.
</TABLE>
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<PAGE>
RESTRICTIONS ON BUSINESS COMBINATIONS
<TABLE>
<CAPTION>
GALAXY ENTERPRISES NETGATEWAY
- --------------------------------------------- ---------------------------------------------
<S> <C>
- - Nevada Revised Statutes Section 78.411 ET - Netgateway is subject to section 203 of
SEQ. generally prohibits certain the Delaware General Corporation Law.
combinations between Nevada corporations - Section 203 prohibits mergers with,
and any interested stockholder for three dispositions of assets to, the receipt of
years after the interested stockholder disproportionate financial benefits by or
first becomes an interested stockholder. any other transaction that would increase
- - The term "interested stockholder" is the interested stockholder's proportionate
defined by NRS Section 78.423 but ownership of any class or series of the
generally includes (1) beneficial owners corporation's stock for a period of three
of more than 10% of the corporation's years from the date a person became an
outstanding voting shares or interested stockholder.
(2) affiliates of the corporation who were - A corporation may "opt out" of Section
beneficial owners of more than 10% of the 203.
corporation's outstanding voting shares - Even if section 203 is triggered, a
within the preceding three years. supermajority vote by stockholders may
- - The term "combination" is defined by NRS exempt a transaction from the restrictions
Section 78.416, but generally includes any contained in Section 203.
kind of transaction that would allow a - An interested stockholder owns 15% or more
potential acquiror to use the of the corporation's voting stock unless
corporation's assets to finance the the transaction in which the person became
acquisition or to benefit the acquiror's an interested stockholder was approved by
interests, rather than the interests of the corporation's board of director or
the corporation or its other shareholders. 66.67% of the outstanding voting stock of
- - Nevada Revised Statutes Section 78.411 ET the corporation, excluding shares held by
SEQ. also prohibits certain combinations the interested stockholder.
between Nevada corporations and any
interested stockholder after the three
year period unless (1) the combination is
approved by the board of directors or
interested stockholders, or (2) the
interested stockholder satisfies certain
fair value requirements.
- - Although a Nevada corporation may opt out
of the requirements of NRS Section 78.411
ET SEQ., Galaxy Enterprises has not done
so and thus remains subject to these
requirements.
</TABLE>
DIRECTORS
<TABLE>
<CAPTION>
GALAXY ENTERPRISES NETGATEWAY
- --------------------------------------------- ---------------------------------------------
<S> <C>
- - One year term. - One class of one year terms; proposal
- - Any director who has been declared before the stockholders to create a staggered
incompetent by a court or convicted of a board with two classes of two year terms.
felony may be removed by a majority vote - Removal only for cause, either by a
of (1) the board of directors or (2) the majority vote of the entire board or by the
stockholders. vote of the holders of a majority of the
- - Not less than one nor more than nine. shares entitled at the time to vote at an
election of directors by two-thirds of the
outstanding shares.
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
GALAXY ENTERPRISES NETGATEWAY
- --------------------------------------------- ---------------------------------------------
<S> <C>
- - Vacancies filled by majority vote of board - Not less than one nor more than nine.
or by stockholders at any regular or - Vacancies filled only by board until
special meeting. successor elected by stockholders.
</TABLE>
AMENDMENT OF ORGANIZATIONAL DOCUMENTS
<TABLE>
<CAPTION>
GALAXY ENTERPRISES NETGATEWAY
- --------------------------------------------- ---------------------------------------------
<S> <C>
- - Articles of incorporation may be amended - Certificate of incorporation amended by a
as prescribed by Nevada law. A Nevada vote of a majority of the shares entitled to
corporation which has issued stock must vote.
follow the following procedures to amend - Bylaws amended by either a vote of a
its articles: (1) the board of directors majority of the shares entitled to vote or a
must adopt a resolution setting forth the vote of a majority of the board of
proposed amendment and declaring its directors.
advisability; (2) the board of directors
must call a meeting of shareholders,
either annual or special, to consider the
amendment; (3) notice of the meeting must
be given to each shareholder entitled to
vote; (4) if a majority of shares entitled
to vote are voted in favor of the
amendment, the president or vice president
must execute and file a certificate of
amendment.
- - Bylaws amended by entire board or majority
vote of stockholders.
</TABLE>
VOTING RIGHTS
<TABLE>
<CAPTION>
GALAXY ENTERPRISES NETGATEWAY
- --------------------------------------------- ---------------------------------------------
<S> <C>
- - One vote per share of common stock. - One vote per share of common stock,
- - In most cases, a merger must be approved subject to the rights of any shares of
by the stockholders of the corporation to preferred stock.
be acquired. In some cases, a merger must - 120 days advance notice requirement for
be approved by the stockholders of the stockholder proposals and director
acquiring corporation. nominations.
- - Majority vote to approve merger. - Majority vote to approve merger.
</TABLE>
TREASURY SHARES
<TABLE>
<CAPTION>
GALAXY ENTERPRISES NETGATEWAY
- --------------------------------------------- ---------------------------------------------
<S> <C>
- - Any shares repurchased are deemed to - Treasury shares may be reissued in the
revert to authorized but unissued shares business judgment of the board.
upon acquisition. - Shares held in treasury or owned by a
subsidiary are not deemed to be
outstanding and may not be voted.
</TABLE>
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<PAGE>
STOCKHOLDER MEETINGS
<TABLE>
<CAPTION>
GALAXY ENTERPRISES NETGATEWAY
- --------------------------------------------- ---------------------------------------------
<S> <C>
- - Special meetings may be called by the - Special meetings called by the board or
president or the board and shall be called the holders of 40% of the capital stock
by the president at the written request of entitled to vote at that special meeting.
the holders of not less than 51% of the - Advance notice requirements.
shares entitled to vote. - Record date must be within 90 days of
- - Record date must be within 60 days of meeting date.
meeting date.
</TABLE>
DISSENTERS' RIGHTS
<TABLE>
<CAPTION>
GALAXY ENTERPRISES NETGATEWAY
- --------------------------------------------- ---------------------------------------------
<S> <C>
- - Stockholders of Nevada corporations may - Not granted under Delaware law if the
dissent, under certain circumstances, from consideration consists exclusively of
(1) consummation of a plan of merger, publicly traded securities.
(2) consummation of a plan of exchange, - Not granted under Delaware law for a sale
and (3) corporate action taken pursuant to of all or substantially all of a
shareholder approval, where the articles corporation's assets.
of incorporation, bylaws, or a board
resolution authorizes dissent.
- - Stockholders of Nevada Corporations have
no right to dissent where their shares are
either (1) listed on a national securities
exchange, or (2) there are at least 2000
shareholders of record. There are limited
exceptions to this rule.
</TABLE>
The preceding summary of exceptions is not intended to be complete and is
qualified in its entirety by reference to the Delaware General Corporation Law,
the Nevada Business Corporation Act, the General Corporation Law of the State of
California, where applicable, Netgateway's certificate of incorporation and
bylaws and Galaxy Enterprises' articles of incorporation and bylaws.
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<PAGE>
INFORMATION REGARDING NETGATEWAY
NETGATEWAY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be read
in conjunction with Netgateway's consolidated financial statements and related
notes thereto and Netgateway's "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Netgateway" which are
incorporated by reference in this document and reflect the acquisition of
Infobahn Technologies, LLC (d/b/a Digital Genesis) and Spartan Multimedia, Ltd.
completed on June 2, 1998 and January 15, 1999, respectively. The consolidated
statement of operations data for the period from March 4, 1998 (inception)
through June 30, 1998 and the year ended June 30, 1999, and the consolidated
balance sheet data at June 30, 1998 and 1999 are derived from the consolidated
financial statements of Netgateway which have been audited by KPMG LLP,
independent accountants, and are included elsewhere in this document. The
unaudited consolidated statement of operations data for the nine months ended
March 31, 1999 and 2000, and the unaudited consolidated balance sheet data at
March 31, 2000 are derived from the unaudited consolidated financial statements
included elsewhere in this document. In the opinion of management, these
statements have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results of these
periods. Historical results are not necessarily indicative of the results to be
expected in the future.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 4, 1998
(INCEPTION) YEAR NINE MONTHS ENDED
THROUGH ENDED MARCH 31,
JUNE 30, JUNE 30, -----------------------
1998 1999 1999 2000
-------------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ 3 157 122 3,215
Loss from operations........................... (4,553) (11,499) (7,884) (22,864)
Loss before extraordinary item................. (4,572) (12,429) (8,618) (27,499)
Net loss....................................... (4,572) (10,776) (6,965) (27,499)
Net loss per common share
Basic and diluted............................ (0.84) (1.21) (0.80) (2.02)
Weighted average common shares outstanding
Basic and diluted............................ 5,416 8,912 8,660 13,589
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30 AT MARCH 31
------------------- -----------
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................ $ 255 569 8,740
Working capital (deficit)................................... (1,960) (1,834) 8,525
Total assets................................................ 872 3,458 15,523
Short-term debt............................................. 2,052 1,698 --
Long-term debt.............................................. 368 -- --
Stockholder's equity (deficit).............................. (1,828) 245 12,373
</TABLE>
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<PAGE>
Note 1--Netgateway, Inc. was formed on March 4, 1998, as a Nevada corporation.
In June 1998, Video Calling Card, Inc., a Nevada public shell corporation,
acquired 100% of the outstanding common stock of Netgateway. Since the
stockholders of Netgateway received the majority voting interests in the
combined company, Netgateway is the acquiring enterprise for financial reporting
purposes.
Note 2--In November and December 1999, Netgateway sold 3,795,000 shares of
common stock in a public offering generating net proceeds of $23,057,844.
Note 3--Netgateway changed its method of accounting for revenue from the
completed contract method to the percentage-of-completion method effective
October 1, 1999. The percentage-of-completion method is preferable according to
Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, issued by the American Institute of Certified
Public Accountants. The new method has been applied retroactively by restating
Netgateway's consolidated financial statements for prior periods in accordance
with Accounting Principles Board Opinion (APB) No. 20.
75
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF NETGATEWAY
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF NETGATEWAY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS JOINT PROXY
STATEMENT/PROSPECTUS CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS AND
UNCERTAINTIES. NETGATEWAY'S 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 JOINT PROXY STATEMENT/PROSPECTUS, THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH NETGATEWAY'S FINANCIAL STATEMENTS
AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
GENERAL
Effective October 1, 1999, Netgateway changed its method of accounting for
revenue from the completed contract method to the percentage-of-completion
method. Netgateway believes that the percentage-of-completion method more
accurately reflects the current earnings process under its contracts. The
percentage-of-completion method is preferable according to Statement of
Position 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, issued by the American Institute of Certified Public
Accountants. The new method has been applied retroactively by restating our
consolidated financial statements for prior periods in accordance with
Accounting Principals Board Opinion No. 20.
FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY
In view of the rapidly evolving nature of our business and its limited
operating history, Netgateway believes that period-to-period comparisons of its
operating results, including its 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.
Netgateway cannot predict the degree to which it will experience seasonality
in its business because of its limited operating history, and the fact that it
cannot identify which companies, if any, it will acquire in the foreseeable
future.
RESULTS OF OPERATIONS
REVENUE
Service revenue includes revenue related to Web site development and the
design of electronic storefronts, internet-based shopping mall development and
design, and transaction processing. Service revenues for the three and nine
month periods ended March 31, 2000 increased to $2,042,315 and $3,214,997,
respectively, from $42,208 and $122,392 in the comparable prior periods. The
growth in service revenues was attributable primarily to the addition of several
new customers to Netgateway's Internet Commerce Center and to the licensing of
Netgateway's software to certain customers. In addition, Netgateway's average
price for system development increased as the scope and technical requirements
of Netgateway's customers using the Internet Commerce Center has increased.
GROSS PROFIT
Gross profit is calculated as net sales less the cost of sales, which
consists of the cost of project development and customer support expenses. Gross
profit for the three and nine month periods ended March 31, 2000 increased to
$1,533,851 and $1,815,972, respectively, from $8,683 and $19,903 in the
comparable prior periods. Gross profit increased in absolute dollars over the
same periods in 1999, primarily reflecting Netgateway's increased sales volume.
Gross margin percentages increased over the same periods due to the introduction
of Netgateway's software licensing program, which has significantly higher
margins than its existing revenue base.
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<PAGE>
PRODUCT DEVELOPMENT
Product development expenses consist primarily of payroll and related
expenses for development, editorial, creative and systems personnel and outside
contractors. Product development expenses for the three and nine month periods
ended March 31, 2000 increased to $2,342,665 and $4,104,599, respectively, from
$257,589 and $911,236 in the comparable prior periods. Product development
expenses have increased as Netgateway continues to upgrade its Internet Commerce
Center. Netgateway's focus continues to be large corporate clients in the
business-to-business sector; accordingly, its increased product development
expenses are consistent with its need to meet the more complex technical
requirements of that customer base.
SELLING AND MARKETING
Selling and marketing expenses consist of payroll and related expenses for
sales and marketing and the cost of advertising, promotional and public
relations expenditures and related expenses for personnel engaged in sales and
marketing activities. Selling and marketing expenses for the three and nine
month periods ended March 31, 2000 increased to $1,356,764 and $3,093,634,
respectively, from $306,974 and $333,437 in the comparable prior periods. The
increases in selling and marketing expenses are primarily attributable to
increased payroll-related and other infrastructure costs as Netgateway expands
and incurs additional costs related to the growth of its business.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of payroll and related expenses
for executive, accounting and administrative personnel, professional fees and
other general corporate expenses. General and administrative expenses for the
three and nine month periods ended March 31, 2000 increased to $1,993,223 and
$16,873,064, respectively, from $1,976,326 and $6,514,569 in the comparable
prior periods. The increase in general and administrative expenses is
attributable primarily to non-cash compensation expense from common stock issued
to executives in December 1999 valued at $11,775,000. The increases in general
and administrative expenses are also attributable to increased payroll-related
and other infrastructure costs as Netgateway expands and incurs additional costs
related to the growth of its business.
INTEREST (INCOME) EXPENSE, NET
Interest expense consists primarily of amortization of debt issuance costs
and debt discount and interest in connection with Netgateway's $1,000,000 of
Secured Convertible Debentures due December 31, 1999 and $6,633,500 of
Netgateway's Series A 12% Senior Notes. The Senior Notes were issued in
connection with Netgateway's May through October 1999 bridge financing private
placements. Interest (income) expense, net for the nine month period ended
March 31, 2000, increased to $4,635,012 from $679,274 in the comparable prior
period. The increase in interest expense for the nine month period is
attributable primarily to the amortization of promissory note discounts incurred
in conjunction with the bridge financing. The amortization of the debt discount
aggregated $4,356,934 during the nine month period ended March 31, 2000. All of
the Convertible Debentures were converted into common stock as of December 31,
1999. The Senior Notes were repaid in full in November 1999. The net interest
income for the nine month period ended March 31, 2000 is attributable to
interest earned on cash balances.
INCOME TAXES
Netgateway has not generated any taxable income to date and, therefore,
Netgateway has not paid any federal income taxes since its inception. The use of
Netgateway's 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.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, Netgateway had $8,739,972 in cash on hand, an increase of
$8,170,500 from June 30, 1999.
Net cash used in operating activities was $9,901,178 for the nine month
period ended March 31, 2000. Net cash used in operations was primarily
attributable to $27,498,958 in net losses and increases in assets, partially
offset by non-cash charges as well as increases in accounts payable and accrued
expenses. Increases in assets included $574,674 in accounts receivable and
$679,134 in unbilled receivables resulting from the growth in revenues during
the nine month period ended March 31, 2000. Non-cash charges include $3,402,313
for common stock issued for services, $8,400,000 for stock issued for
cancellation of options and $4,022,550 from the amortization of debt discount.
Accounts payable and accrued expenses increased $1,687,897 and resulted
primarily from the accrual of wages and benefits and balances owed on
expenditures.
Net cash used in investing activities was $2,789,888 for the nine months
ended March 31, 2000 and consisted primarily of purchases of property and
equipment for the upgrade of Netgateway's technological infrastructure.
Net cash provided by financing activities of $20,862,364 for the nine month
period ended March 31, 2000 resulted primarily from $1,114,950 in proceeds from
the issuance of Senior Notes and $25,313,863 in proceeds from the issuance of
common stock in connection with Netgateway's secondary offering, which
Netgateway completed in November and December 1999. These proceeds were
partially offset by $6,633,500 used to repay the bridge financing loans in their
entirety.
As of March 31, 2000, Netgateway believes that its existing capital
resources are adequate to meet its cash requirements for at least the next
6 months. Netgateway anticipates that it will incur additional capital
expenditures during the fourth quarter of its current fiscal year to continue
upgrading its technological infrastructure.
RECENT EVENTS
In January 2000, Netgateway reached an agreement with Intermedia Partners
Southeast, an affiliate of AT&T Media Services, to launch a local electronic
shopping portal in Nashville, Tennessee. Under this agreement, Netgateway will
design and develop an Internet-based shopping mall, to be branded with
Intermedia's name, brand and image. Netgateway will also offer its storefront
building and maintenance services to Intermedia's branded collateral material
and periodic distribution and updating of advertising spots to promote the
branded online shopping mall and storebuiliding services.
In January 2000, Netgateway also entered into an agreement with PharMerica,
a subsidiary of Bergen Brunswig Corporation, and the nation's foremost provider
of professional, quality and cost effective pharmacy products and services to
the long-term care, assisted living, sub-acute and skilled nursing industries.
Under the agreement, Netgateway will design, develop, manage and host a patient
prospecting system, known as PMSIOnLine.com, in which sales professionals and
claims adjustors will input prospective patient referrals directly into a
secured browser session and submit these prospective patient referrals to
PharMerica's legacy systems for analysis and possible sales follow-up.
In March 2000, Netgateway entered into a systems integrator agreement with
Complete Business Solutions, Inc., a leading systems integrator and worldwide
provider of information technology services to large and mid-sized
organizations. Under the terms of the agreement, Netgateway will provide CBSI
with access to the Internet Commerce Center development environment. Netgateway
will also allow CBSI to integrate individual business-to-business customers of
CBSI, primarily located in North America and Mexico, into the Internet Commerce
Center platform. Netgateway receives an upfront fee from CBSI for each CBSI
customer integrated into to the Internet Commerce Center. CBSI provides the
integration services for each CBSI customer and collects integration revenue
from that customer. Netgateway and CBSI share recurring fees for hosting,
transactions and advertising. In April 2000, Netgateway entered into a similar
agreement with Complete Business Solutions, India, an Indian
78
<PAGE>
subsidiary of CBSI. This agreement contains similar terms to those described
above and expands the customer reach available for licensing of the Internet
Commerce Center internationally to include Europe, Asia and South America.
In April 2000, Netgateway reached an agreement with CableRep, Inc., an
affiliate of Cox Communications, to launch one or more electronic shopping
portals in Cox Communications cable television markets designated by Cox
Communications. Pursuant to this agreement, Netgateway will design and develop
Internet-based shopping malls, to be branded with Cox Communications' name,
brand and image, and will offer its storefront building and maintenance services
to Cox Communications' cable television subscribers. Netgateway will also be
responsible for marketing support, including development of Cox Communications'
branded collateral material and periodic distribution and updating of
advertising spots to promote the branded online shopping mall and storebuilding
services.
MARKET PRICE AND DIVIDEND INFORMATION FOR NETGATEWAY
Netgateway's common stock has traded on The Nasdaq National Market under the
symbol "NGWY" since November 18, 1999. From June 2, 1998 until November 18,
1999, Netgateway's common stock traded on the Nasdaq OTC Bulletin Board under
the symbol "NGWY." The following table sets forth the range of high and low bid
prices reported on The Nasdaq National Market or the Nasdaq OTC Bulletin Board,
as applicable, for Netgateway common stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal 2000
First Quarter............................................. $11.88 $6.50
Second Quarter............................................ 11.56 5.13
Third Quarter............................................. 13.38 7.94
Fiscal 1999
First Quarter............................................. 11.13 5.75
Second Quarter............................................ 10.00 2.12
Third Quarter............................................. 15.25 4.50
Fourth Quarter............................................ 16.62 8.75
</TABLE>
The above bid prices indicate the prices that a market maker is willing to
pay. These quotations do not include retail markups, markdowns or other fees and
commissions and may not represent actual transactions.
DIVIDENDS
Netgateway has never paid any cash dividends on its common stock and
Netgateway anticipates that it will continue to retain any earnings for the
foreseeable future for use in the operation of the combined company.
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BUSINESS OF NETGATEWAY
GENERAL
Netgateway provides eCommerce services that allow clients to extend their
business to the Internet to conduct commercial transactions between business
enterprises and between business enterprises and consumers. The hub of
Netgateway's eCommerce solution is its proprietary Internet Commerce Center,
which consists of the hardware, proprietary and licensed software, and the
related technical services necessary for Netgateway's clients to transact
eCommerce. Netgateway also designs and builds custom interfaces, or spokes, to
connect business clients to the Internet Commerce Center. Netgateway's Internet
Commerce Center 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 eCommerce with one or more specific customers.
Netgateway, Inc. was incorporated under the laws of the State of Nevada on
April 13, 1995 under the name Video Calling Card, Inc. In June 1998, Netgateway,
Inc. acquired all of the outstanding capital stock of Netgateway, a Nevada
corporation formerly known as eClassroom.com, in exchange for 5,900,000 shares
of its common stock. At the same time, Netgateway, Inc. acquired the assets of
Infobahn, LLC d/b/a Digital Genesis, an electronic commerce applications
developer, in exchange for 400,000 shares of its common stock.
In January 1999, StoresOnline.com, Ltd., a Canadian corporation and a wholly
owned subsidiary of Netgateway, Inc., acquired all of the outstanding capital
stock of Spartan Multimedia, Ltd., an Internet storefront developer and
storefront service provider, in exchange for 371,429 shares of Class B common
stock of StoresOnline.com. The Class B common stock is exchangeable on a
one-to-one basis for shares of common stock of Netgateway, Inc.
In November 1999, Netgateway, Inc. reincorporated under the laws of the
State of Delaware.
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 people using the Internet.
According to International Data Corp., or IDC, a leading research firm, the
number of Internet users will grow from approximately 98 million worldwide at
the end of 1998 to approximately 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. In addition,
specialized intranets that are also available to select outsiders, such as
clients, suppliers or vendors, known as extranets, have also emerged. These new
global communications and commerce environments represent a significant
opportunity for enterprises to interact in new and highly efficient ways with
customers, employees, suppliers and partners.
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ECOMMERCE
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 eCommerce 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. Sales are projected to increase to
$95 billion in 2000 and to $400 billion by 2002. IDC also projects that by the
year 2002, 78% of all Internet commerce will occur in the business-to-business
sector.
ECOMMERCE SERVICES MARKET
IDC forecasts that the market for Internet and eCommerce 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 eCommerce 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 eCommerce 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.
Companies face significant challenges in successfully adapting their
businesses to conduct commerce by means of the Internet. These include 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.
Netgateway believes that few of the existing eCommerce 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, Netgateway believes that organizations are increasingly searching
for professional services firms offering turn-key eCommerce solutions, including
integrated strategy, technology and creative design, connectivity, transaction
processing, data warehousing, transaction reporting, help desk and consulting
and training. Furthermore, Netgateway believes 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.
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THE NETGATEWAY SOLUTION
GENERAL
Netgateway has structured the Internet Commerce Center, to provide scalable,
fully integrated, customizable solutions. Netgateway develops customized
interfaces to connect its clients' Web sites, whether created and maintained by
Netgateway or others on behalf of the clients, with the Internet Commerce Center
and our eCommerce servers. As a result of Netgateway's hub and spoke structure,
it can offer rapidly deployed, low cost eCommerce services which incorporate the
sales and other practices of its clients and their industries, as well as
maintain Netgateway's clients' prior investment in creating and maintaining a
Web presence.
THE INTERNET COMMERCE CENTER
The Internet Commerce Center consists of hardware and software, as well as
related technical services, which are necessary to transact eCommerce.
Netgateway has developed the Internet Commerce Center based upon an
object-oriented, modular strategy. As a result, Netgateway is able to reuse
functional software components of the Internet Commerce Center across different
clients and industries, as well as allow introduction of new capabilities and
services without adversely affecting existing systems.
The following features are designed to provide more complete eCommerce
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 systems
- Budget reporting
- Customer self-administration
- Order management
- System status monitoring
- Product catalog management
THE INTERFACE SPOKE
Netgateway has the capability to rapidly design and deploy software
interfaces. These permit client Web sites, networks and enterprises resource
planning systems to connect with, receive relevant information from, and provide
relevant information to, the Internet Commerce Center. Data integration between
the Internet Commerce Center 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 work flow;
- Unique order header for each customer;
- Product configuration;
- Graphical interface;
- Special reporting needs;
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- Product variation rules; and
- Workflow with routing and approvals.
All spokes are developed according to a common methodology so as clients in
similar industries are added to the Internet Commerce Center, the cost and time
of development is reduced by sharing previously created modules. Netgateway has
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; and
- Enterprises resource planning systems advantages.
Netgateway believes that the following are significant advantages of its
eCommerce solution over other currently available alternatives:
- Netgateway's customers do not invest in hardware, software and staffing,
but rather connect to Netgateway's existing infrastructure. Netgateway
believes this is a highly economical method to obtain and maintain an
eCommerce presence.
- Clients with existing Web sites can maintain their investment in the
creation of that presence while seamlessly adding eCommerce capabilities.
- Because Netgateway's infrastructure permits scalable eCommerce solutions,
Netgateway can offer incremental services to its clients through the
activation of additional software capabilities in response to client
growth or commercial requirements quickly and cost effectively.
- Because Netgateway's other software resides only on its servers,
Netgateway can offer clients easy access to additional functionality on a
test or temporary basis in order to permit its clients to try new or
additional services with their respective customers on their Web sites.
Netgateway can provide real time updates, patches and fixes to software
with no additional effort by the client.
BUSINESS STRATEGY
Key elements of Netgateway's strategy are described below.
- IMPLEMENT COST EFFECTIVE SERVICES WITH BROAD APPEAL. Netgateway has
designed its operations and business model to focus upon the eCommerce
services of highest value to its clients. These are services which would
require high levels of investment of resources or technical expertise by
clients if they were to provide these services themselves. By offering
these services to a number of clients simultaneously and by creating and
using reusable software modules, Netgateway is 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 eCommerce transactions. This permits Netgateway to
offer these services to its clients on a highly cost effective basis.
- LEVERAGE RELATIONSHIPS WITH SYSTEMS INTEGRATIONS TO MAXIMIZE
GROWTH. Netgateway has embraced a channel strategy with systems
integrators to expand its market reach. Netgateway has found that this
particular strategy matches well with systems integrators that have
existing client
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relationships where adding an eCommerce solution for that client will
strengthen the relationship.
- PROVIDE EASY ACCESS TO SCALABLE ECOMMERCE FUNCTIONALITY. Netgateway has
designed the Internet Commerce Center and its hardware and software
infrastructure to permit scalable eCommerce solutions. Netgateway can
offer incremental services to its clients through the activation of
additional software capabilities which quickly provide additional services
and added functionality in response to client growth or commercial
requirements.
- OFFER ADDITIONAL FUNCTIONALITY OF INTERNET COMMERCE CENTER
SERVICES. Netgateway's hub and spoke approach constantly generates new
features for its Internet Commerce Center 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 Internet
Commerce Center. This benefits all Internet Commerce Center users in that
industry.
- USE OF TECHNOLOGY TO CREATE ECOMMERCE HUBS. Netgateway has improved the
attractiveness of its services by creating eCommerce hubs in the form of
(1) private label Internet-based shopping malls where eCommerce 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. Netgateway has structured the Internet Commerce Center and its
hardware and software infrastructure, and developed customizable, software
to permit the easy interconnection of client Web sites with Netgateway's
eCommerce servers, whether prepared and maintained by Netgateway or others
on behalf of Netgateway's clients. As a result, Netgateway can offer
eCommerce services which incorporate the sales and other practices of its
clients and their industries, as well as maintain the clients' prior
investment in creating and maintaining a Web presence.
- SEEK STRATEGIC ACQUISITIONS AND INVESTMENTS. Netgateway intends to seek
strategic acquisitions of, and investments in, businesses and technologies
which Netgateway believes will enhance the functionality of Netgateway's
services, operations and competitive position.
SERVICES OFFERED
Netgateway offers eCommerce services which range from simple Internet
storefronts to highly complex business-to-business eCommerce systems. Netgateway
currently offers the following specific services to our clients:
WEB SITE DEVELOPMENT AND DESIGN; DEVELOPMENT OF ELECTRONIC STOREFRONTS
Netgateway believes that a professionally designed Web site is critical to
the success of business customers desiring to transact eCommerce. Netgateway
offers Web site development, design and maintenance solutions to our business
customers, including the development and design of graphical interfaces and
applications necessary to fully integrate each customer's Web site with its
order and payment processing, order confirmation and fulfillment centers.
Netgateway's 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 the
merger, Netgateway intends to further develop and enhance this solution and to
aggressively market these services through its cable company partners.
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INTERNET-BASED SHOPPING MALL DEVELOPMENT AND DESIGN
Netgateway believes that the use of Internet-based shopping malls is
critical to create an effective eCommerce marketplace. Through the creation and
use of private labeled Internet malls, users of Netgateway's 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, Netgateway developed and features an
eCommerce search engine that searches within each Internet mall, as well as
across all Internet malls served by the Internet Commerce Center. Netgateway
believes the use of malls and the availability of Netgateway's robust eCommerce
search engine adds substantial value to individual stores and resellers alike.
For Netgateway customers not otherwise affiliated with any mall, Netgateway
provides access to Netgateway's own mall as a value-added service.
TRANSACTION PROCESSING
Netgateway offers solutions which capture and transact customer orders
according to the business rules and specific "back office" needs of the
particular client. Netgateway's eCommerce system solution allows Netgateway to
receive and process orders and payments, provide order confirmation and
reporting and organize order fulfillment. Netgateway also has the ability to
provide support for eCommerce transactions using checks, credit cards,
electronic funds transfers, purchase orders and other forms of payment.
Netgateway currently provides this capability in conjunction with certain third-
party vendors, including PaymentNet in San Jose, California, AuthorizeNet 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 the merger, Netgateway plans to pursue its own secured
transaction clearing solutions as well as a strategic alliance or acquisition of
a secured transaction processing center.
DATA WAREHOUSING AND TRANSACTION REPORTING
Netgateway anticipates that, as its business continues to grow, Netgateway
will compile large amounts of transactional and other data with respect to
Netgateway's clients and their businesses, markets, customers, and eCommerce
transactions. Netgateway has 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 Netgateway's hardware and
software infrastructure. Following the merger, Netgateway plans to further
develop these capabilities.
CABLECOMMERCE SERVICES
In July 1999, Netgateway formed CableCommerce, a new operating division that
focuses on providing eCommerce services and solutions to cable television
operators. Typically, CableCommerce will design, develop, host and manage
branded Internet-based shopping malls in the markets served by the cable
television operator featuring businesses local to each of these markets. In
addition, CableCommerce offers local and regional classified advertisements,
community calendars and coupons, provides mall content, trains cable system
salespeople and offers storefront creation and maintenance services to the cable
television system's subscribers. To date, Netgateway has entered into contracts
to provide these services with MediaOne, CableOne, Wireless One, Frontiervision
Media Services and Intermedia Partners Southeast, an affiliate of AT&T Media
Services. See "--Clients and Strategic Relationships."
CUSTOMER SUPPORT SERVICES
Netgateway provides clients with 24-hour per day and seven-day per week
customer service and support through its customer support staff of approximately
17 individuals.
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ADVERTISING
Netgateway has signed agreements with 24/7 Media Services, Inc. and Engage
Technologies, Inc. to manage national banner advertising in Netgateway's
Internet-based shopping malls. Netgateway shares advertising revenues with the
respective mall owner on whose Web site the advertisement resides.
CONNECTIVITY SOLUTIONS
For business customers to effectively engage in eCommerce, they must be
connected to the Internet. Netgateway assists its business customers in
structuring and obtaining high-speed Internet connectivity solutions to improve
their business-to-business communications by means of the Internet. Netgateway
provides these connectivity solutions to its business customers in conjunction
with third party Internet access providers. Netgateway's connectivity solutions
also include the ability to host clients' Web sites and provide clients with
security measures necessary for secure transmissions over the Internet.
Netgateway supports its hosted Web sites by a connectivity enhancing,
high-performance, high-bandwidth server system.
SALES AND MARKETING
Netgateway sells and markets its services by means of a combination of
direct sales and through partnership agreements with systems integrators.
Netgateway maintains a direct sales force of approximately 16 full-time
employees. Netgateway anticipates increasing its sales force substantially
following the merger, including creating a group within its sales force trained
to assist systems integrators in marketing its products and services.
Netgateway has developed, and is continuing to develop, its relationships
with its cable company partners to sell entry level Internet Commerce Center
services, such as simple Internet storefronts and services to the cable
company's customers. Netgateway will "private label" the Internet storefront
service and establish private branded Internet-based shopping malls to provide
its cable partners with the means to drive traffic to these storefronts. The
storefronts and mall will have the customized "look and feel" of the cable
company.
In July 1999, Netgateway established a call center in American Fork, Utah.
The center has immediate capacity for 40 telephone salespeople with future
expansion capabilities to add up to 130 telephone sales stations. The primary
focus of the call center is to produce revenues by means of outbound sales call
campaigns and selling Netgateway products and services. Netgateway believes that
the center will also produce revenues by performing outbound calling services
for its reseller channel partners charging hourly fees and for other clients
requiring inbound or outbound services by charging a combination of development,
activation and hourly fees. The center also supports inbound technical questions
from Netgateway's user base 24 hours per day, 7 days per week. The center is
equipped with the latest technology, affording the operators digital
capabilities such as queue control over voice, e-mail and fax in digital format,
rapid development and deployment of outbound marketing campaigns, database
integration into the outbound queuing system, Web-based monitoring tools and
drastically reduced costs as compared to other standard telephone technologies.
CLIENTS AND STRATEGIC RELATIONSHIPS
Netgateway views its clients as both the sponsor and owner of the eCommerce
site in question and, in some cases, resellers of its products and services.
Netgateway is currently processing eCommerce transactions for over 2,300
clients. Netgateway's clients are geographically dispersed and represent a mix
of businesses.
Each Netgateway client enters into a standard eCommerce services agreement
or subscription agreement, as appropriate. These agreements vary significantly
based upon the terms and conditions of
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the particular client transaction, the features of the proposed eCommerce site,
the levels of service necessary for the client and other factors. The agreements
may include provisions for the payment to Netgateway of development fees,
hosting fees, interchange fees, transaction fees and other fees related to the
services provided by Netgateway under the agreements.
The following are descriptions of a number of the client contracts into
which Netgateway has recently entered, including contracts with its
CableCommerce operating division.
XOOM.COM. In March 1999, Netgateway entered into an agreement with
XOOM.com, an eCommerce Web portal with over 7.8 million members. Under the terms
of the agreement:
- Netgateway is 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;
- Netgateway developed XOOM.com's Internet-based shopping mall located at
www.xoommemberstores.com;
- Netgateway is the sole provider of eCommerce processing services to
XOOM.com's eCommerce customers; and
- Netgateway will use XOOM.com as a Netgateway reseller to provide eCommerce
solutions and services to its member companies.
CB RICHARD ELLIS. In March 1999, Netgateway entered into an eCommerce
services agreement with CB Richard Ellis, 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,
Netgateway developed, manages and services 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.
WIRELESS ONE. In June 1999, Netgateway entered into a reseller and mall
agreement with Wireless One, Inc. Under the agreement, Netgateway will design
and develop an Internet-based shopping mall, to be branded with the Wireless One
name, brand and image, and will offer its storefront creation and maintenance
services to Wireless One's subscribers. Netgateway will also provide 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 Netgateway and Wireless One in all systems in which
it is able to provide advertising.
RELIANT INNOVATIONS. In June 1999, Netgateway entered into an eCommerce
services agreement with Reliant Innovations under which Netgateway will develop
an eCommerce site for Reliant Innovations to sell computer products to clients
who are members of specific trade and professional associations with which
Reliant Innovations has formed a partnership.
MEDIAONE. In July 1999, Netgateway entered into a strategic relationship
with MediaOne, a leading cable television operator. Under the agreement
Netgateway will design, develop, host and manage Internet-based shopping malls
in each of MediaOne's cable television markets. These markets currently consist
of more than five million households. These shopping malls will be branded with
the MediaOne name, brand and image, will feature businesses local to each market
and will offer additional online services, such as classified advertisements,
local community events calendars and
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coupons. MediaOne has agreed to contribute commercial advertising time on their
cable systems to promote these malls. In connection with this agreement,
MediaOne acquired 50,000 shares of Netgateway common stock and a warrant
exercisable for up to 200,000 shares of Netgateway common stock. The warrant
vests in four installments upon the satisfaction of milestones relating to the
scope of the launch of these Internet-based shopping malls. As of March 31,
2000, MediaOne has launched shopping malls in six cable television markets
representing more than 500,000 subscriber households.
FRONTIERVISION MEDIA SERVICES. In July 1999, Netgateway entered into a
reseller and mall agreement with Frontiervision Media Services, a provider of
cable television programming services. Under the agreement, Netgateway will
design and develop an Internet-based shopping mall, to be branded with the
Frontiervision name, brand and image, and will offer its storefront creation and
maintenance services to Frontiervision's subscribers. Netgateway will also
provide marketing support, including development of mall content, training of
Frontiervision salespeople and production of advertising spots to promote their
services. Frontiervision will promote this mall with a minimum of 1,000
cablecasts per broadcast month in each broadcast market where the mall services
are offered.
B2BSTORES.COM. In July 1999, Netgateway entered into an eCommerce services
agreement with B2BStores.com, Inc., a catalog aggregator and procurement
company, under which Netgateway will develop, manage and service an Internet
commerce site for B2B Stores.com to offer and sell goods and services to
businesses.
CABLEONE. In August 1999, Netgateway entered into a cable reseller and mall
agreement with CableOne, a large cable television operator. Under the agreement,
Netgateway will design and develop an Internet-based shopping mall, to be
branded with the CableOne name, brand and image, and will offer its storefront
creation and maintenance services to CableOne's subscribers. Netgateway will
also provide marketing support, including development of mall content, training
of CableOne sales people and production of advertising to promote their
services. CableOne will promote this mall with a minimum of 400 cablecasts per
broadcast month in each broadcast market where the mall services are offered.
BUYSELLBID.COM. In August 1999, Netgateway entered into a distributor mall
and reseller agreement with BuySellBid.com, Under the agreement, Netgateway will
design and develop Internet-based shopping malls for BuySellBid.com, which will
in turn resell and/or sublicense these Internet-based shopping mall packages,
custom-branded, to other resellers. In the alternative, BuySellBid.com will
offer to brand any such Internet-based mall with the BuySellBid.com name, brand
and image and offer Netgateway's storefront creation and maintenance services to
its own subscribers. Netgateway will provide marketing support, including
development of mall content, and training of BuySellBid.com salespeople.
BERGEN BRUNSWIG CORPORATION. In October 1999, Netgateway entered into an
internet services agreement with Bergen Brunswig Corporation, a leading supplier
of pharmaceutical, medical-surgical supplies and specialty healthcare products.
Under this agreement, Netgateway will design, develop, manage and service an
Internet-based shopping mall to be branded with the Bergen Brunswig name, brand
and image and which will contain on-line storefronts for affiliated local
pharmacies. We will also be responsible for training of Bergen Brunswig
personnel.
DIVERSITY ECOMMERCE.COM, INC., FORMERLY KNOWN AS LEADING TECHNOLOGIES. In
December 1999, Netgateway reached an agreement with Diversity
eCommerce.com Inc. to develop, manage and service its Internet-based mall and
client extranet.
AT&T MEDIA SERVICES. In January 2000, Netgateway entered into a reseller
and mall agreement with Intermedia Partners Southeast, an affiliate of AT&T
Media Services, to launch an electronic shopping portal in Nashville, Tennessee.
Under this agreement, Netgateway will design and develop an
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Internet-based shopping mall, to be branded with Intermedia's name, brand and
image, and will offer its storefront creation and maintenance services to
Intermedia's subscribers. Netgateway will also provide marketing support,
including development of Intermedia's branded collateral material and periodic
distribution and updating of advertising spots to promote the branded online
shopping mall and storebuilding services. Intermedia will promote the mall with
a total of 500 30-second spots every month, jointly developed by Netgateway and
Intermedia in the Nashville market.
PHARMERICA. In January 2000, Netgateway also entered into an agreement with
PharMerica, a subsidiary of Bergen Brunswig Corporation that provides
professional, quality and cost effective pharmacy products and services to the
long-term care, assisted living, sub-acute and skilled nursing industries. Under
the agreement, Netgateway will design, develop, manage and host a patient
prospecting system, known as PMSIOnLine.com, in which sales professionals and
claims adjustors will input prospective patient referrals directly into a
secured browser session and submit these prospective patient referrals to
PharMerica's legacy systems for analysis and possible sales follow-up.
COX COMMUNICATIONS. In April 2000, Netgateway reached an agreement with
CableRep, Inc., an affiliate of Cox Communications, to launch one or more
electronic shopping portals in Cox Communications cable television markets
designated by Cox Communication. Pursuant to this agreement, Netgateway will
design and develop Internet-based shopping malls, to be branded with Cox
Communications' name, brand and image, and will offer its storefront building
and maintenance services to Cox Communications' cable television subscribers.
Netgateway will also be responsible for marketing support, including development
of Cox Communications' branded collateral material and periodic distribution and
updating of advertising spots to promote the branded online shopping mall and
storefront building services.
Netgateway has embraced a channel strategy with systems integrators to
expand its market reach. Netgateway has found that this particular strategy
matches well with systems integrators that have existing clients for whom adding
an eCommerce solution will strengthen the relationship.
The following is a description of the systems integrator agreements into
which Netgateway has recently entered:
COMPLETE BUSINESS SOLUTIONS, INC.; COMPLETE BUSINESS SOLUTIONS, INDIA. In
March 2000, Netgateway entered into a systems integrator agreement with Complete
Business Solutions, Inc., a leading systems integrator and worldwide provider of
information technology services to large and mid-sized organizations. Under the
terms of the agreement, Netgateway will provide CBSI with access to the Internet
Commerce Center development environment, and allow CBSI to integrate individual
business to business customers of CBSI, primarily located in North America and
Mexico, into the Internet Commerce Center platform. Netgateway receives an
upfront fee from CBSI for each CBSI customer integrated into the Internet
Commerce Center. CBSI provides the integration services for each CBSI customer
and collects integration revenue from that customer. Netgateway and CBSI share
recurring fees for hosting, transactions and advertising. In April 2000,
Netgateway entered into a similar agreement with Complete Business Solutions,
India, an Indian subsidiary of CBSI. This agreement contains similar terms to
those described above and expands the customer reach available for licensing of
the Internet Commerce Center internationally to include Europe, Asia and South
America.
Initial customer service and support for Netgateway's customers is provided
through Netgateway's customer support staff of 17 individuals that provides
telephone customer service and support 24 hours a day, 365 days a year.
Netgateway can also provide customers with access to information and customer
support services by means of the Internet.
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RESEARCH AND DEVELOPMENT
Since June 1998, Netgateway has conducted extensive research and development
with respect to Netgateway's technology. During the year ended June 30, 1999,
and during the nine months ended March 31, 2000, Netgateway invested
approximately $1,496,563 and $4,104,599, respectively, in the research and
development of its technology. Netgateway's research and development efforts
have:
- emphasized the development of advanced technology and new services;
- the enhancement and refinement of existing services in response to rapidly
changing client specifications and industry needs;
- introduced support for evolving communications methodologies and
protocols, software methodologies and protocols and computer hardware
technologies; and
- improved functionality, flexibility, ease of use and enhanced the quality
of documentation, training materials and technical support tools.
Netgateway intends to conduct additional research and development to, among
other things, further its strategy of developing cost effective services with
broad appeal, provide easy access to scalable eCommerce services and offer
additional functionality of its Internet Commerce Center services. At March 31,
2000, Netgateway's research and development activities employed approximately
110 computer programmers and technicians.
COMPETITION
The eCommerce services market is intensely competitive and characterized by
rapidly evolving technologies. Netgateway currently faces substantial
competition in all of its product and service lines. Netgateway expects 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. Netgateway's target market is rapidly evolving and is subject to
continuous technological change. As a result, Netgateway's 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 Netgateway's
business, prospects, financial condition and results of operations. Netgateway
competes on the basis of a number of factors, including the attractiveness of
the eCommerce 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 Netgateway's control. Existing or
future competitors may develop or offer eCommerce services that provide
significant technological, creative, performance, price or other advantages over
the services offered by Netgateway.
Netgateway's current and potential competitors include:
- Internet integrators, Internet service providers and Internet consulting
service providers, such as IBM, AppNet, Braun Consulting, Calico Commerce,
Cambridge Technology, iXL Enterprises, Luminant, Organic Online, Proxicom,
RareMedium Group, Razorfish, Sapient, Scient Corp., Us Internetworking, US
Web Corporation and Viant Corp;
- large information technology consulting service providers, such as
Andersen Consulting, Cambridge Technology Partners and EDS;
- Internet commerce providers, such as Internet Capital and Safeguard
Scientific;
- Internet marketing service providers, such as 24/7 Media Services, Inc.,
AdForce, Ariba, Chemdex Corp., CommerceOne, Critical Path, CyberSource,
Digital River, DoubleClick, Earth Web, eBay, Fatbrain, Flycast
Communications, Intraware, Modem Media, MyPoints.com, National Info
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Consortium, pcOrder.com, PurchasePro.com, RoweCm, silknet Software, uBid,
VerticalNet and Web Trends;
- 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 have not yet offered a full
range of Internet professional services, many are currently offering some of
these services or have announced their intention to do so. These competitors at
anytime could elect to focus additional resources in our target markets, which
could materially adversely affect Netgateway's business, prospects, financial
condition and results of operations. Many of Netgateway's 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 Netgateway. 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 Netgateway's target market or prevent Netgateway's
penetration into their client accounts.
Additionally, in pursuing acquisition opportunities, Netgateway may compete
with other companies with similar growth strategies. Some of these competitors
may be larger and have greater financial and other resources than Netgateway.
Competition for these acquisition targets 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 Netgateway's business.
Netgateway has limited proprietary technology that would preclude or inhibit
competitors from entering the eCommerce services market. Therefore, Netgateway
must rely on the skill of Netgateway personnel and the quality of its client
services. The costs to develop and provide eCommerce services are low.
Therefore, Netgateway expects that it will continually face additional
competition from new entrants into the market in the future. In addition,
Netgateway is subject to the risk that its employees may leave to start
competing businesses. The emergence of these enterprises could have a material
adverse effect on Netgateway's business, prospects, financial condition and
results of operations.
INTELLECTUAL PROPERTY
Netgateway's success depends upon its proprietary technology and other
intellectual property and on its ability to protect its proprietary technology
and other intellectual property rights. In addition, Netgateway must conduct its
operations without infringing on the proprietary rights of third parties.
Netgateway also intends to rely upon unpatented trade secrets and the know-how
and expertise of its employees. To protect Netgateway's proprietary technology
and other intellectual property, Netgateway relies 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.
Netgateway has trademark applications pending with the United States Patent and
Trademark Office for:
- CABLECOMMERCE
- NETGATEWAY
- NETGATEWAY ICC
- NETGATEWAY INTERNET COMMERCE CENTER
- NETGATEWAY KNOWLEDGE AND COMMERCE FOR THE DIGITAL AGE
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- NETGATEWAY WHERE BUSINESS DOES BUSINESS ON THE INTERNET
- STORESONLINE
- STORESONLINE.COM
- STORESONLINE.COM WHERE MERCHANTS DO BUSINESS ON THE INTERNET
- MERCHANT MISSION CONTROL
- two NETGATEWAY logos.
Although Netgateway believes that it has taken appropriate steps to protect
its intellectual property rights, including requiring that its employees and
third parties who are granted access to its intellectual property enter into
confidentiality agreements, these measures may not be sufficient to protect
Netgateway's rights against third parties. Others may independently develop or
otherwise acquire unpatented technologies or products similar or superior to
Netgateway's.
Netgateway licenses from third parties certain software and Internet tools
that Netgateway includes in its services and products. If any of these licenses
were terminated, Netgateway could be required to seek licenses for similar
software and Internet tools from other third parties or develop these tools
internally. Netgateway 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.
Netgateway may in the future be required to defend its 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, Netgateway. An adverse determination could subject Netgateway to
significant liabilities to third parties, require Netgateway to seek licenses
from, or pay royalties to, third parties, or require Netgateway to develop
appropriate alternative technology. Some or all of these licenses may not be
available to Netgateway on acceptable terms or at all. In addition, Netgateway
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 Netgateway's
business, prospects, financial condition and results of operations.
EMPLOYEES
As of the date of this joint proxy statement/prospectus, Netgateway had
approximately 146 full-time employees, including 7 executive personnel,
approximately 21 in sales and marketing, approximately 58 in the development of
its eCommerce solutions, approximately 17 in customer support and approximately
8 in general administration and finance. Netgateway intends to hire additional
key personnel in the near future.
FACILITIES
Netgateway's headquarters are located at 300 Oceangate, 5th Floor, Long
Beach, California 90802. These premises, which occupy 16,360 square feet, are
subject to a lease between Netgateway and an unaffiliated third party. The lease
expires on July 9, 2001 and monthly payments under this lease are currently
approximately $25,900. Netgateway believes that, in the event alternative or
larger offices are required, such space is available at competitive rates.
To house and support the Netgateway Internet Commerce Center, Netgateway
maintains its equipment in Exodus' state-of-the-art data center in Irvine,
California, which provides 24-hour per day, seven days per week accessible
operating environment with multiple redundant high-speed connections
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to the Internet backbone. Hardware used by Netgateway at the Exodus data center
includes Multiple Sun Spare Servers, Sun Enterprise 3500 and 4500 servers and
EMC storage. 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 days per week key card access, video monitors, motion sensors and
staff members on-site.
GOVERNMENTAL REGULATION
Netgateway is 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 commerce
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 eCommerce 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 Netgateway's
products or services, Netgateway's cost of doing business or otherwise have an
adverse effect on Netgateway's 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
Netgateway is not a party to any material litigation or legal proceeding
relating to its products and services or otherwise. Except as set forth in the
following paragraph, Netgateway is not aware of any material legal proceedings
threatened against it.
On May 23, 2000, Netgateway received a notice from one of its customers,
Affinitee.com, alleging that Netgateway breached an Electronic Commerce Services
Agreement by and between Netgateway and Affinitee. Affinitee contends that
Netgateway's alleged breach of the agreement has caused damages to Affinitee in
an amount in excess of $500,000. Netgateway believes that the allegations
contained in Affinitee's notice are without merit. As of May 24, 2000, Affinitee
had not commenced a formal legal proceeding against Netgateway in connection
with the foregoing dispute.
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MANAGEMENT OF NETGATEWAY
OUR DIRECTORS AND EXECUTIVE OFFICERS
Set forth in the table below are the names, ages and positions of the
current directors and executive officers of Netgateway. None of the directors or
executive officers has any family relationship to any other director or
executive officer of Netgateway.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------------
<S> <C> <C>
Keith D. Freadhoff........................... 41 Chairman of the Board of Directors
Roy W. Camblin III........................... 53 Chief Executive Officer and Director
Donald M. Corliss, Jr........................ 50 President, Chief Operating Officer and Director
Jon C. Frojen................................ 41 Chief Financial Officer
Jill Glashow Padwa........................... 42 Executive Vice President-Sales and Marketing
Simon Spencer................................ 34 Chief Information Officer
Craig S. Gatarz.............................. 38 General Counsel and Corporate Secretary
David Bassett-Parkins........................ 39 Director
R. Scott Beebe............................... 47 Director
William Brock................................ 49 Director
John Dillon.................................. 50 Director
Joseph Roebuck............................... 64 Director
</TABLE>
Set forth below is a brief description of the business experience for the
previous five years of all current directors and executive officers of
Netgateway.
KEITH D. FREADHOFF
Mr. Freadhoff has served as chairman of the board of directors of Netgateway
since its inception in March 1998. He also served as chief executive officer of
Netgateway from March 1998 through October 1999. 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.
ROY W. CAMBLIN III
Mr. Camblin has served as chief executive officer of Netgateway since
October 1, 1999. He has been a Director of Netgateway since December 15, 1999.
Mr. Camblin served as chief information officer of Netgateway from July 1999
until his appointment as Chief Executive Officer. Prior to joining Netgateway,
from May 1998 until July 1999, Mr. Camblin was the global chief information
officer, executive vice president and executive committee member of CB Richard
Ellis. From January 1996 to April 1998, Mr. Camblin was the head of global
operations and technology, Investment Products Division at Citibank. From
July 1993 to December 1995, Mr. Camblin was the chief information officer and a
senior vice president at Oracle Corporation. From June 1989 until July 1993,
Mr. Camblin was a senior vice president at Wells Fargo Bank, responsible for
operations and technologies for wholesale banking and also responsible for
credit card technologies. Prior to Wells Fargo, Mr. Camblin spent over five
years at Charles Schwab in several management positions, where he also obtained
his Series 7.
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Other career experiences included twelve years as an officer and pilot in the US
Air Force, with jobs including chief of operations plans and chief of flight
management for the Pacific region. Mr. Camblin has a Bachelor of Science degree
in Marketing from Florida State University and a Masters in Systems Management
from the University of Southern California. Past recognitions have included
"Visionary of the Year", awarded by Sun Microsystems in 1992.
DONALD M. CORLISS, JR.
Mr. Corliss has served as the president and a director of Netgateway since
March 1998. He was appointed chief operating officer in March 2000. 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 responsible for 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 responsible
for 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 Inglehame 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 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 resumed
operations.
JILL GLASHOW PADWA
Ms. Padwa has served as executive vice president--sales and marketing of
Netgateway since December 1999. Ms. Padwa has more than 20 years experience in
information technology, and has worked for such leading companies as
Hewlett-Packard and GartnerGroup, a leader in IT research and consulting
services. Ms. Padwa held numerous senior management positions at GartnerGroup
from January 1997 to December 1999, and directed the marketing and sales
strategies for the company's entry into the healthcare industry market. During
her tenure, the business recognized significant growth. Most recently,
Ms. Padwa was responsible for managing sales operations for GartnerGroup's North
American operations. Ms. Padwa also served as the business development manager
for Hewlett-Packard's Healthcare Information Management Division from
October 1994 to December 1996. She managed the team that developed the worldwide
product strategies for Hewlett-Packard's successful entry and growth into new
market segments. Ms. Padwa held numerous positions with Hewlett-Packard, ranging
from technical to sales and marketing management positions. Ms. Padwa received a
Bachelor of Science degree in Computer Science from the University of Vermont in
1979 and a Masters of Science in Public Health Policy from Boston University in
1989.
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SIMON SPENCER
Mr. Spencer has served as chief information officer of Netgateway since
March 2000. From September 1999 through February 2000, he served as Netgateway's
chief technical officer. He has experience in Internet development in the
financial services industry as well as significant experience in the software
development industry. Mr. Spencer has been recognized internationally as a
leader in the field of information systems and information technology. In 1998
Mr. Spencer was included in the International Who's Who of information
technology professionals. Prior to joining Netgateway, Mr. Spencer managed
Emerging Technologies within CitiGroup's investment technology organization and
was instrumental in the design and implementation of middleware and Internet
technologies supporting CitiGroup's new investment platforms. Mr. Spencer has
also worked with Oracle Corporation as a director of Global Productivity Systems
within their worldwide operations organization. He also was responsible for
engineering within their Knowledge Management, InterOffice and Internet
(www.oracle.com) organizations.
JON C. FROJEN
Mr. Frojen has served as chief financial officer of Netgateway since
February 2000. Mr. Frojen has extensive experience in domestic and international
finance and treasury. As vice president and treasurer of Long Beach Mortgage
from July 1999 to January 2000, Mr. Frojen directed mergers and acquisitions,
corporate development and strategic planning. Long Beach Mortgage Company, a
specialty finance company, originated $2.6 billion in mortgage production in
1998. Mr. Frojen served as vice president of capital markets and strategy
planning for Long Beach Mortgage Company from September 1998 to June 1999. Prior
to joining Long Beach Mortgage, Mr. Frojen was vice president and treasurer of
Avco Financial Services, Inc. from April 1996 to August 1998, a $9 billion
consumer and commercial finance company. Mr. Frojen's responsibilities included
the funding of domestic and international finance operations, asset/liability
management and risk management. Mr. Frojen spent eleven years in banking at
First Interstate Bank, Ltd. and Standard Chartered Bank from January 1993 to
March 1996. During his three years at Standard Chartered, Mr. Frojen worked for
the Asia Pacific Merchant Banking group. He was responsible for developing
business with U.S. based multinational companies for the Group's corporate
finance advisory and fund raising activities in the Asia Pacific Region. At
First Interstate, Mr. Frojen worked in a variety of areas, including corporate
banking, loan syndication, leveraged ESOPs, leveraged buy-outs, and corporate
finance. Mr. Frojen earned his Bachelor of Arts degree in Economics at the
University of California at Berkeley in 1982 and a Masters of Business
Administration degree from the University of Southern California in 1985.
CRAIG S. GATARZ
Mr. Gatarz has served as general counsel of Netgateway since April 1999 and
was appointed the corporate secretary of Netgateway in February 2000. From
March 1989 until March 1999, Mr. Gatarz was an attorney at the law firm of
Jones, Day, Reavis & Pogue and specialized in corporate law, particularly
corporate restructurings and asset-based lending transactions. From
September 1987 through February 1989, he was an attorney at the law firm of
Cadwalader, Wickersham & Taft in New York, New York. Mr. Gatarz received a
Bachelor of Arts degree in Political Science from Boston College in 1984 and his
law degree in 1987 from the University of Virginia School of Law. He 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.
DAVID BASSETT-PARKINS
Mr. Bassett-Parkins served as chief financial officer and chief operating
officer of Netgateway from its inception in March 1998 until February 2000. He
has also served as a director of Netgateway since Netgateway's 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
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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
Bachelor of Science degree in Management from California State Polytechnic
University, Pomona and an Executive Education Certificate from University of
California at Los Angeles.
Mr. Bassett-Parkins no longer serves as Netgateway's chief financial officer
or chief operating officer. He remains a director. On April 14, 2000, Netgateway
received notice from Mr. Bassett-Parkins of his intent to terminate his
employment agreement for "good reason," as that term is defined in his
employment agreement, effective as of June 7, 2000. Mr. Bassett-Parkins has
alleged that, under his employment agreement, he is entitled to a lump sum
severance payment as a result of terminating his employment for "good reason."
Netgateway is in negotiations with Mr. Bassett-Parkins regarding any severance
payments and it is not possible to determine the outcome of these negotiations
at this time.
JOHN DILLON
Mr. Dillon has served as a director of Netgateway since December 1999.
Mr. Dillon was named president and chief executive officer of Salesforce.com in
September 1999. Before joining Salesforce.com, Mr. Dillon was interim president
and chief executive officer for Perfecto Technologies, a start-up company
delivering solutions for ensuring Internet application security. Prior to his
employment with Perfecto, he served as president and chief executive officer for
Hyperion, the global company formed through the merger of Arbor Software and
Hyperion Software. Mr. Dillon also spent five years with Arbor Software as vice
president of sales and then as president and chief executive officer. Earlier in
his career, Mr. Dillon was employed at Oracle Corporation and Grid Systems in
various sales management capacities and at EDS as a systems engineer. A graduate
of the United State Naval Academy at Annapolis, Mr. Dillon received a bachelor's
degree in engineering and a Master of Business Administration degree from Golden
State University. He served five years of active duty in the United States Navy
nuclear submarine service and retired with the rank of commander from the Naval
Reserve.
R. SCOTT BEEBE
Mr. 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, Inc., an investment and consulting firm specializing in technology growth
companies. Mr. Beebe was a registered representative in the securities industry
from 1982 through 1998. Mr. Beebe received his a Bachelor of Arts degree in
English from the University of California at Berkeley in 1973.
WILLIAM BROCK
Mr. 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 eCommerce 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 SmithBarney. 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.
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JOSEPH ROEBUCK
Mr. Roebuck was appointed to the board of directors in April 2000.
Mr. Roebuck has served as vice president of strategic sales of Sun Microsystems
Computer Systems Division since 1990. Prior to 1990, Mr. Roebuck held the
position of vice president for U.S. and intercontinental sales for Asia, Latin
American and Canada at Sun Microsystems. Mr. Roebuck joined Sun Microsystems as
the vice president of sales in 1983. Prior to 1983, he served as director of
vertical marketing for Apple Computer. Mr. Roebuck previously served as a
lieutenant junior grade in the United States Navy. He received his Bachelor of
Arts degree from Cornell University and completed the advanced management
program at Harvard Business School.
DIRECTOR COMPENSATION
On December 15, 1999, the board of directors approved cash compensation for
non-employee directors in the amount of $15,000 annually, payable in four
quarterly installments. At that time, the non-employee directors of Netgateway
were Messrs. Beebe and Dillon, William Brock and Ronald Spire. In addition, at
that time, as part of their compensation package for serving as directors,
Messrs. Beebe, Dillon and Spire were each granted 20,000 options to purchase
common stock under Netgateway's 1999 Stock Option Plan for Non-Executives. The
options vest quarterly over a two-year period beginning on January 1, 2000. At
the time of his appointment to the board of directors in July 1999, Mr. Brock
was granted options to purchase 150,000 shares of common stock pursuant to
Netgateway's 1999 Stock Option Plan for Non-Executives. Mr. Brock's options vest
as follows: 50,000 at July 20, 1999 and the remainder in equal quarterly
increments for 2 years. At the time of his appointment to the board of directors
in April 2000, Mr. Roebuck was granted options to purchase 180,000 shares of
common stock under Netgateway's 1999 Stock Option Plan for Non-Executives.
Mr. Roebuck's options vest annually over a three year period from the date of
the grant. In April 2000, Mr. Dillon was granted options to purchase an
additional 180,000 shares of common stock under the 1999 Stock Option Plan for
Non-Executives. Mr. Dillon's options vest quarterly over a three-year period. In
April 2000, Mr. Beebe was granted options to purchase an additional 60,000
shares of common stock under the 1999 Stock Option Plan for Non-Executives.
Mr. Beebe's options vest quarterly over a one-year period.
Messrs. Freadhoff, Camblin and Corliss are employees of Netgateway and are
not compensated for their services as directors of the Netgateway.
All directors are reimbursed for reasonable expenses incurred in connection
with attending meetings of the board of directors.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During fiscal year 1999, Netgateway's board of directors held one regularly
scheduled meeting and acted by unanimous written consent on 26 occasions. For
the period from July 1, 1999 through March 31, 2000, the board of directors held
eight regularly scheduled meetings and acted by unanimous written consent on
14 occasions. In addition to attending meetings, directors also discharge their
responsibilities by review of management reports to directors, visits to
Netgateway's facilities, correspondence and telephone conferences with the
company's executive officers and others regarding matters of interest and
concern to Netgateway.
The board of directors has standing audit, finance and compensation
committees. All committees report their activities, actions and recommendations
to the board of directors.
The compensation committee currently consists of Messrs. Beebe, Brock and
Dillon. The compensation committee interprets the provisions and supervises the
administration of Netgateway's stock option plans. It also has the authority to
review all of Netgateway's compensation matters.
98
<PAGE>
The audit committee currently consists of Messrs. Beebe and Brock. The audit
committee currently has one vacancy. The audit committee reviews the results of
the audit with the independent auditors; reviews the adequacy, scope and results
of the internal accounting controls and procedures; reviews the independence of
the auditors; reviews the auditors' fees; and makes recommendations concerning
the engagement of independent public auditors.
The finance committee, currently consists of of Messrs. Freadhoff, Corliss,
Beebe, Camblin, Brock and Dillon. The finance committee reviews Netgateway's
annual operating budgets, strategic business objectives and financial
projections. Additionally, the finance committee reviews all proposed financing
transactions, merger and acquisition transactions and advises the board of
directors on all matters related to the financial condition of Netgateway.
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.
EXECUTIVE COMPENSATION
The following table and discussion summarizes the compensation for (a) the
individuals who served as chief executive officer during fiscal year 1999 and
the four most highly compensated executive officers, other than the chief
executive officer, who were serving as executive officers at the end of fiscal
year 1999 (Messrs. Freadhoff, Corliss, Bassett-Parkins, Gatarz and Ms. Hanh
Ngo), and (b) individuals who served as the chief executive officer and each of
the five other most highly compensated executive officers through March 31, 2000
of fiscal year 2000 (Messrs. Freadhoff, Camblin, Corliss, Bassett-Parkins,
Gatarz and Simon Spencer and Ms. Ngo) for the years indicated during which each
person was employed by Netgateway.
99
<PAGE>
FISCAL YEAR 1999
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
--------------------------------------------- ------------------------------------
OTHER RESTRICTED
ANNUAL STOCK STOCK
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR ($) ($) ($) (1) ($) (#) COMPENSATION
- ------------------ -------- -------- -------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Keith D. Freadhoff ...... 1999 100,625 57,500 -- $3,200,000(2) (2) --
Chief Executive Officer
and Director
Roy W. Camblin III(3).... 1999 -- -- -- -- -- --
Donald M. Corliss, 1999 96,250 50,000 -- $3,200,000(4) (4) --
Jr. ...................
President and Director
David Bassett-Parkins ... 1999 87,500 50,000 -- $3,200,000(5) (5) --
Chief Financial Officer
and Chief Operating
Officer
Simon Spencer(6)......... 1999 -- -- -- -- -- --
Hanh Ngo ................ 1999 75,000 25,000 -- -- 150,000(7) --
Executive Vice
President of Operations
and Secretary
Craig S. Gatarz ......... 1999 30,000 7,500 -- -- 161,812(8) --
General Counsel
</TABLE>
- --------------------------
(1) Subsequent to June 30, 1999, Netgateway terminated performance-based stock
options exercisable for an aggregate of 780,000 shares of common stock and
other stock options exercisable for an aggregate 1,200,000 shares of common
stock granted to Messrs. Freadhoff, Corliss and Bassett-Parkins and issued
in lieu of these options restricted stock awards of an aggregate of
1,200,000 shares of common stock.
(2) During the year ended June 30, 1999, Mr. Freadhoff earned performance-based
stock options exercisable for an aggregate of 69,000 shares of common stock
and other options exercisable for an aggregate of 200,000 shares of common
stock. Subsequent to June 30, 1999, all performance and other options
granted to Mr. Freadhoff, including the options referenced in the preceding
sentence, were terminated. In lieu of these options, Mr. Freadhoff received
a restricted stock award of 400,000 shares of common stock.
(3) Mr. Camblin commenced his employment with Netgateway in August 1999.
(4) During the year ended June 30, 1999, Mr. Corliss earned performance-based
stock options exercisable for an aggregate of 64,000 shares of common stock
and other options exercisable for an aggregate of 200,000 shares of common
stock. Subsequent to June 30, 1999, all performance and other options
granted to Mr. Corliss, including the options referenced in the preceding
sentence, were terminated. In lieu of these options, Mr. Corliss received a
restricted stock award of 400,000 shares of common stock.
(5) During the year ended June 30, 1999, Mr. Bassett-Parkins earned
performance-based stock options exercisable for an aggregate of 60,000
shares of common stock and other options exercisable for an aggregate of
200,000 shares of common stock. Subsequent to June 30, 1999, all performance
and other options granted to Mr. Bassett-Parkins, including the options
referenced in the preceding sentence, were terminated. In lieu of these
options, Mr. Bassett-Parkins received a restricted stock award of 400,000
shares of common stock.
(6) Mr. Spencer commenced his employment with Netgateway in September 1999.
(7) During the year ended June 30, 1999, Ms. Ngo earned performance-based stock
options exercisable for an aggregate of 50,000 shares of common stock and
other options exercisable for an aggregate of
100
<PAGE>
133,333 shares of common stock. Subsequent to June 30, 1999, all performance
options granted to Ms. Ngo, including the performance options referenced in
the preceding sentence, were terminated and all other options awarded to
Ms. Ngo were reduced so as to be exercisable for an aggregate of 150,000
shares of common stock. As a result of this amendment, options exercisable
for an aggregate of 75,000 shares of common stock were declared vested as of
June 30, 1999.
(8) At June 30, 1999, Mr. Gatarz held options exercisable for an aggregate of
161,812 shares of common stock. Subsequent to June 30, 1999, Netgateway
amended performance-based stock options exercisable for an aggregate of
150,000 shares of common stock granted to Mr. Gatarz so as to vest over a
period of two years and not as a result of the satisfaction of performance
milestones. As a result of this amendment, options exercisable for an
aggregate of 21,703 shares of common stock were declared vested as of
June 30, 1999.
FISCAL YEAR 2000
(THROUGH MARCH 31, 2000)
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
--------------------------------------------- ------------------------------------
OTHER RESTRICTED
ANNUAL STOCK STOCK ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- ------------------ -------- -------- -------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Keith D. Freadhoff ...... 2000 150,982 57,500 -- -- -- --
Chairman of the Board
of Directors
Roy W. Camblin III ...... 2000 120,299 28,750 -- $3,375,000(1) 200,000(2) --
Chief Executive Officer
Chief Information
Officer and Director
Donald M. Corliss, 2000 144,473 55,000 -- -- -- --
Jr. ...................
President, Chief
Operating Officer and
Director
David 2000 131,288 50,000 -- -- -- --
Bassett-Parkins(3).....
Hanh Ngo(4).............. 2000 101,265 37,500 -- -- 150,000(5) --
Simon Spencer ........... 2000 93,785 52,500 -- -- 150,000(6) --
Chief Technical Officer
and Chief Information
Officer
Craig S. Gatarz ......... 2000 98,484 37,500 -- -- 161,812(7) --
General Counsel and
Secretary
</TABLE>
- --------------------------
(1) In November 1995, Mr. Camblin received a restricted stock award of
500,000 shares of common stock.
(2) At March 31, 2000, Mr. Camblin held options exercisable for an aggregate of
200,000 shares of common stock. Of these options, options exercisable for
116,667 shares of common stock were declared vested as of March 31, 2000.
(3) Mr. Bassett-Parkins no longer serves as the chief financial officer or chief
operating officer. He remains a director. On April 14, 2000, Netgateway
received notice from Mr. Bassett-Parkins of his intent to terminate his
employment agreement for "good reason," as that term is defined in his
employment agreement, effective as of June 7, 2000. Mr. Bassett-Parkins has
alleged that, under his employment agreement, he is entitled to a lump sum
severance payment as a result of terminating his employment for "good
reason." Netgateway is in negotiations with Mr. Bassett-Parkins regarding
any severance payments and it is not possible to determine the outcome of
these negotiations at this time.
101
<PAGE>
(4) Ms. Ngo no longer serves as the executive vice president--operations or
secretary. On April 14, 2000, we received notice from Ms. Ngo of her intent
to terminate her employment agreement with Netgateway for "good reason," as
that term is defined in her employment agreement, effective as of June 7,
2000. She has alleged that, under her employment agreement, she is entitled
to a lump sum severance payment as a result of terminating her employment
for "good reason." Netgateway is in negotiations with Ms. Ngo regarding any
severance payments and it is not possible to determine the outcome of these
negotiations at this time.
(5) At March 31, 2000, Ms. Ngo held options exercisable for an aggregate of
150,000 shares of common stock. Of these options, options exercisable for
150,000 shares of common stock were declared vested as of March 31, 2000.
(6) At March 31, 2000, Mr. Spencer held options exercisable for an aggregate of
150,000 shares of common stock. Of these options, options exercisable for
12,500 shares of common stock were declared vested as of March 31, 2000.
(7) At March 31, 2000, Mr. Gatarz held options exercisable for an aggregate of
161,821 shares of common stock. Of these options, options exercisable for
77,616 shares of common stock were declared vested as of March 31, 2000.
EMPLOYMENT AGREEMENTS
The following table summarizes the key provisions of the employment
agreements of Netgateway's executive officers.
<TABLE>
<CAPTION>
CONTRACT CONTRACT
COMMENCEMENT TERMINATION BONUS
NAME/POSITION DATE DATE PER ANNUM SALARY ARRANGEMENTS
- ------------- ------------------ ------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff...... January 1, 1999 December 31, 2001 $185,000 through June $57,500 payable in June
Chairman of the Board 30, 1999 $201,500 1999; Eligible for bonus
of Directors thereafter of up to $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.
Roy W. Camblin, III..... August 13, 1999 July 25, 2000 $175,000 As determined by board
Chief Executive of directors
Officer
Donald M. Corliss, January 1, 1999 December 31, 2001 $185,000 through June $55,000 payable in July
Jr.................... 30, 1999; $192,500 1999; Eligible for bonus
President, Chief thereafter for each of the three
Operating Officer and month periods ended
Director September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones; Otherwise as
determined by the board
of directors
Jill Glashow Padwa...... December 15, 1999 December 14, 2001 $180,000 As determined by board
Executive Vice of directors
President--Sales and
Marketing
Jon C. Frojen........... February 14, 2000 February 13, 2002 $160,000 As determined by board
Chief Financial of directors
Officer
Simon Spencer........... March 1, 2000 February 28, 2002 $200,000 As determined by board
Chief Information of directors
Officer
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
CONTRACT CONTRACT
COMMENCEMENT TERMINATION BONUS
NAME/POSITION DATE DATE PER ANNUM SALARY ARRANGEMENTS
- ------------- ------------------ ------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
David January 1, 1999 December 31, 2001 $175,000 $25,000 payable in
Bassett-Parkins(1).... December 1999; Eligible
for bonus 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(1)............. January 1, 1999 December 31, 2001 $135,000 $25,000 payable in
December 1999; Eligible
for bonus 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 S. Gatarz......... April 5, 1999 April 5, 2002 $120,000 through June As determined by the
General Counsel and 30, 1999; $150,000 board of directors.
Corporate Secretary through March 31, 2000;
$175,000 thereafter
</TABLE>
- ------------------------------
(1) On April 14, 2000, Netgateway received notification from
Mr. Bassett-Parkins and Ms. Ngo of their intent to terminate their
employment agreements for "good reason," as that term is defined in their
employment agreements, effective as of June 7, 2000. They have alleged that
under their employment agreements, they are each entitled to a lump-sum
payment as a result of their terminating their employment for good reason.
Netgateway is in negotiations with Mr. Bassett-Parkins and Ms. Ngo regarding
any severance payments and it is not possible to determine the outcome of
these negotiations at this time.
In the event of a change in control of Netgateway, all options previously
granted to these individuals which are then unvested will vest immediately. Upon
a termination of the employment of any of these individuals following a change
in control for any reason other than the relevant officer's death or disability
or for cause, as defined in each employee's employment agreement, Netgateway is
required to pay to such individual in the case of Messrs. Freadhoff, Corliss and
Basset-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 Messrs. Camblin,
Gatarz, Frojen, Spencer and Mmes. Padwa and Ngo, a lump sum severance payment
equal to two times the sum of (1) his or her then current annual salary and
(2) his or her highest bonus in the three year period preceding the change in
control. In addition, if the relevant individual's employment is terminated by
Netgateway without cause or by the relevant individual with good reason, then
Netgateway is 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. If any of these severance payments result in the imposition
of an excise tax on the relevant individual, Netgateway is required to gross up
this individual for such excess tax and any income taxes arising as a result of
the gross up payment. 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-competition, non-disclosure, and non-solicitation provisions for one year.
103
<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options to
purchase Netgateway common stock that were granted in fiscal year 1999 to the
named executive officers. Netgateway did not grant SARs in fiscal year 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE CLOSING OPTION TERM ($)
OPTIONS EMPLOYEES IN OR BASE SALE ---------------------------------
NAME GRANTED FISCAL YEAR PRICE ($) EXPIRATION DATE PRICE($) 5% 10% 0%(7)
- ---- ---------- ------------ --------- ----------------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Keith D. Freadhoff...... 276,000(1) 7.7 2.50 December 15, 2008 4.87 1,499,430 2,796,301 1,262,560
400,000(1) 11.1 4.87 December 15, 2008 4.87 1,225,087 3,104,610 --
Roy W. Camblin III(2)... -- -- -- -- -- -- -- --
Donald M. Corliss, 264,000(3) 7.3 2.50 December 15, 2008 4.87 1,434,237 2,674,723 1,207,666
Jr.................... 400,000(3) 11.1 4.87 December 15, 2008 4.87 1,225,087 3,104,610 --
David Bassett-Parkins... 240,000(4) 6.7 2.50 December 15, 2008 4.87 1,303,852 2,431,566 1,097,878
400,000(4) 11.1 4.87 December 15, 2008 4.87 1,225,087 3,104,610 --
Hanh Ngo................ 200,000(5) 5.6 2.50 December 15, 2008 4.87 1,086,543 2,026,305 914,898
266,667(5) 7.4 4.87 December 15, 2008 4.87 816,726 2,069,743 --
Simon Spencer(6)........ -- -- -- -- -- -- -- --
Craig S. Gatarz......... 150,000 4.2 6.50 April 4, 2009 12.88 2,172,024 4,036,110 1,815,921
11,812 0.3 5.17 April 4, 2009 12.88 186,750 333,540 144,147
</TABLE>
- ------------------------------
* Less than one percent.
(1) Subsequent to June 30, 1999, all of these options granted to Mr. Freadhoff
were terminated.
(2) Mr. Camblin commenced his employment with us in August 1999.
(3) Subsequent to June 30, 1999, all of these options granted to Mr. Corliss
were terminated.
(4) Subsequent to June 30, 1999, all of these options granted to
Mr. Bassett-Parkins were terminated.
(5) Subsequent to June 30, 1999, options for an aggregate of 316,667 shares of
common stock granted to Ms. Ngo were terminated.
(6) Mr. Spencer commenced his employment with Netgateway in September 1999.
(7) Calculated using the Black Scholes pricing model with the following
assumptions: (a) volatility--100%, (b) risk free rate--5%, (c) dividend
yield--0% and (d) time of exercise--10 years.
104
<PAGE>
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information concerning the year-end number
and value of unexercised options with respect to each of the named executive
officers. None of these individuals exercised any options during this period.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff(2).......................... -- -- -- --
Roy W. Camblin III(3).......................... -- -- -- --
Donald M. Corliss, Jr.(4)...................... -- -- -- --
David Bassett-Parkins(5)....................... -- -- -- --
Simon Spencer(6)............................... -- -- -- --
Hanh Ngo(7).................................... 75,000 75,000 478,500 478,500
Craig S. Gatarz(8)............................. 21,703 140,109 103,089 665,118
</TABLE>
- ------------------------
(1) Based on the closing sale price of Netgateway common stock on the OTC
bulletin board at fiscal year end of $11.25 per share less the exercise
price payable for the shares. The fair market value of Netgateway common
stock at June 30, 1999 was determined on the basis of the closing sale price
of Netgateway common stock on June 30, 1999.
(2) At June 30, 1999, Mr. Freadhoff held stock options under Netgateway plans
exercisable for an aggregate of 676,000 shares of common stock. Subsequent
to June 30, 1999, all of these options granted to Mr. Freadhoff were
terminated. In lieu of these options, Mr. Freadhoff received a restricted
stock award of 400,000 shares of common stock. At June 30, 1999,
Mr. Freadhoff held exercisable in-the-money stock options for an aggregate
of 200,000 shares of common stock with a value of $1,276,000 and held
unexercisable in-the-money stock options for an aggregate of 476,000 shares
of common stock with a value of $3,036,880.
(3) Mr. Camblin commenced his employment with Netgateway in August 1999.
(4) At June 30, 1999, Mr. Corliss held stock options under Netgateway plans
exercisable for an aggregate of 664,000 shares of common stock. Subsequent
to June 30, 1999, all of these options granted to Mr. Corliss were
terminated. In lieu of these options, Mr. Corliss received a restricted
stock award of 400,000 shares of common stock. At June 30, 1999,
Mr. Corliss held exercisable in-the-money stock options for an aggregate of
200,000 shares of common stock with a value of $1,276,000 and held
unexercisable in-the-money stock options for an aggregate of 464,000 shares
of common stock with a value of $2,960,320.
(5) At June 30, 1999, Mr. Bassett-Parkins held stock options under Netgateway
plans exercisable for an aggregate of 640,000 shares of common stock.
Subsequent to June 30, 1999, all of these options granted to
Mr. Bassett-Parkins were terminated. In lieu of these options,
Mr. Bassett-Parkins received a restricted stock award of 400,000 shares of
common stock. At June 30, 1999, Mr. Bassett-Parkins held exercisable
in-the-money stock options for an aggregate of 200,000 shares of common
stock with a value of $1,276,000 and held unexercisable in-the-money stock
options for an aggregate of 440,000 shares of common stock with a value of
$2,807,200.
(6) Mr. Spencer commenced his employment with Netgateway in September 1999.
(7) At June 30, 1999, Ms. Ngo held stock options under Netgateway's plans
exercisable for an aggregate of 466,667 shares of common stock. Subsequent
to June 30, 1999, options exercisable for an aggregate of 316,667 shares of
common stock granted to Ms. Ngo were terminated. At June 30,
105
<PAGE>
1999, Ms. Ngo held exercisable in-the-money stock options for an aggregate
of 133,333 shares of common stock with a value of $850,665 and held
unexercisable in-the-money stock options for an aggregate of 333,334 shares
of common stock with a value of $2,126,671.
(8) At June 30, 1999, Mr. Gatarz held stock options under Netgateway's plans
exercisable for an aggregate of 161,812 shares of common stock. Subsequent
to June 30, 1999, we amended performance-based stock options exercisable for
an aggregate of 150,000 shares of common stock granted to Mr. Gatarz so as
to provide that these options would vest over a period of two years and not
as a result of the satisfaction of performance milestones. As a result of
this amendment, options exercisable for an aggregate of 21,703 shares of
common stock were declared vested as of June 30, 1999. Accordingly, at
June 30, 1999, Mr. Gatarz held exercisable in-the-money stock options for an
aggregate of 21,703 shares of common stock with a value of $103,089 and held
unexercisable in-the-money stock options for an aggregate of 140,109 shares
of common stock with a value of $665,118.
In the event of a change in control of Netgateway, all options previously
granted to these individuals that remain unvested will vest immediately. Upon a
termination of the employment of any of these individuals following a change in
control for any reason other than the relevant officer's death or disability or
for cause, as defined in each employee's employment agreement, Netgateway is
required to pay to the 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 Messrs. Camblin,
Gatarz and Spencer and Ms. Ngo, a lump sum severance payment equal to two times
the sum of (1) his or her then current annual salary and (2) his or her highest
bonus in the three year period preceding the change in control. In addition, if
the relevant individual's employment is terminated by Netgateway without cause
or by the relevant individual with good reason, then Netgateway is 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. If any of
these severance payments result in the imposition of an excise tax on the
relevant individual, Netgateway is required to gross up this individual for the
excess tax and any income taxes arising as a result of the gross up payment. The
relevant individual may terminate his or her employment at any time upon at
least 30 days written notice to Netgateway. Upon the termination of the
agreement, the relevant individual is subject to non-competition, 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, and Netgateway's
stockholders approved, 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 is administered by the compensation committee of the board of
directors, which currently consists of three non-employee directors of the board
of directors. The committee has appointed a plan administrator to address the
day-to-day administration of this plan. The committee determines, 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 compensation 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
106
<PAGE>
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 Netgateway 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 Netgateway 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.
Netgateway 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. Payment of the
exercise price may be made by (1) delivery of cash or a check, bank draft or
money order, in United States dollars, payable to the order of Netgateway,
(2) through delivery to Netgateway of shares of common stock already owned by
the optionee with an aggregate fair market value on the date of exercise equal
to the total exercise price, (3) by having shares with an aggregate fair market
value on the date of exercise equal to the total exercise price (A) withheld by
Netgateway or (B) sold by a broker-dealer under the circumstances meeting the
requirements of 12 C.F.R. Section 220 or any successor thereof, (4) by any
combination of the above methods of payment or (5) by any other means determined
by the board of directors. 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 Netgateway become available again for reissuance under
this plan.
As of March 31, 2000, options exercisable for an aggregate of 835,714 shares
of common stock have been granted pursuant to this plan at a weighted average
exercise price of $3.41 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 is administered by the compensation committee of the board of
directors, which currently consists of three non-employee directors of the board
of directors. The committee has appointed a plan administrator to address the
day-to-day administration of this plan. The compensation committee determines,
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 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.
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<PAGE>
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
anytime 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.
Netgateway 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. Payment of the
exercise price may be made by (1) delivery of cash or a check, bank draft or
money order, in United States dollars, payable to the order of Netgateway,
(2) through delivery to Netgateway of shares of common stock already owned by
the optionee with an aggregate fair market value on the date of exercise equal
to the total exercise price, (3) by having shares with an aggregate fair market
value on the date of exercise equal to the total exercise price (A) withheld by
Netgateway or (B) sold by a broker-dealer under the circumstances meeting the
requirements of 12 C.F.R. Section 220 or any successor thereof, (4) by any
combination of the above methods of payment or (5) by any other means determined
by the board of directors. 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 Netgateway become available again for reissuance under
this program.
This program permits Netgateway 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 Netgateway common stock;
- stock appreciation rights; and
- performance shares of common stock.
However, Netgateway has not issued any other type of compensation under this
program other than non-qualified stock options and has agreed not to do so in
the future.
As of March 31, 2000, options exercisable for an aggregate of 720,451 shares
of common stock have been granted pursuant to this program at a weighted average
exercise price of $3.62 per share.
1999 STOCK OPTION PLAN FOR NON-EXECUTIVES
In July 1999, the board of directors adopted the 1999 Stock Option Plan for
Non-Executives. This program is administered by the compensation committee of
the board of directors, which currently consists of three non-employee directors
of the board of directors. The compensation committee has appointed a plan
administrator to address the day to day administration of this plan. The
compensation committee determines, 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.
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The exercise price per share of common stock subject to an option is
determined on the date of grant, and is generally fixed at 100% of the fair
market value per share at the time of grant. The exercise price of any option
granted to an option who owns stock possessing more than 10% of the voting power
of Netgateway's outstanding capital stock must equal at least 110% of the fair
market value of the common stock on the date of grant. Payment of the exercise
price may be made by (1) delivery of cash or a check, bank draft or money order
in United States dollars, payable to the order of Netgateway, (2) through
delivery to Netgateway of shares of common stock already owned by the optionee
with an aggregate fair market value on the date of exercise equal to the total
exercise price (3) by having shares with an aggregate fair market value on the
date of exercise equal to the total exercise price (A) withheld by Netgateway or
(B) sold by a broker-dealer under circumstances meeting the requirements of 12
C.F.R. Section 220 or any successor thereof, (4) by any combination of the above
methods of payment or (5) by any other means determined by the board of
directors.
Options granted to employees under the 1999 Stock Option Plan for
Non-Executives generally become exercisable in increments, based on the
optionee's continued employment with Netgateway, over a period of up to three
years. The form of option agreement generally provides that options granted
under the 1999 Stock Option Plan for Non-Executives is not transferable by the
optionee, other than by will or the laws of descent and distribution, and are
exercisable during the optionee's lifetime 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 anytime 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.
Generally, in the event of a merger of Netgateway with or into another
corporation or a sale of all or substantially all of Netgateway's assets, all
outstanding options under the 1999 Stock Option Plan for Non-Executives shall
accelerate and become fully exercisable upon consummation of such merger or sale
of assets.
The board may amend the 1999 Stock Option Plan for Non-Executives at any
time or from time to time or may terminate the 1999 Stock Option Plan for
Non-Executives without the approval of the stockholders, provided that
stockholder approval is required for any amendment to the 1999 Stock Option Plan
for Non-Executives requiring stockholder approval under applicable law as in
effect at the time. However, no action by the board of directors or stockholders
may alter or impair any option previously granted under the 1999 Stock Option
Plan for Non-Executives. The board may accelerate the exercisability of any
option or waive any condition or restriction pertaining to such option at any
time.
Any unexercised options that expire or that terminate upon an optionee's
ceasing to be employed by Netgateway become available for reissuance by
Netgateway.
The 1999 Stock Option Plan for Non-Executives provides for the grant of
nonstatutory stock options. Generally, an optionee will not recognize any
taxable income at the time he or she is granted a nonstatutory option. Upon its
exercise, however, the optionee will generally recognize taxable ordinary income
measured as the excess of the then fair market value of the shares acquired over
the exercise price of the option. Any taxable income recognized in connection
with an option exercise by an optionee who is also an employee of Netgateway
will be subject to tax withholding by Netgateway. Netgateway will be entitled to
a tax deduction in the same amount as the ordinary income recognized by the
optionee with respect to shares acquired upon exercise of a nonstatutory option.
Upon resale of the shares by the optionee, any difference between the sales
price received and the fair market value for the shares on the date of exercise
of the option will be treated as long-term or short-term capital gain or loss,
depending on the optionee's holding period for the shares.
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The foregoing is only a summary, based on the current federal income tax
code and treasury regulations, of the federal income tax consequences to the
optionee and Netgateway with respect to the grant and exercise of options under
the 1999 Stock Option Plan for Non-Executives. It does not purport to be
complete, and does not discuss the tax consequences of the optionee's death or
the income tax laws of any municipality, state or foreign country in which an
optionee may reside.
As of March 31, 2000, options exercisable for an aggregate of 1,577,242
shares of common stock have been granted pursuant to this plan at a weighted
average exercise price of $9.08.
Proposals to approve and adopt this plan and to increase the number of
shares available for grant under this plan from 2,000,000 to 5,000,000 will be
considered at a special meeting of Netgateway stockholders on May 24, 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Netgateway did not have a compensation committee during the period from its
inception on March 1, 1998 through September 30, 1998. Messrs. Beebe, Brock and
Dillon currently are members of the compensation committee. No interlocking
relationships exist between Netgateway's compensation committee and board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past. There are no interlocking
relationships between Netgateway and other entities that might affect the
determination of the compensation of our directors and executive officers.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Netgateway's 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. Netgateway believes that these provisions
are necessary to attract and retain qualified persons as directors and officers.
Netgateway has directors and officers liability insurance in an amount of
not less than $9 million.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to Netgateway's directors, officers and controlling persons
pursuant to the foregoing provisions or otherwise, Netgateway has been advised
that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF NETGATEWAY
The following table sets forth, as of March 31, 2000:
- each person who is known by Netgateway 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 named in the Summary
Compensation Table, as of March 31, 2000; and
- all of Netgateway's current directors and executive officers as a group,
the number of shares of common stock beneficially owned by each person and group
and the percentage of the outstanding shares owned by each person and group.
Except as otherwise noted below, the address of each of the persons in the
table is c/o Netgateway, Inc., 300 Oceangate, 5th Floor, Long Beach, California
90802.
<TABLE>
<CAPTION>
NUMBER OF WARRANTS
OR OPTION GRANTS
UNDER NETGATEWAY PERCENT OF CLASS
STOCK OPTIONS TOTAL BENEFICIAL BENEFICIALLY
NAME OF BENEFICIAL OWNER SHARES OWNED PLANS(1) OWNERSHIP(2) OWNED
- ------------------------ ------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff................. 1,750,215 0 1,750,215(3) 10.0%
Roy W. Camblin III................. 500,000 150,000 650,000 3.7%
Donald M. Corliss, Jr.............. 552,000 0 552,000 3.2%
David Bassett-Parkins.............. 840,667 0 840,667 4.8%
Simon Spencer...................... 0 12,500 12,500 *
Craig S. Gatarz.................... 0 93,071 93,071 *
Hanh Ngo........................... 105,000 150,000 255,000 1.4%
John Dillon........................ 0 2,500 2,500 *
R. Scott Beebe..................... 773,651 2,500 776,151 4.5%
William Brock...................... 0 125,000 125,000 *
Ronald Spire....................... 85,302 2,500 87,802 *
Joseph Roebuck..................... 0 0 0 0%
All current directors and executive
officers as a group (12
persons)(4)...................... 4,416,533 406,404 4,822,937 27.0%
</TABLE>
- ------------------------
* Less than 1 percent.
(1) Reflects warrants or options that will be vested as of March 31, 2000 or
within 60 days thereof.
(2) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to
options held by that person that are currently exercisable or become
exercisable within 60 days following March 31, 2000 are deemed outstanding.
These shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person. Unless otherwise
indicated in the footnotes to this table, the persons and entities named in
the table have sole voting and sole investment power with respect to the
shares set forth opposite such stockholder's name.
(3) Includes 456,666 shares of common stock currently held by the individual
trusts of which Mr. Freadhoff is trustee and over which Mr. Freadhoff has
beneficial ownership.
(4) Netgateway's current directors and executive officers include: Keith D.
Freadhoff, Roy W. Camblin III, Donald M. Corliss, Jr., Simon Spencer,
Jon C. Frojen, Jill Padwa, Craig S. Gatarz, David Bassett-Parkins,
John Dillon, Scott Beebe, William Brock and Joseph Roebuck.
STOCKHOLDER RETURN FOR LAST FISCAL YEAR
Netgateway's common stock was not registered under Section 12 of the
Securities Exchange Act of 1934, as amended, at the end of Netgateway's last
fiscal year.
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RELATED PARTY TRANSACTIONS
In July 1998 and August 1998, Netgateway 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 was due and payable on December 31, 1999 and
accrued interest at the rate of 9.5% per annum until October 1999 and 10%
thereafter per annum. In August 1998, Netgateway 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.
Netgateway has reduced the value of this loan in its financial statements to $0
effective December 31, 1998. Keith D. Freadhoff, Netgateway's chairman of the
board of directors and chief executive officer, and Scott Beebe, one of
Netgateway's directors, beneficially own less than 1% and 2.89%, respectively,
of the outstanding capital stock of Admor. Donald Danks, the beneficial owner of
491,783 shares of Netgateway common stock, owned approximately 1.6% of the
outstanding common stock of Admor. These individuals did not directly or
indirectly receive any of the proceeds of these loans.
From Netgateway's inception on March 1, 1998 until June 1998, Netgateway's
business plan was to engage in the licensing and distribution of software
support materials for the governmental and educational markets. In June 1998,
Netgateway changed its business model to the development of technology to enable
businesses and other organizations to engage in eCommerce. In connection with
the implementation of Netgateway's initial business plan, Netgateway 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 Inc., an
investment and consulting firm, 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 Netgateway's
significant stockholders. Netgateway, 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, Netgateway agreed to
assume the minimum royalty payments required under their master license,
totaling $1,600,000. In consideration of the sublicense from Steps, Netgateway
- 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, Netgateway paid approximately
$1,500,000. Due to a lack of revenue derived from these licenses, Netgateway
terminated the licenses and, in December 1998, entered into a settlement
agreement with such corporation pursuant to which Netgateway has been released
from all further obligation with respect to the remaining amounts payable. Steps
is substantially owned by Scott Beebe, one of Netgateway's directors and a
significant stockholder. Training Resources is owned by Michael Khaled, another
of Netgateway's 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., Netgateway's
president and a director, and Scott Beebe, a director, each beneficially own
less than 1%, of the outstanding common stock of ProSoft. Donald Danks, the
beneficial owner of 491,783 shares of our common stock, was an officer,
director, and significant stockholder of ProSoft until early 1998.
During the period from March 2, 1998 through June 30, 1998, Mr. Freadhoff
loaned Netgateway $132,429, $100,000 of which was converted into a capital
contribution in June 1998. The remaining
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balance of $32,429 is not interest bearing and is repayable upon demand. During
the year ended June 30, 1999, $30,630 was repaid.
During the period from March 2, 1998 through June 30, 1998, Michael Khaled,
Donald Danks, and Lynn Turnbow, stockholders of Netgateway, paid on Netgateway's
behalf to ProSoft pursuant to its master licenses $200,000, $100,000, and
$100,000, respectively, in exchange for an aggregate of 600,000 shares of
Netgateway common stock.
In May 1999, Mr. Freadhoff loaned Netgateway $100,000. This loan was
non-interest bearing. This loan was repaid with a portion of the proceeds of
Netgateway's summer 1999 private placement. In June 1999, Netgateway loaned
Mr. Freadhoff $30,000 which was repaid in July 1999.
In November 1998, Netgateway 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
Vanderhoof 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 Vanderhoof,
contributed to a 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 the master trust. The master 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.,
Netgateway's president, chief operating officer and one of its directors and the
beneficiary of one of which is David Bassett-Parkins, formerly Netgateway's
chief financial officer and chief operating officer, and one of its directors,
in exchange for a promissory note from each of these trusts 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, formerly Netgateway's executive vice president--operations, in
exchange for a promissory note from this trust in the principal amount of
$50,000. 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 of Netgateway),
provided that the individual beneficiary of the individual trust in question has
not voluntarily terminated their employment with Netgateway 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 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. In January 2000, a new individual trust was formed, the
trustee of which is Mr. Freadhoff and the beneficiary of which is Roy W. Camblin
III, Netgateway's chief executive officer and a director. At that time, the
master trust contracted to sell to Mr. Camblin's trust 100,000 shares of common
stock in exchange for a promissory note in the amount of $425,000.
Messrs. Freadhoff and Beebe contributed 50,000 shares of common stock each to
the master trust in respect of this sale to Mr. Camblin trust. The terms of
Mr. Camblin's trust are substantially similar to the description of the other
individual trusts set forth above.
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INFORMATION REGARDING GALAXY ENTERPRISES, INC.
GALAXY ENTERPRISES' SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be read
in conjunction with Galaxy Enterprises' consolidated financial statements and
related notes thereto and Galaxy Enterprises' "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Galaxy Enterprises"
included elsewhere in this document. The consolidated statement of operations
data for each of the three years ended December 31, 1997, 1998 and 1999, and the
consolidated balance sheet data at December 31, 1998 and 1999, are derived from
the consolidated financial statements of Galaxy Enterprises which have been
audited by Wisan, Smith, Racker & Prescott, LLP, independent accountants, and
are included elsewhere in this document. The unaudited consolidated statement of
operations data for the nine months ended March 31, 1999 and 2000, are derived
from the unaudited financial records of Galaxy Enterprises. The unaudited
consolidated balance sheet data at March 31, 2000 is derived from the unaudited
consolidated financial statements included elsewhere in the document. In the
opinion of management, these statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair statement of the results of
these periods. Historical results are not necessarily indicative of the results
to be expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue.......................................... $2,495 11,448 17,934 8,159 17,840
Income (loss) from operations.................... 126 18 (7,111) (1,485) (6,888)
Net income (loss)................................ 87 35 (12,639) (6,628) (6,927)
Net loss per common share
Basic.......................................... 0.02 0.01 (2.23) (1.23) (1.20)
Diluted........................................ 0.02 0.01 (2.23) (1.23) (1.20)
Weighted average common shares outstanding
Basic.......................................... 5,272 5,272 5,676 5,390 5,768
Diluted........................................ 5,272 5,725 5,676 5,390 5,768
</TABLE>
<TABLE>
<CAPTION>
AT
AT DECEMBER 31, MARCH 31,
------------------- ----------
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................ $ 25 133 81
Working capital (deficit)................................... (800) (11,330) (12,834)
Total assets................................................ 1,335 3,231 4,473
Short-term debt............................................. 115 162 543
Long-term debt.............................................. -- 4 5
Stockholder's equity (deficit).............................. 256 (10,594) (12,481)
</TABLE>
Note 1--In calendar year 1999, Galaxy Enterprises acquired substantially all of
the assets of Impact Media, LLC. The operations of Impact Media, LLC are
included in the consolidated statement of operations of Galaxy Enterprises since
the date of acquisition.
Note 2--In calendar year 1997, Galaxy Enterprises purchased all of the assets of
both Profit Education Systems, Inc. (PES) and CO-OP Business Services (CO-OP).
Galaxy Enterprises agreed to assume the liabilities of PES and CO-OP in exchange
for their assets.
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Note 3--As of December 31, 1999, Galaxy Enterprises recorded a charge of
$5.45 million ($.96 per share), which represents the cumulative effect of a
change in accounting principle regarding revenue recognition. Upon evaluation of
the accounting requirements of Staff Accounting Bulletin (SAB) 101, Galaxy
Enterprises determined that it is required to adopt the provisions and that
revenue recognition will more closely parallel the time period over which the
revenue is earned. The adoption of this modification in revenue recognition
policy is reflected in the 1999 financial statements as of and for the year
ended December 31, 1999.
Note 4--During 1999, Galaxy Enterprises' board of directors granted an
additional 788,750 options pending the approval of Galaxy Enterprises'
shareholders. Shareholder approval is necessary in order to expand the number of
shares authorized under the plan from 1,000,000 to 2,000,000. As shareholder
approval had not been obtained as of March 31, 2000 all options granted in
excess of the original 1,000,000 shares authorized are not considered
outstanding and have not been included in the preceding analysis. Shareholder
approval was obtained at the annual meeting held on May 17, 2000. For accounting
purposes the options were deemed to have been granted on that date. The fair
market value of the stock at the closing of the market on May 16, 2000 was $1.69
per share. The difference between the option grant price given to employees and
$1.69 gives rise to compensation expense which affects the net income (loss) for
the period over which the options become exercisable under the vesting schedule
in the plan. As a result, approximately $24,000 of compensation expense will be
recognized each fiscal year. Compensation expense recognized under these options
will be added to the amortization of previously issued options resulting in an
approximate $60,000 annual increase in compensation expense. These amounts will
be recognized over the vesting period of five years adjusted for exercises and
cancellations.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION OF GALAXY ENTERPRISES
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF GALAXY ENTERPRISES' FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS JOINT PROXY
STATEMENT/PROSPECTUS CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS AND
UNCERTAINTIES. GALAXY ENTERPRISES' 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 JOINT PROXY STATEMENT/ PROSPECTUS,
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH GALAXY ENTERPRISES' FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of Galaxy Enterprises and
other financial information appearing elsewhere in this joint proxy
statement/prospectus.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
REVENUES
Galaxy Enterprises' sales for the three-month period ending March 31, 2000
were $6,282,626 as compared to $2,879,031 for the similar period ending
March 31, 1999, an increase of 118%. This sales comparison between the two
periods should only be made taking into account the change in revenue
recognition policies as described in the notes to the financial statements. The
increase in sales was partially due to increased attendance at Galaxy
Enterprises' Internet training workshops. During the first three months of 2000,
Galaxy Enterprises conducted 83 workshops compared with 38 for the similar
period in 1999. In addition, IMI contributed $1,058,684 in sales. IMI's assets
were purchased on May 31, 1999 so there were no corresponding sales in the first
quarter of 1999.
COST OF SERVICES/PRODUCTS SOLD
Cost of sales during the first quarter of 2000 totaled $4,563,186, which is
equal to 72.5% of revenues. Cost of sales during the first quarter of 1999
totaled $1,944,500, which is equal to 67.5% of revenues. This increase in the
cost of sales as a percentage of revenues is primarily due to an increase in the
cost of conducting the Internet training workshops and programming customer
storefronts. Another factor contributing to the lower gross profit was an
increase in telemarketing sales, which have lower margins. The products sold by
IMI consist of multimedia brochures and shaped compact disks which at current
volume levels have lower gross profit margins than Galaxy Enterprises' other
products. Cost of sales is made up of the cost of tangible products sold, the
cost to conduct Internet training workshops, the cost to program customer
storefronts and contract telemarketing services. Cost of sales does not include
depreciation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses in the first quarter were $2,405,087 in 2000 compared to
$1,281,558 for the comparable period in 1999. These expenses, as a percentage of
sales, decreased in 2000 to 38% from 45% in 1999. The improved percentage was
the result of Galaxy Enterprises' increased volume of Internet training
workshops that provided economies of scale, as well as the contribution to
revenues from IMI, which has lower selling expenses in its business model.
Administrative expenses were $1,136,359 during the first quarter of 2000
compared to $481,693 in the preceding year's first quarter. As a percentage of
sales, these expenses increased to 18% in 2000 from 17% in 1999. Galaxy
Enterprises moved to larger quarters and incurred other expenses that were
necessary to sustain the year to year growth. The operations of IMI also
contributed to higher
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administrative expenses. Galaxy Enterprises anticipates that such expenses as a
percentage of sales will improve in the future, as increasing revenues will not
require proportional increases in overhead type costs.
DEPRECIATION
Depreciation expense in the first quarter of 2000 was $33,611 compared to
$25,724 in 1999. This was the result of purchases of computer equipment,
software and other long-term assets.
AMORTIZATION
During 2000, amortization of goodwill was $16,545 compared to $14,450 in
1999. Total goodwill at the end of the period was $833,889 net of amortization
to date. The goodwill arose from the purchase by Galaxy Enterprises of the
assets and business interests of Profit Education Systems, Inc., CO-OP Business
Services, Inc. and Impact Media, LLC.
INCOME TAXES
Since Galaxy Enterprises incureed a loss for the period, there is no
provision for income taxes in the current year. Galaxy Enterprises has not
recorded an income tax benefit as a result of the loss for the year or other
temporary differences since it is uncertain as to when Galaxy Enterprises will
become profitable and thereby be able to use the benefit of such items. The
income tax benefit recorded in the first quarter of 1999 has been written off.
NET INCOME/LOSS
Galaxy Enterprises reported a net loss of $1,906,913 for the three months
ending March 31, 2000, as compared to a net loss of $6,281,932 for the similar
period in 1999. On a per share basis, this amounted to a loss of $.32 per share
in 2000 as compared to a loss of $1.12 per share in 1999. The loss in 1999
included the cumulative effect on prior years of an accounting change. The
change was relative to revenue recognition as is more fully explained in the
notes to the financial statements. The 1999 loss before the cumulative effect
adjustment was $831,281.
YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUES
Galaxy Enterprises' sales for the calendar year ending December 31, 1999
were $17,934,277 as compared to $11,448,392 for the twelve months ending
December 31, 1998, an increase of 56.7%. This sales comparison between the two
years should only be made taking into account that during December 1999, the SEC
published Staff Accounting Bulletin Number 101 which deals with revenue
recognition issues. The SEC issued the Bulletin to offer guidance on how revenue
should be recognized for various transactions including nonrefundable up front
fees. Some of Galaxy Enterprises' revenues come from up front fees and therefore
should be accounted for as described in the Bulletin. See the notes to the
financial statements for a more detailed explanation of this change. Galaxy
Enterprises deferred $10,551,402 of 1999 revenues into the years 2000 and 2001
and recognized $5,256,490 as revenues carried into 1999 from 1998. These
transactions were accounted for as a change in accounting principal pursuant to
Staff Accounting Bulletin 101 during the year ending December 31, 1999.
The sales increase was partially due to increased attendance at Galaxy
Enterprises' Internet training workshops. During 1999, Galaxy Enterprises
conducted 177 workshops compared to 108 in 1998. In addition Galaxy Enterprises'
Impact Media business generated sales for the year of $3,646,315. Additional
segment information on the Impact Media business and the Galaxy Mall business is
in footnote 14 to Galaxy Enterprises' financial statements. The Impact Media
business was acquired effective May 31, 1999 when Galaxy Enterprises, through
its subsidiary IMI, purchased the assets and
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business interests of Impact Media. There were no corresponding sales in 1998.
The purchase transaction is more completely described in Galaxy Enterprises'
Form 8-K/A dated June 25, 1999.
The pending merger with Netgateway will also offer Galaxy Enterprises
additional opportunities to increase revenues through contacts with Netgateway's
customers. In particular, the cable division of Netgateway has a program which
it is anticipated will bring additional people into Galaxy Enterprises'
workshops.
SEASONALITY
Revenues during the year are subject to seasonal fluctuations. The first and
second calendar quarters are generally stronger than the third and fourth
quarters. Customers seem less interested in attending Galaxy Enterprises'
workshops during the period July 15th through Labor day, and again during the
holiday season from Thanksgiving Day through the first week of the following
January.
IMI sales began May 31, 1999 and therefore it is not possible to determine
the seasonal fluctuations that may be present on a quarterly basis until such
time as we have at least 12 full months of operations.
The change in accounting principle mentioned above was proposed by the SEC
in December 1999 so previously reported quarterly revenues during the year were
on the same basis used in 1998 and prior periods.
COST OF SALES/PRODUCTS SOLD
Cost of sales during 1999 totaled $13,506,633, which is equal to 75.3% of
revenues. Cost of sales during 1998 totaled $5,105,617, which is equal to 44.5%
of revenues. This comparison, like the sales comparison, should be made in light
of the effect of adopting Staff Accounting Bulletin 101. The increase in the
cost of sales as a percentage of revenues is primarily due to the deferral of
revenue. Also affecting the change was an increase in telemarketing sales, which
have lower margins and IMI's sales which also have lower margins.
Galaxy Mall's cost of sales were equal to 67.3% of sales in 1999 and 44.5%
in 1998. This increase is due to the factors explained above. IMI's cost of
sales was 107.4% in 1999.
IMI's sales are made up of compact discs and multi media presentations.
During 1999 only $69,487 were multi media projects. The mix is expected to
change in favor of the multi media projects which have a higher gross profit.
IMI has raised its prices for compact discs. Galaxy Enterprises anticipates that
overall margins at IMI will improve in the year 2000.
Cost of sales is made up of the cost of tangible products sold, the cost to
conduct Internet training workshops, the cost to program customer storefronts
and contract telemarketing services. Cost of sales does not include any
depreciation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were equal to $10,703,741 in
1999 compared to $6,147,356 in 1998. These expenses, as a percentage of sales,
increased in 1999 to 59.6% from 53.6% in 1998. The increase in the expenses as a
percentage of sales is attributable to increases in advertising, postage,
mailing expenses and other costs to solicit persons to attend Galaxy
Enterprises' preview sessions and workshops. In 1998, the revenue generated by
these activities was recognized when the sale at the workshop was made. Under
the changed accounting policy much of the revenue from 1999 is deferred into the
year 2000, which results in the higher percentage of recognized sales when
compared to the same type of expenses.
Galaxy Enterprises anticipates that selling expenses, as a percentage of
sales, will improve in the future as lower cost methods of attracting people to
the workshops are employed. Galaxy Enterprises
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has developed a number of programs which it believes will have lower costs and
anticipates that they will be implemented beginning in second quarter of 2000.
Certain administrative expenses such as legal, telephone and rent for larger
quarters showed increases as a percentage of sales from 1998 to 1999. Galaxy
Enterprises anticipates that these expenses, as a percentage of sales, will
improve in the future as increasing revenues will allow for economies of scale.
Selling, general and administrative expenses for IMI totaled $545,621 which
was equal to 14.9% of sales. These same expenses for Galaxy Mall were $9,700,658
which is equal to 69.9% of sales. Galaxy Enterprises' expenses were affected by
the deferral of revenue mentioned above.
DEPRECIATION
Depreciation expense in 1999 was $97,591, ($90,867 at Galaxy Mall and $6,724
at IMI) compared to $53,260 in 1998. This was the result of purchases of
computer equipment, software and other long-term assets.
AMORTIZATION
During 1999 amortization of goodwill and deferred charges was $61,974
($57,800 at Galaxy Mall and $4,174 at IMI) compared to $80,175 in 1998. In
July 1998, the AICPA issued Statement of Position 98-5 "Reporting on the Costs
of Start-up Activities." SOP 98-5 requires start-up costs to be expensed as
incurred and requires previously capitalized organization and start-up costs to
be written-off effective for fiscal years beginning after December 15, 1998.
Further, SOP 98-5 requires that the write-off be reported as the cumulative
effect of a change in accounting principle. Accordingly, Galaxy Enterprises
reported a cumulative effect charge of $67,127 during the year for previously
capitalized organization costs. The balance of the amortization, $61,974,
results from the amortization of goodwill. Total goodwill at the end of 1999 was
$850,434, net of amortization. The goodwill arose through the purchase by Galaxy
Enterprises of the assets and business interests of Profit Education
Systems, Inc., CO-OP Business Services, Inc. and Impact Media, L.L.C.
INCOME TAXES
Income tax expense for 1999 was $2,692, resulting from minimum payments due
for state income taxes and deferred taxes due for various timing differences
between financial and tax accounting. Galaxy Enterprises has not recorded an
income tax benefit as a result of the loss for the year or other temporary
differences since it is uncertain as to when Galaxy Enterprises will become
profitable and thereby be able to use the benefit of such items.
NET INCOME/LOSS
Galaxy Enterprises reported a net loss of $12,638,600 for the calendar year
ending December 31, 1999, as compared to net income of $35,375 for the
twelve-month period ending December 31, 1998. The loss included a non-cash
charge of $5,517,778 which resulted from the deferral of revenue into the years
2000 and 2001 and the write-off of organization costs which are reflected as a
change in accounting principle discussed previously. On a per share basis the
loss amounted to $2.23 per share in 1999 as compared to a profit of $.0067 per
share in 1998.
CAPITAL RESOURCES
NEW INVESTMENTS
Since the end of fiscal year 1998, Galaxy Enterprises sold (1) a $500,000
convertible note to the Augustine Fund through Augustine Capital Management, an
institutional investor based in Chicago, Illinois; (2) 250,000 shares of Galaxy
Enterprises common stock to Invest Linc Capital Corp. for
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$1,000,000; and (3) 228,570 shares of Galaxy Enterprises common stock to
Zylo Ltd. for $300,000. During January and February 1999, the Augustine Fund
converted the note into 169,192 shares of Galaxy Enterprises common stock. These
capital infusions significantly improved Galaxy Enterprises' liquidity and its
ability to meet ongoing working capital needs. During the first quarter of 2000,
Galaxy Enterprises borrowed $450,000 from Netgateway. These funds were used for
merger-related expenses and working capital. The notes are due on the earlier of
June 1, 2000 or the date the merger between Galaxy Enterprises and Netgateway
becomes effective. These capital infusions improved Galaxy Enterprises'
liquidity and its ability to meet ongoing working capital needs.
CASH
Cash on hand at March 31, 2000 totalled $81,455 as compared to $132,741 at
December 31, 1999 and $24,719 at December 31, 1998. Bank overdrafts for the same
periods were $420,274, $348,907 and $179,301 respectively.
ACCOUNTS RECEIVABLE
Accounts receivable, net of allowance for doubtful accounts, was $2,089,525
at March 31, 2000 ($1,913,456 at Galaxy Enterprises and $176,069 at IMI)
compared to $1,112,947 at December 31, 1999 ($717,971 at Galaxy Mall and
$394,976 at IMI) and $40,838 at the prior year's end. This increase is the
result of Galaxy Mall offering to finance customer purchases with monthly
payments at its Internet training workshops and IMI selling to customers in the
normal course of business on open account. The receivables associated with the
Internet training workshops are collected for Galaxy Enterprises by Travelers
Investment Corporation for a fee.
PREPAID EXPENSES
Prepaid expenses at March 31, 2000 were $393,909 compared to $336,148 at
December 31, 1999 and $18,549 at December 31, 1998. The increase from 1998 is
partially the result of payments made by Galaxy Mall for certain marketing costs
that apply directly to Internet training workshops to be held in the future.
Revenues to be derived from these expenditures will be earned in 2000 and 2001.
These marketing costs consist of mailings to and newspaper advertising for
potential customers for Galaxy Enterprises' Internet training workshops that
target dates in subsequent quarters; the travel costs, meeting rooms and
supplies used by our employees to hold "preview sessions" which will secure
attendees to workshops in subsequent quarters; and travel, hotel and other costs
which must be prepaid to support workshops in subsequent quarters.
CREDIT CARD RESERVES
Credit card reserves at March 31, 2000 were $447,628 ($425,418 at Galaxy
Mall and $22,210 at IMI) compared to $248,431 at December 31, 1999 and $129,205
at December 31, 1998. Credit card reserves represent amounts of money due Galaxy
Enterprises from banks and credit card processing companies who have handled
Visa, Master Card, American Express and Discover Card transactions. Some banks
require Galaxy Enterprises to leave on deposit with them 5% of the credit card
proceeds until the amount reaches 50% of one month's transactions. This reserve
earns interest at the bank's certificate of deposit rate and will be returned to
Galaxy Enterprises at a future date.
ACCOUNTS PAYABLE
Accounts payable at March 31, 2000 totalled $1,533,833 compared to
$2,157,389 at December 31, 1999 as compared to $830,774 at the end of 1998.
These amounts include related party trade payables and bank overdrafts amounting
to $512,543, $348,907 and $224,221, respectively.
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DEFERRED REVENUE
Deferred revenue at March 31, 2000 totalled $13,900,885 ($13,262,974 at
Galaxy Mall and $637,911 at IMI) compared to $10,745,563 at December 31, 1999
and $0 at December 31, 1998. As explained under "Revenues" earlier in this
discussion, Galaxy Enterprises has adopted a change in accounting principle as
contemplated by Staff Accounting Bulletin 101, which resulted in this amount
being established for the first time at December 31, 1999. Galaxy Enterprises
defers revenue from the current quarter into the future, but brings into the
current quarter amounts deferred in earlier periods that have now been earned
and can thus be recognized. As long as Galaxy Enterprises continues to grow, as
it did in the year 2000 first quarter, the amount deferred into the future will
be greater than the amount recognized from prior quarters and will have a
negative impact on revenues and earnings. The reverse would be true should sales
fall below current levels.
CUSTOMER DEPOSITS
Customer deposits amounted to $532,439 at March 31, 2000 as compared to
$285,226 at December 31, 1999 and $6,060 at December 31, 1998. This represents
amounts paid to the company as deposits from customers for orders to be
delivered in the future. At the time the goods are shipped and title transfers
to the customer, the amount will be taken into income in accordance with Galaxy
Enterprises' normal accounting policies.
EQUIPMENT AND PROPERTY
Equipment increased during the first quarter of 2000 to $262,456 from
$259,577 at December 31, 1999 and from $171,868 at December 31, 1998 net of
accumulated depreciation of $190,977 at March 31, 2000, $157,364 at
December 31, 1999 and $59,773 at December 31, 1998. This was due to the need for
additional computers and other equipment to conduct Galaxy Enterprises'
business. Additional capital equipment purchases will be necessary as Galaxy
Enterprises grows. Galaxy Enterprises also leases equipment. Leasing allows
Galaxy Enterprises the use of equipment without the need to disburse the entire
purchase price in cash at the time of acquisition.
STOCKHOLDERS' EQUITY
Total stockholders' equity decreased to a deficit of $12,481,332 during the
first quarter of 2000 compared to a deficit of $10,593,690 at December 31, 1999
and a positive $256,285 at December 31, 1998. This was mainly the result of the
change in accounting principle described earlier that established the deferred
revenue with the resultant net loss from operations for the first quarter of
2000 and the year ending December 31, 1999. The sale of additional stock
partially offset the decline during 1999 by the amounts discussed in "New
Investments" above. Since the establishment of the deferred revenue was a
non-cash transaction, and no monies were required to be repaid to customers as a
result of the change, Galaxy Enterprises believes it can continue to operate
inspite of the negative net worth.
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LIQUIDITY
RATIOS
At March 31, 2000, Galaxy Enterprises' current ratio, current assets
compared to current liabilities, was .21 to 1 compared to .16 to 1 and .25 to 1
as of December 31, 1999 and December 31, 1998, respectively. This out of balance
situation is exacerbated by the deferred revenue adjustment. Based on the
previous accounting policy, the ratios would have been 1.1 to 1 at March 31,
2000, .68 to 1 at December 31, 1999 and .25 to 1 at December 31, 1998, an
improving trend.
FINANCING ARRANGEMENTS
Galaxy Enterprises has worked out extended payment plans with hotels and
other vendors and is meeting its commitments under the plans. On July 30, 1998,
Galaxy Enterprises closed on a bank line of credit for $100,000 with Far West
Bank of Provo, Utah. This credit line is intended to assist Galaxy Enterprises
through the seasonal slow periods it experiences. Generally, from July 15
through Labor Day and again from Thanksgiving Day until January 15 of the
following year, Galaxy Enterprises' business is slower than at other times
during the year. This seasonal business slow down is the result of fewer
attendees at Galaxy Enterprises' Internet training seminars during these
traditional vacation and holiday periods.
CASH FLOW
Cash flows from financing activities during the first quarter of 2000 were
$395,683, including a loan from Netgateway of $450,000, which was partially
offset by repayment of a bank loan. The loan to Netgateway comes due during the
third quarter of 2000. It will be necessary to obtain additional equity funding
or long-term loans from banks or other financial institutions for Galaxy
Enterprises to meet its long-term goals. During the first quarter of 1999,
Galaxy Enterprises obtained $1,450,000 from the sale of debt and equity
securities and in the fourth quarter obtained $300,000 from the sale of
unregistered common stock. $8,850 was obtained from employees who exercised
their stock options during the year so the total cash in-put from debt and
equity transactions was $1,758,850.
In conjunction with the merger agreement with Netgateway and upon
consummation of the merger, Galaxy Enterprises will become a wholly-owned
subsidiary of Netgateway. The merger is expected to close during the second
calendar quarter of 2000 and is subject to the satisfaction or waiver by the
parties of certain conditions. Galaxy Enterprises may be required to pay a
substantial termination fee if the merger agreement is terminated for certain
specific reasons. If required, payment of the fee would have a material adverse
effect on Galaxy Enterprises' business, prospects, financial conditions, results
of operations and its ability to raise future capital.
The foregoing statements are based upon management's current assumptions.
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MARKET PRICE AND DIVIDEND INFORMATION FOR GALAXY ENTERPRISES
Galaxy Enterprises' common stock has traded on the Nasdaq OTC Bulletin Board
under the symbol "GLXY" since January 7, 1997. The following table sets forth
the range of high and low bid prices reported on the Nasdaq OTC Bulletin Board
for Galaxy Enterprises common stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal 2000
First Quarter.......................................... $ 5.63 $ 3.31
Fiscal 1999
First Quarter.......................................... 6.88 2.50
Second Quarter......................................... 4.24 1.56
Third Quarter.......................................... 2.81 1.47
Fourth Quarter......................................... 6.00 1.13
Fiscal 1998
First Quarter.......................................... 2.25 .75
Second Quarter......................................... 2.12 .75
Third Quarter.......................................... 2.32 .56
Fourth Quarter......................................... 8.63 .56
</TABLE>
The above bid prices indicate the prices that a market maker is willing to
pay. These quotations do not include retail markups, markdowns or other fees and
commissions and may not represent actual transactions.
Galaxy Enterprises has never paid any cash dividends on its common stock.
Article VIII, Section 2(e) of Galaxy Enterprises' articles of incorporation
authorizes the board of directors to determine whether any, and if so, what
part, of Galaxy Enterprises' earned surplus shall be paid in dividends to
shareholders.
Nevada Revised Statutes Section 78.288 limits Galaxy Enterprises' ability to
pay dividends on its common stock if any such dividend would render the company
insolvent.
Galaxy Enterprises' credit facility with its bank prohibits the payment of
dividends without the consent of the bank.
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BUSINESS OF GALAXY ENTERPRISES
GENERAL
Galaxy Enterprises was organized as a corporation under the laws of the
State of Nevada on March 3, 1994. Galaxy Enterprises was originally formed under
the name Cipher Voice, Inc., and was incorporated for the purpose of developing,
producing and marketing equipment related to computer hardware security, known
as a digital voice encryption-decryption electronic device. Galaxy Enterprises
was unsuccessful in developing the technology and subsequently ceased
operations. On December 4, 1996, Galaxy Enterprises acquired all of the issued
and outstanding common stock of Galaxy Mall, Inc., a Wyoming corporation, in
exchange for 3,600,000 shares of Galaxy Enterprises common stock. As a result of
this stock acquisition, Galaxy Mall became a wholly owned subsidiary of Galaxy
Enterprises. Galaxy Enterprises has neither filed nor been the subject of a
bankruptcy, receivership or similar proceeding. On December 16, 1996, Galaxy
Enterprises changed its name from Cipher Voice, Inc. to Galaxy
Enterprises, Inc.
Effective October 1, 1997 Galaxy Enterprises, through its wholly-owned
subsidiary Galaxy Mall, acquired the business of Profit Education Systems, a
Wyoming corporation. Galaxy Enterprises previously had used the services of
Profit Education Systems as a marketer of its services and as a provider and
conductor of its Internet education seminars. As part of the Profit Education
Systems acquisition, Galaxy Enterprises acquired Profit Education Systems'
marketing strategies and products, employees and assets.
Also effective October 1, 1997, Galaxy Enterprises, again through Galaxy
Mall, acquired the business of CO-OP Business Services, Inc., a Utah
corporation. CO-OP previously had provided Galaxy Mall with customer support,
electronic storefront programming, and merchant and client interface programs
for Galaxy Mall's storefronts on the Galaxy Enterprise Mall. As part of the
transaction, Galaxy Enterprises agreed to assume approximately $85,000 of CO-OP
payables and liabilities, and assumed future payment of certain existing
equipment and other leases. CO-OP agreed to transfer to Galaxy Mall its assets
including computers, office equipment and inventory.
Effective May 31, 1999, Galaxy Enterprises, through its wholly owned
subsidiary IMI, Inc., acquired substantially all of the assets of Impact Media,
L.L.C., a Utah limited liability company engaged in the design, manufacture and
marketing of multimedia brochure kits, shaped compact discs and similar products
and services intended to facilitate conducting business over the Internet. The
assets acquired included, among other things, equipment, inventory and finished
goods, intellectual property, computer programs and cash and accounts
receivable, the primary use of which assets relate to the design, manufacture
and marketing of Impact Media's products and services.
SERVICES OFFERED
GALAXY MALL BUSINESS
Galaxy Enterprises, through its subsidiary Galaxy Mall, engages in the
business of selling to its customers Internet services and products which
include electronic home pages, or storefronts, on its Galaxy Mall, an Internet
shopping mall, and hosts those storefront sites on its Internet server. Galaxy
Mall's business is to assist its customers in establishing their businesses on
the Internet. Storefronts designed and programmed by or for customers by Galaxy
Enterprises are displayed on the mall. The Galaxy Mall is located at
HTTP://WWW.GALAXYMALL.COM. Galaxy Mall also operates the portal and search
engine MatchSite.com. This search engine allows Internet users to locate sites
of interest on the Web. When a Web user types in a search request, MatchSite
sends the query to several different resources, including several leading, major
search engines. The responses are then returned to the user organized into a
uniform format, and ranked by relevance.
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The Galaxy Mall business contracts with consultants and independent
contractors, or creates and produces in-house, various products and services
which are used by its customers in marketing their own products or services.
Galaxy Mall's products include the following:
COMMERCIAL WEB SITES/WEB HOSTING
Galaxy Mall programs commercial web sites with the most current types of
Internet programming, such as HTML, JavaScript and Perl. Each site programmed by
Galaxy Mall for its customer/merchants has available on-line ordering
capabilities. All orders processed on-line are supported by encrypted security,
which provides merchants and their customers confidence in the safety of
ordering products and services on-line. Galaxy Mall either hosts the sites on
the mall itself, or provides virtual hosting, which gives the
customer/merchant's site the appearance of having its own server and a
non-Galaxy Mall IP address.
AUTO-RESPONDERS
Galaxy Mall sets up e-mail addresses for its merchants that send back to the
individual requesting information an instant reply, then forwards the original
message to the owner of the auto-responder. Similar to fax-on-demand,
auto-responders are a powerful marketing tool for merchants offering products or
services. A merchant can write advertising copy for its product and when someone
inquires to the merchant's auto-responder e-mail address, the ad copy is
immediately sent to the potential customer.
TRACKING SOFTWARE
Galaxy Mall provides software for a merchant's web site which tracks the
volume of traffic to that web site. It also provides the merchant with
information concerning the derivation of its potential customer and such
person's referring universal resource locator, or URL. This enables the merchant
to track its marketing efforts to determine if its potential customer found the
merchant through the merchant's Internet advertisements or its listings in
search directories.
INTERNET CLASSIFIED ADVERTISEMENTS
Galaxy Mall sells 200 word classified ads on its classified ad network. Each
classified ad runs on the network for 90 days. This network is comprised of
thousands of listings.
MERCHANT ACCOUNTS
Galaxy Mall sells merchant accounts combined with software which allows the
customer to have real time on-line processing for credit cards and checks.
BANNER COURSE/BANNER LICENSE
The banner course consists of over 200 pages and 10 audio cassettes of
instruction. Banners are the equivalent of billboards on the Internet. They are
graphical images placed throughout the Internet advertising specific web pages.
Internet users simply click on the banner image when it is displayed and they
are taken immediately to the site the image is advertising. The purpose of this
course is to help merchants better understand how banner advertising works on
the Internet. They enhance their own Internet business by learning how to
properly use banner advertising to promote their Internet site. The banner
license, which is sold in conjunction with the course, allows the customer to
put banners on multiple sites within the Galaxy Mall Banner Network, as well as
benefit from ongoing discounts for future impression and banner purchases.
BANNER/IMPRESSIONS
Galaxy Mall designs and program banners for its customers. These banners are
then advertised on Galaxy Mall's network of over 20,000 Internet sites. The
number of banner impressions is determined
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by the number of times the banner advertisement is uploaded, or displayed, on
one of the banner network's Internet sites. Galaxy Mall's customer purchases a
number of impressions based upon its specific marketing and advertising needs.
The Galaxy BannerSource network currently markets in excess of one million
banner impressions daily to businesses doing commerce on the Internet.
EXECUTIVE MENTOR PROGRAM
Galaxy Mall's mentoring program is a ten week program in which a select
number of Galaxy Mall's customers become involved. This program provides a
personal coach to the customer who works with the customer one-on-one to help
the customer build its business on the Internet. These services are provided by
Professional Marketing International, Inc. on a contract basis.
IMI BUSINESS
Galaxy Enterprises, through its subsidiary IMI, is engaged in the design,
manufacture and marketing of multimedia brochures, shaped compact disks and
other products and services intended to facilitate traditional marketing and to
bridge the gap between conventional and Internet marketing. These CDs are an
advertising tool and can be used by companies seeking to drive traffic to their
Web site. Through the use of custom cut CDs, businesses can, in an inexpensive,
broadband-like format, deliver a multimedia presentation of their corporate
image or product or tell their story and market their products. A link can be
embedded on a custom cut CD which activates a local Internet connection and
browser to connect a customer to that company's Web page, thereby allowing that
company's customer to place an order or find out the latest information about
that company and generally interact with that company's Web site. Custom cut
CD's have also been introduced to the trading card industry to turn traditional
trading cards into a multimedia presentation or even an Internet experience for
collectors.
IMI's products and services include the following:
- MULTIMEDIA PRESENTATIONS. IMI creates custom multimedia presentations
which allow a company or individual to deliver its message using sound,
video, text, photos, and which can link to a corporate Web site when
provided on a CD.
- CUSTOM CDS. IMI works with clients to design shaped CD-Roms which IMI then
sells to its clients.
- WEB SITES. IMI designs and develops custom built web sites for small and
medium sized companies.
SALES AND MARKETING
GALAXY MALL BUSINESS
Most of the products of Galaxy Enterprises' Galaxy Mall business are
Internet related and, consequently, do not use traditional distribution
channels. Galaxy Mall's principal products involve delivering to its customers
the ability to conduct business over the Internet. Galaxy Mall attracts its
customers through Internet marketing workshops. These workshops are presented
several times a week during most weeks of the year. Galaxy Mall rents hotel
conference rooms in various cities throughout the United States in which it
hosts its preview sessions and Internet training workshops. Galaxy Mall uses a
90-minute information seminar which previews the Internet, the "Registered
Merchant" section and the option to establish a storefront on the Galaxy Mall
and the Internet marketing workshop. Preview attendees are invited to attend a
one day workshop at which Galaxy Mall provides an intensive training course on
Internet marketing using e-mail, news groups, auto-responders, classified ads,
search engines and other Internet "tools" to market their products and services
on the Internet. Interested attendees are then offered the opportunity to pay a
fee to become a registered merchant with the option to establish "storefront"
presence on the Galaxy Mall to market their products and services.
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Galaxy Mall advertises its preview sessions in direct mail solicitations
targeted to potential customers meeting certain demographic criteria established
by Galaxy Mall. The direct mail pieces are mailed to persons and small
businesses located in cities scheduled to be visited by Galaxy Mall's personnel.
Mailing lists approximating the demographics established by Galaxy Mall are
obtained from list brokers. Announcements of upcoming preview sessions also
appear in newspaper advertisements in scheduled cities.
Galaxy Mall also uses a telemarketing effort to market Galaxy Mall products
and services, and also conducts its preview sessions and workshops for audiences
assembled by third parties at selected locations.
IMI BUSINESS
IMI primarily sells its products through two channels, consisting of eight
distributors and an inside sales force of seven employees primarily engaged in
outbound telemarketing. IMI has no long term agreements with its customers.
COMPETITION
The Internet has developed at a very rapid pace and it is impossible to
determine what, if any, changes could or will occur that would change current
competitive business conditions. Galaxy Enterprises anticipates that new
entrants will try to develop competing Internet malls or new forums for
conducting e-commerce that could be deemed competitors. Galaxy Enterprises,
however, believes that it presently has a competitive advantage due to its
marketing strategies for its Galaxy Mall and other products. In 1995, certain of
Galaxy Enterprises' principals, who at that time were working with Profit
Education Systems, were instrumental in creating an Internet marketing workshop
industry. Galaxy Enterprises obtained this Internet marketing workshop expertise
when it acquired Profit Education Systems. To the knowledge of Galaxy
Enterprises, there were no other businesses engaged in the Internet marketing
workshop industry at that time. Due to its experience with such marketing
workshops, Galaxy Enterprises believes it enjoys a strong competitive position
in this industry. Galaxy Enterprises has used its position as a leader in the
Internet marketing workshop industry to establish its Galaxy Mall as one of the
largest malls on the Internet. According to the December 1998 edition of
Internet World, Galaxy Enterprises is considered "one of the large general
malls."
Galaxy Enterprises is aware of several companies previously active in the
Internet marketing workshop industry that no longer are connected with the
industry. Galaxy Enterprises is aware of only three companies currently in the
industry with which it competes, and to the knowledge of Galaxy Enterprises,
none of these competitors have been engaged in the industry as long as Galaxy
Enterprises.
Anticipated and expected technology advances associated with the Internet
itself, increasing use of the Internet, and new software products, are welcome
advancements expected to attract more interest in the Internet and broaden its
potential as a viable marketplace and industry. Galaxy Enterprises anticipates
it can compete successfully, building on its three-year head start in its
segments of the industry by relying on its infrastructure, existing marketing
strategies and techniques, systems and procedures, by adding additional products
and services in the future, and by periodic revision of such methods of doing
business as deemed necessary.
IMI's markets are relatively new and there is little accumulated data or
accurate means of assessing size but they are believed to be highly fragmented.
IMI competes with other providers of custom cut CDs, as well as providers of
regular CDs, zip disks, and other means which may be used to deliver a
multimedia presentation to the end consumer. IMI's website development business
and multimedia presentation creation business compete with many different
businesses, including advertising agencies, web development houses and
multimedia development houses as well as similar internal resources of many
businesses.
127
<PAGE>
REAL PROPERTY
Galaxy Enterprises' principal office is located at 754 E. Technology Avenue,
Orem, Utah 84097. The property consists of the basement and third floor of
approximately 12,700 square feet of a three story office building and includes
landscaping and a paved parking area adequate for employee and customer vehicle
parking. The property is leased from an unaffiliated third party for a period of
five years with an annual rental of $241,764. Galaxy Enterprises' IMI business
is located at 890 North Industrial Park Drive, Orem, Utah 84057. The property is
an unfurnished two-story office building having approximately 8,000 square feet,
and includes landscaping and a paved parking area adequate for employee and
customer vehicle parking. The property is leased from an unaffiliated third
party for a period of three years with annual rental of $72,000. Galaxy
Enterprises maintains tenant fire and casualty insurance on its properties
located in such buildings in an amount deemed adequate by Galaxy Enterprises.
Galaxy Enterprises also rents on a daily basis hotel conference rooms and
facilities from time to time in various cities throughout the United States and
Canada at which it hosts its preview session and Internet training workshops.
Galaxy Enterprises is under no long-term obligations in connection with such
hotels.
SUPPLIERS AND CUSTOMERS
Galaxy Mall does not rely on any raw materials for its business operations.
IMI purchases its custom cut CDs ready for shipment to IMI's customers pursuant
to purchase orders without guaranteed supply arrangements from two suppliers.
Although Galaxy Enterprises does not rely, nor is it dependent, on one or a
few major customers, IMI's top two customers accounted for approximately 54% of
IMI's sales during the period May 31, 1999 through December 31, 1999. Neither of
these customers accounted for more than 10% of Galaxy Enterprises' total sales.
INTELLECTUAL PROPERTY
Galaxy Enterprises' business depends significantly on intellectual property
developed by Galaxy Enterprises and intellectual property licensed from third
parties. Galaxy Enterprises generally does not seek copyright and patent
protection for its intellectual property but does endeavor to treat such as
trade secrets where appropriate and has procedures in place to maintain their
status as such. Galaxy Enterprises has been informed that certain of IMI's
shaped CD products may infringe patents of third parties. IMI's supplier of
these CDs has agreed to indemnify Galaxy Enterprises with respect to these
claims and IMI currently plans to continue to sell these products pending
further developments. There can be no assurance that Galaxy Enterprises'
products do not infringe these or other patents.
GOVERNMENTAL REGULATIONS
Galaxy Enterprises is not aware of any existing governmental regulation and
does not anticipate any governmental regulation which materially affects its
ability to conduct its business operations. Currently sales on the Internet are
not taxed. Whether or when governmental agencies impose sales taxes on Internet
sales, it is expected they will be passed on to the consumer as in traditional
marketing and sales.
From time to time, Galaxy Enterprises receives inquiries from attorneys
general offices and other regulators about civil and criminal compliance matters
with various state and federal regulations. These inquiries sometimes rise to
the level of investigations and litigation. In the past, Galaxy Enterprises has
received letters of inquiry from and/or has been made aware of investigations by
the attorney general offices in Hawaii, Illinois, Nebraska, North Carolina, Utah
and Texas and from a regional office of the Federal Trade Commission. Galaxy
Enterprises has responded to these inquiries, and has generally been successful
in addressing the concerns of these persons and entities, although there is
generally no formal closing of the inquiry or investigation and certain of
these, including Illinois and Utah, are
128
<PAGE>
believed to be ongoing. Hawaii has taken the position that Galaxy's marketing
efforts, in their current form, must comply with its "Door-to-Door Sale Law."
On June 18, 1998, the Commonwealth of Kentucky filed an action against
Galaxy Mall, Inc. under the Kentucky business opportunity statute. On
December 15, 1998, an order of dismissal was entered based on Galaxy Mall
agreeing to advise the Kentucky Attorney General's office of any complaints from
Galaxy Mall customers in Kentucky for a period of twelve months from the date of
entry of the order of dismissal. There can be no assurance that these or other
inquiries and investigations will not have a material adverse effect on Galaxy
Enterprises. Cost of compliance with environmental laws are nominal, if any, and
are therefore immaterial to Galaxy Enerprises' operations.
RESEARCH AND DEVELOPMENT
During the last two fiscal years, Galaxy Enterprises has engaged in
extensive research and development activities, developing the various products
and services described above. Galaxy Enterprises also has developed the
following:
- An on-line real time order processing system interface allowing its
customers to have real time verification and processing of all their
orders.
- A "shopping cart" system allowing unlimited products to be added to an
on-line order. It calculates the product price totals and adds shipping,
handling and other applicable charges.
- A "window shopping" feature allowing users to surf through random
storefronts with greater ease.
- Automated auto-responder software allowing a Galaxy Enterprises customer
to log in to make changes to the customer's auto-responder text, rather
than relying on Galaxy Enterprises programmers to make such changes.
- A database driven merchant registration service allowing Galaxy
Enterprises to monitor and keep secure its "Merchants Only" section of the
Galaxy Mall.
- Integrated directory database and billing database, providing Galaxy
Enterprises with faster and easier billing of its customers.
- New banner exchange software allowing Galaxy to sell advertising space
based upon the impressions each site generates. The banner exchange is
located at bannersource.com.
- Development of "Quick-Links" for incorporation into multimedia
presentations to allow easy access to customer websites.
- A search engine, Matchsite.com, which simultaneously queries other search
engines.
Galaxy Enterprises estimates that it spent approximately $146,000 during
1999 and $250,000 during 1998 on research and development activities.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Cost of compliance with environmental laws are nominal, if any, and are
therefore immaterial to Galaxy Enterprises' operations.
EMPLOYEES
As of April 15, 2000, Galaxy Enterprises employed 171 people, 146 of whom
work full-time. Of the total employees, six employees are executive personnel,
47 are technical personnel, 65 are in marketing and sales, 23 are in fulfillment
and 30 were administrative, accounting, information systems, and clerical
personnel.
129
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
OF GALAXY ENTERPRISES
The following table sets forth, as of April 21, 2000:
- each person who is known by Galaxy Enterprises to be the owner of record
or beneficial owner of more than 5% of the outstanding common stock;
- each of its directors and executive officers; and
- all of Galaxy Enterprises' current directors and executive officers as a
group,
the number of shares of common stock beneficially owned by each person and group
and the percentage of the outstanding shares owned by each person and group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OF CLASS(2)
- ---------------- --------------------- -------------------
<S> <C> <C>
John J. Poelman........................... 1,030,213(3) 16.2%
4009 N. Quail Run Drive
Provo, UT 84604
Netgateway, Inc........................... 980,213(4) 15.4%
300 Oceangate, 5th floor
Long Beach, CA 90803
Brandon B. Lewis.......................... 129,333(5) 2.0%
2952 West 1060 North
Provo, UT 84601
Frank C. Heyman........................... 101,667(6) 1.6%
8468 Jardim Way
Sandy, UT 84093
Darral G. Clarke.......................... 22,000(7) .3%
4102 N. Quail Run Drive
Provo, UT 84604
All officers and directors as a group
(5 persons)............................. 1,313,213(8) 20.1%
</TABLE>
- ------------------------
(1) Except as otherwise indicated, all shares are directly owned with voting and
investment power held by the person named. Amounts shown include, where
applicable, shares subject to presently exercisable options.
(2) The percentage shown for each beneficial owner is calculated based upon the
outstanding Common Stock, including shares of Common Stock subject to
presently exercisable options held by such beneficial owner which are deemed
to be outstanding.
(3) Includes 80,000 shares subject to presently exercisable options.
(4) Includes 980,213 shares subject to an option granted by John J. Poelman.
(5) Includes 118,333 shares subject to presently exercisable options.
(6) Includes 101,667 shares subject to presently exercisable options.
(7) Includes 22,000 shares subject to presently exercisable options.
(8) Includes 322,000 shares subject to presently exercisable options.
STOCKHOLDERS
As of April 21, 2000 there were approximately 142 stockholders of record of
Galaxy Enterprises' common stock.
130
<PAGE>
LEGAL PROCEEDINGS
Galaxy Enterprises completed transactions with over 40,000 customers during
1999 and in its regular course of business receives requests for refunds from
customers, who at times threaten and/or have brought legal proceedings. Galaxy
analyzes each refund request on a case-by-case basis and grants refunds where
appropriate. In the vast majority of cases Galaxy Enterprises has been
successful in defending these actions. Galaxy Enterprises considers these to be
routine claims incidental to its business. See "Information Regarding Galaxy
Enterprises, Business, Governmental Regulation."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada Revised Statutes concerning corporations, and Galaxy Enterprises'
articles of incorporation and bylaws, provide for indemnification of its
officers, directors and others in most instances for any liability suffered by
them or arising out of their activities as officers, directors, employees or
agents of Galaxy Enterprises if they were not engaged in intentional misconduct,
fraud or knowing violation of the law.
Specifically, Nevada Revised Statutes Sections 78.7502 (1) and (2) grant
discretionary authority on corporations to indemnify such persons under certain
conditions, and (3) mandates indemnification of any such person who has
successfully defended on the merits any action, suit or proceeding, or any
claim, issue or matter herein, against expenses, including attorneys' fees,
actually and reasonably incurred in such defense. Nevada Revised Statutes
Section 78.751 provides that any discretionary indemnification, unless ordered
by a court, may be made only as authorized in the specific case upon a
determination that indemnification of the officer, director, officer, employee
or agent is proper in the circumstances, which determination must be made:
(a) by the stockholders; (b) by the board of directors by majority vote of a
quorum consisting of directors who were not parties to the action, suit or
proceeding; (c) if a majority vote of a quorum of non-party directors so orders,
by independent legal counsel in a written opinion; or (d) if a quorum of
non-party directors cannot be obtained, by independent legal counsel in a
written opinion. Officer and director expenses incurred in defending a civil or
criminal action, suit or proceeding must be paid by the corporation as incurred
and in advance of final disposition of the action, suit or proceeding, upon
receipt of an undertaking by or on behalf of the officer or director to repay
the amount if it is ultimately determined by a court that he is not entitled to
be indemnified by the corporation. Galaxy Enterprises' articles of incorporation
and bylaws are essentially the same as the statutory provisions except that
indemnification is not allowed for judgments, fines, excise taxes or penalties
imposed under the Employee Retirement Income Security Act of 1974, as amended,
or other excise taxes or penalties.
FUTURE STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, Netgateway stockholders may
present proper proposals for inclusion in Netgateway's proxy statement and for
consideration at its 2000 annual meeting of stockholders by submitting such
proposals to Netgateway in a timely manner. In order to be so included for the
2000 annual meeting stockholder proposals must be received by Netgateway within
a reasonable time before the meeting, and must otherwise comply with the
requirements of Rule 14a-8.
Pursuant to Rule 14a-8 under the Exchange Act, Galaxy Enterprises
stockholders may present proper proposals for inclusion in Galaxy Enterprises'
proxy statement and for consideration at its 2001 annual meeting of
stockholders, in the event the merger has not been consummated prior thereto, by
submitting such proposals to Galaxy Enterprises in a timely manner. In order to
be so included for the 2001 annual meeting stockholder proposals must be
received by Galaxy Enterprises within a reasonable time before the meeting, and
must otherwise comply with the requirements of Rule 14a-8.
131
<PAGE>
EXPERTS
The consolidated balance sheets of Netgateway, Inc. and subsidiaries as of
June 30, 1998 and 1999 and the related consolidated statements of operations,
changes in stockholders' deficit and cash flows for the year ended June 30,1999
and for the period March 4, 1998 (inception) through June 30, 1998, have been
included herein and in the Registration Statement in reliance on the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein
and upon authority of said firm as experts in auditing and accounting.
The consolidated balance sheets of Galaxy Enterprises as of December 31,
1999 and 1998 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999, included in this document, have been so included in
reliance on the report of Wisan, Smith, Racker & Prescott LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of
Netgateway common stock offered hereby will be passed upon for Netgateway by
Nida & Maloney, LLP, Santa Barbara, California. Nida & Maloney, LLP is the
record and beneficial owner of 15,000 shares of Netgateway common stock.
WHERE YOU CAN FIND MORE INFORMATION
Netgateway filed a registration statement with the SEC on Form S-4 under the
Securities Act to register the Netgateway common stock to be issued to Galaxy
Enterprises stockholders in the merger. This joint proxy statement/prospectus is
a part of that registration statement and constitutes a prospectus of Netgateway
in addition to being a proxy statement for the meetings of Netgateway and Galaxy
Enterprises stockholders. This document does not contain all the information
contained in the registration statement. For further information with respect to
Netgateway or Galaxy Enterprises and the shares of Netgateway common stock to be
issued in connection with the merger, Netgateway and Galaxy Enterprises refer
you to the registration statement and the exhibits and schedules filed with the
registration statement. Netgateway and Galaxy Enterprises have described all
material information for each contract, agreement or other document filed with
the registration statement in this document. However, statements contained in
this document as to the contents of any contract, agreement or other document
referred to are not necessarily complete. As a result, you should refer to the
copy of the contract, agreement or other document filed as an exhibit to the
registration statement for a complete description of the matter involved.
Netgateway and Galaxy Enterprises file annual, quarterly and special
reports, proxy statements and other information with the SEC. You may read and
copy all or any portion of the registration statement and any reports,
statements or other information filed by either company at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 or at any of
the SEC's other public reference rooms in New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Netgateway's and Galaxy Enterprises' SEC filings
including this registration statement are also available to the public from
commercial document retrieval services and at the Web site maintained by the SEC
at HTTP://WWW.SEC.GOV.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE APPROVAL OF THE MERGER AGREEMENT. NEITHER
NETGATEWAY NOR GALAXY ENTERPRISES HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY
STATEMENT/ PROSPECTUS. THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED MAY 24,
2000. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY OTHER DATE, AND NEITHER THE MAILING
OF THIS JOINT PROXY STATEMENT/PROSPECTUS TO GALAXY ENTERPRISES STOCKHOLDERS NOR
THE ISSUANCE OF NETGATEWAY COMMON STOCK IN THE MERGER SHALL CREATE ANY
IMPLICATION TO THE CONTRARY.
132
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NETGATEWAY, INC. AND SUBSIDIARIES
Independent Auditors' Report for Netgateway, Inc............ F-2
Consolidated Balance Sheets as of June 30, 1999 and 1998.... F-3
Consolidated Statements of Operations for The Year Ended
June 30, 1999 and
The Period March 4, 1998 (Inception) Through June 30,
1999...................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity
(Deficit)................................................. F-5
Consolidated Statements of Cash Flows for The Year Ended
June 30, 1999 and The Period March 4, 1998 (Inception)
Through June 30, 1998..................................... F-7
Notes to the Consolidated Financial Statements.............. F-8
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and June 30, 1999............................. F-22
Unaudited Condensed Consolidated Statements of Operations
for The Three and Nine Months Ended March 31, 2000 and
1999...................................................... F-23
Unaudited Condensed Consolidated Statements of Cash Flows
for The Nine Months Ended March 31, 2000 and March 31,
1999...................................................... F-24
Unaudited Condensed Consolidated Statement of Changes in
Shareholders' Equity...................................... F-25
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-27
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
Independent Auditors' Report for Galaxy Enterprises, Inc.... F-32
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-33
Consolidated Statements of Operations for The Years Ended
December 31, 1999, 1998 and 1997.......................... F-34
Consolidated Statements of Stockholders' Equity for The
Years Ended December 31, 1999, 1998 and 1997.............. F-35
Consolidated Statements of Cash Flows for The Years Ended
December 31, 1999, 1998 and 1997.......................... F-36
Condensed Unaudited Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999...................... F-37
Condensed Unaudited Consolidated Statements of Operations
for The Three Months Ended March 31, 2000 and 1999........ F-38
Condensed Unaudited Consolidated Statements of Cash Flows
for The Three Months Ended March 31, 2000 and 1999........ F-39
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-40
Notes to Consolidated Financial Statements.................. F-42
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Netgateway, Inc.:
We have audited the accompanying consolidated balance sheets of Netgateway,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity (deficit) and cash
flows for the year ended June 30, 1999 and the period March 4, 1998 (inception)
through June 30, 1998. 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 audit 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 June 30, 1999 and 1998 and the results of its
operations and its cash flows for the year ended June 30, 1999 and the period
March 4, 1998 (inception) through June 30, 1998, 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 principle 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.
As discussed in note 1 to the financial statements, the Company changed its
method of accounting for revenue in the fiscal year ended June 30, 1999.
KPMG LLP
Los Angeles, California
August 23, 1999, except for the last two paragraphs
of note 1, which is as of October 1, 1999.
F-2
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................ $ 569,472 254,597
Accounts receivable less allowance for doubtful accounts of
$3,000 and $0 June 30, 1999 and 1998, respectively........ 44,198 21,305
Note receivable from officer (note 6)....................... 30,000 --
Short term notes receivable, net (note 6)................... -- 50,000
Debt issue costs............................................ 336,288 --
Prepaid offering costs...................................... 325,887 --
Other current assets........................................ 73,481 45,565
------------ -----------
Total current assets...................................... 1,379,326 371,467
Property and equipment, net (note 4)...................... 496,536 143,384
Intangible assets, net (note 5)............................. 1,562,635 351,804
Other assets................................................ 19,853 4,897
------------ -----------
$ 3,458,350 871,552
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable (note 8)................. $ 1,496,000 --
Convertible debentures (note 8)........................... 200,000 --
Accounts payable.......................................... 278,723 106,242
Accrued wages and benefits................................ 278,741 12,720
Accrued interest.......................................... 44,301 130,122
Accrued liabilities....................................... 543,632 30,000
Deferred revenue.......................................... 67,694 --
Accrued contract losses................................... 302,543 --
Current portion of notes payable to related parties
(note 8)................................................ 1,799 2,052,159
------------ -----------
Total current liabilities................................. 3,213,433 2,331,243
Notes payable to related parties, less current portion
(note 8).................................................. -- 367,892
------------ -----------
Total liabilities....................................... 3,213,433 2,699,135
Shareholders' equity (deficit) (note 9 and 10):
Preferred stock, par value $.001 per share. Authorized
5,000,000 shares; issued and outstanding at June 30,
1999 and 1998 $0........................................ -- --
Common stock, par value $.001 per share. Authorized
40,000,000 shares; issued and outstanding 9,912,304 and
7,510,000 at June 30, 1999 and 1998, respectively....... 9,913 7,510
Additional paid-in capital................................ 15,639,160 2,849,163
Deferred compensation..................................... (52,919) (112,320)
Accumulated other comprehensive loss...................... (3,598) --
Accumulated deficit....................................... (15,347,639) (4,571,936)
------------ -----------
Total shareholders' equity (deficit).................... 244,917 (1,827,583)
------------ -----------
Commitments and subsequent events (note 12 and 13)
Total liabilities and shareholders' equity (deficit)...... $ 3,458,350 871,552
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
MARCH 4, 1998
YEAR (INCEPTION)
ENDED THROUGH
JUNE 30, JUNE 30,
1999 1999
------------ -------------
<S> <C> <C>
Service revenue............................................. $ 157,282 2,800
Operating expenses:
License fees (note 7)..................................... -- 3,822,000
Depreciation and amortization............................. 257,342 12,249
Selling, general and administrative....................... 11,349,049 721,2106
------------ ----------
Total operating expenses................................ 11,606,391 4,555,459
------------ ----------
Loss from operations.................................... (11,449,109) (4,552,659)
Loss on sale of equity securities........................... 54,729 --
Interest expense............................................ 925,097 19,277
------------ ----------
Loss before extraordinary item.......................... (12,428,935) (4,571,936)
Extraordinary gain on extinguishment of debt................ 1,653,232 --
------------ ----------
Net loss................................................ $(10,775,703) (4,571,936)
============ ==========
Basic and diluted extraordinary gain per share.............. $ 0.19 --
============ ==========
Basic and diluted loss per share............................ $ (1.21) (0.84)
============ ==========
Weighted average common shares outstanding--basic and
diluted................................................... 8,912,041 5,416,242
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PRICE -------------------- PAID-IN DEFERRED
DATE PER SHARE SHARES AMOUNT CAPITAL COMPENSATION
------------ ----------- --------- -------- ---------- -------------
<S> <C> <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 -- -- -- (14,080)
Amortization of deferred compensation............ 4/98 - 6/98 -- -- -- 1,760
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 (100,000)
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 (112,320)
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 --
Warrants granted for services.................... 10/98 - 6/99 2.00 - 5.50 -- -- 2,340,720 --
Stock compensation paid by shareholders.......... 11/98 2.00 -- -- 400,000 --
Stock option compensation........................ -- -- 233,211 (233,211)
Amortization of deferred compensation............ -- -- -- 282,052
Forfeited stock.................................. (48,000) (48) (10,512) 10,560
Capital contributed upon extinguishment of
debt........................................... 12/98 -- -- 200,000 --
Subsidiary convertible common stock issued in
business acquisition........................... 1/99 - 4/99 3.00 - 4.50 -- -- 1,392,858 --
Options issued for legal services................ 2/99 5.50 -- -- 479,708 --
Warrants granted for debt issue costs............ 2/99 - 6/99 3.50 - 5.50 -- -- 775,585 --
Shares issued for debenture conversion........... 3/99 - 5/99 2.50 320,000 320 950,680 --
Shares issued for services....................... 10/98 - 6/99 2.00 - 5.50 366,500 366 1,261,834 --
Shares issued for debt issue costs............... 3/99 4.00 30,000 30 127,470 --
Sale of common stock for cash, net............... 3/99 - 6/99 3.00 - 5.50 614,334 615 2,300,763 --
Cashless exercise of warrants.................... 4/99 2,570 3 (3) --
Shares issued for technology..................... 5/99 5.00 35,000 35 174,965 --
Comprehensive loss:
Net loss....................................... -- -- -- --
Foreign currency translation adjustment........ -- -- -- --
Total comprehensive loss.........................
--------- ------- ---------- --------
Balance at June 30, 1999......................... 9,912,304 $ 9,913 15,639,160 (52,919)
========= ======= ========== ========
</TABLE>
F-5
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
OTHER SHAREHOLDERS'
COMPREHENSIVE ACCUMULATED COMPREHENSIVE EQUITY
LOSS DEFICIT LOSS (DEFICIT)
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
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) (4,571,936) -- (4,571,936)
-----------
Total comprehesive loss.................................... (4,571,936)
=========== ----------- ------ -----------
Balance at June 30, 1998................................... (4,571,936) -- (1,827,583)
Sale of common stock for cash.............................. -- -- 1,899,600
Exercise of warrants....................................... -- -- 264,200
Warrants granted for services.............................. -- -- 2,340,720
Stock compensation paid by shareholders.................... -- -- 400,000
Stock option compensation.................................. -- -- --
Amortization of deferred compensation...................... -- -- 282,052
Forfeited stock............................................ -- -- --
Capital contributed upon extinguishment of debt............ -- -- 200,000
Subsidiary convertible common stock issued in business
acquisition.............................................. -- -- 1,392,858
Options issued for legal services.......................... -- -- 479,708
Warrants granted for debt issue costs...................... -- -- 775,585
Shares issued for debenture conversion..................... -- -- 951,000
Shares issued for services................................. -- -- 1,262,200
Shares issued for debt issue costs......................... -- -- 127,500
Sale of common stock for cash, net......................... -- -- 2,301,378
Cashless exercise of warrants.............................. -- -- --
Shares issued for technology............................... -- -- 175,000
Comprehensive loss:
Net loss................................................. (10,775,703) (10,775,703) -- (10,775,703)
Foreign currency translation adjustment.................. (3,598) (3,598) (3,598)
-----------
Total comprehensive loss................................... (10,779,301)
=========== ----------- ------ -----------
Balance at June 30, 1999................................... (15,347,639) (3,598) 244,917
=========== ====== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 4, 1998
(INCEPTION)
YEAR ENDED THROUGH
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,775,703) (4,571,936)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 257,432 12,249
Common stock issued for services........................ 1,262,200 371,680
Amortization and write-off of license fees.............. -- 3,822,000
Loss on sale of equity securities....................... 54,729 --
Amortization of deferred compensation................... 282,052 --
Gain on extinguishment of debt.......................... (1,653,232) --
Stock compensation paid by shareholders................. 400,000 --
Interest expense on debt converted to equity............ 236,488 19,277
Interest expense on warrants issued as debt issue
costs.................................................. 535,535 --
Amortization of debt issue costs........................ 144,000 --
Options and warrants issued for services................ 2,820,428 --
Provision for doubtful accounts......................... 26,876 25,000
Write-off of note receivable............................ 800,000 --
Changes in assets and liabilities:
Accounts receivable................................... (49,769) (2,000)
Prepaid offering costs................................ (325,887) --
Other assets.......................................... (76,668) (45,422)
Accounts payable and accrued expenses................. 1,206,064 116,033
Accrued contract losses............................... 302,543 --
------------ ----------
Net cash used in operating activities............... (4,552,912) (253,119)
------------ ----------
Cash flows from investing activities:
Cash assumed in business acquisition.................... 4,781 3,321
Loan for notes receivable............................... (830,000) (75,000)
Repayment of notes receivable........................... 50,000 --
Purchase of equity securities........................... (100,733) --
Proceeds from sale of equity securities................. 46,004 --
Purchase of property and equipment...................... (250,579) (102,034)
------------ ----------
Net cash used in investing activities............... (1,080,527) (173,713)
------------ ----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 4,253,360 649,000
Proceeds from exercise of warrants...................... 264,200 --
Proceeds from issuance of notes payable to related
parties................................................ 100,000 132,429
Proceeds from issuance of notes payable and convertible
debentures............................................. 2,506,000 --
Cash paid for debt issue costs.......................... (181,018) --
Repayment of notes payable to related parties........... (990,630) (100,000)
------------ ----------
Net cash provided by financing activities........... 5,951,912 681,429
------------ ----------
Net increase in cash................................ 318,473 254,597
Cash at beginning of period................................. 254,597 --
Effect of exchange rate changes on cash balances............ (3,598) --
------------ ----------
Cash at end of period....................................... $ 569,472 254,597
============ ==========
Supplemental schedule of noncash activities:
Issuance of common stock for business acquisition......... $ -- 400,000
Issuance of convertible stock in business acquisition..... 1,392,858 --
Accrued asset purchases................................... -- 27,743
Conversion of debt to common stock........................ 800,000 284,000
Common stock issued in exchange for shareholders' payment
of Company debt......................................... -- 400,000
Capital contributed upon extinguishment of debt........... 200,000 --
Common stock issued for internal-use software............. 175,000 --
Warrants issued for debt issue costs...................... 723,203 --
Stock issued for debt issue costs......................... 77,500 --
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Netgateway, Inc. and its subsidiaries ("Netgateway" or the "Company"), was
formed on March 4, 1998 as a Nevada corporation. Netgateway is an internet
commerce and connectivity company which provides electronic commerce 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.
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.
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 $557,145. 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 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 $1,392,858. 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 June 30, 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..................................................... $ 146,867
============
Net loss.................................................... (10,698,625)
============
Loss per share.............................................. (1.20)
============
</TABLE>
F-8
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS (CONTINUED)
Effective October 1, 1999, the Company changed its method of accounting for
revenue from the completed contract method to the percentage-of-completion
method. The Company believes the percentage-of-completion method more accurately
reflects the current earnings process under the Company's contracts. The
percentage-of-completion method is preferable according to Statement of
Position 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, issued by the American Institute of Certified Public
Accountants. The new method has been applied retroactively by restating the
Company's consolidated financial statements for prior periods in accordance with
Accounting Principles Board Opinion No. 20.
Prior to October 1, 1999, the Company was a development stage enterprise as
defined in Statement of Financial Accounting Standards ("SFAS") No. 7. Planned
principal operations commenced and began producing significant revenue on
October 1, 1999, and accordingly, Netgateway is no longer considered a
development stage company.
(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.
(C) INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their
estimated useful lives as follows:
<TABLE>
<S> <C>
Acquired technology......................................... 5 to 7 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.
F-9
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 carry forwards. 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
June 30, 1999 and 1998 approximated fair value due to the short maturity of
those instruments. The fair value of the notes receivable from and 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
F-10
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 year ended June 30, 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 June 30, 1999 and 1998.
(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
F-11
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in a currency other than the entities' functional currency) during the year
ended June 30, 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 in accordance with SFAS No. 128
"Earnings Per Share". 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 3,840,956 options and 1,750,100 warrants to
purchase shares of common stock that were outstanding during the year ended
June 30, 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.
(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.
(Q) RECLASSIFICATIONS
Certain amounts have been reclassified to conform with current year
presentation.
(4) PROPERTY AND EQUIPMENT
Property and equipment balances at June 30, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Computers and office equipment........................... $583,021 152,244
Less accumulated depreciation............................ 86,485 8,860
-------- -------
496,536 143,384
======== =======
</TABLE>
F-12
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INTANGIBLE ASSETS
Intangible assets balances at June 30, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Acquired technology.................................... $1,510,548 120,000
Goodwill............................................... 235,193 235,193
---------- -------
1,745,741 355,193
Less accumulated amortization.......................... 183,106 3,389
---------- -------
$1,562,635 351,804
========== =======
</TABLE>
(6) NOTES RECEIVABLE AND NOTES RECEIVABLE FROM OFFICER
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 year ended June 30, 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. During June 1999, the Company issued its chief
executive officer, Keith Freadhoff, a non-interest bearing $30,000 note
receivable. The note was repaid in July 1999.
(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.
F-13
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LICENSE AGREEMENTS (CONTINUED)
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 December 1998 and January 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 Company recorded interest expense
of $151,000 related to the beneficial conversion feature. The debentures are due
in December 1999. As of June 30, 1999, $800,000 of the debentures had been
converted into 320,000 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. The notes were repaid in June 1999.
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
payable are due the earlier of April 30, 2000 or upon the close of a public sale
of the Company's common stock. The Company also granted 144,000 warrants to
purchase an equivalent number of shares of common stock at an exercise price of
$10 per share as additional issuance costs. The warrants are exercisable for a
period of four years commencing May 18, 2000. The fair value of the warrants on
the dates of issuance was estimated to be $301,300 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. The net proceeds from the bridge financing were allocated to the senior
notes payable and common stock based on their relative fair values, taking into
consideration recent debt and equity transactions. Accordingly, $1,346,000 was
recorded as notes payable, $1,488,952 as equity, net of $346,349 of stock
issuance costs, and $302,952 as debt issuance costs. 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
through September 1999 private placement. If the Company is required to rescind
the May through September private placement in its entirety, the Company would
be required to refund all of the gross proceeds of the May through September
private placement to the investors. Even following the repayment of the notes,
based on the Securities Act, the rule and regulations under the Securities Act,
and the interpretations of the Commission, the investors in the May through
September private placement may have the right to require the Company to
repurchase the shares of common stock which they received in the May through
September private placement if they can successfully argue that those shares
were issued in lieu of a higher interest rate on those notes.
In June 1999, the Company issued a 12% senior note payable of $150,000 and
15,000 shares of common stock valued at $75,000 as settlement of a legal fee
obligation. The note is due the earlier of
F-14
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) CONVERTIBLE DEBENTURES AND NOTES PAYABLE (CONTINUED)
April 30, 2000 or upon the close of a public sale of the Company's common stock.
The Company also granted 3,750 warrants to purchase an equivalent number of
shares of common stock at an exercise price of $10 per share. The warrants are
exercisable for a period of four years commencing May 18, 2000. The fair value
of the warrants on the dates of issuance was estimated to be $7,098 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. As a result, $7,098 of additional legal expense was recorded in
the accompanying consolidated financial statements.
Notes payable and notes payable to related parties at June 30, 1999 and 1998
consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
12% senior notes payable due the earlier of April 30, 2000
or upon the close of a public sale of the Company's common
stock..................................................... $1,496,000 --
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................................................. 1,799 32,429
---------- -----------
1,497,799 2,420,051
Less current portion........................................ 1,497,799 (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. During the year ended
June 30, 1999, the Company repaid $30,630 of the note payable.
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 year
ended June 30, 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 year ended June 30, 1999.
F-15
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY (DEFICIT)
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. 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' equity (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
year ended June 30, 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 year ended June 30, 1999, the 100,000 shares vested resulting
in compensation of $100,000.
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 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 year ended June 30, 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 $3,169,839 using the Black-Scholes option-pricing model with
the
F-16
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
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 $2,394,254, debt issuance costs of $187,668 and interest expense of
$535,535 was recorded in the accompanying consolidated financial statements.
During the year ended June 30, 1999, the Company issued 366,500 shares of
common stock valued at $1,262,200 as payment of consulting and legal services.
In May 1999, the Company issued 35,000 shares of common stock valued at $175,000
to acquire internal-use software from UnitNetImaging (Shopping Planet). The
value of the technology was capitalized in the accompanying consolidated
financial statements.
During March 1999, the Company issued 30,000 shares of common stock valued
at $127,500 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.
From March 1999 through May 1999, the Company sold 326,334 shares of common
stock in exchange for cash of $979,000.
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.
In May 1999, the Company authorized the issuance of 5,000,000 shares of
preferred stock, $.001 par value, and approved an increase in the authorized
number of common shares to 40,000,000.
(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. 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 year
ended June 30, 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, compensation for the fair value of the options
aggregating $479,708 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.
F-17
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) STOCK OPTIONS (CONTINUED)
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.
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 year ended June 30, 1999, the Company
granted 998,301 options under the Program at exercise prices greater than and
below the estimated market price of the Company's common stock on the date of
grant ranging from $2.17 to $5.34 per share. As a result, $180,292 of
compensation expense was recognized during the year ended June 30, 1999. The
weighted-average fair value of options granted during the year ended June 30,
1999 under the Program was $2.07 per share. As of June 30, 1999, 1,699 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 year ended June 30, 1999:
<TABLE>
<S> <C>
Net loss--as reported....................................... $(10,775,703)
Net loss--pro forma......................................... (13,289,478)
============
</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 June 30, 1999, 2,596,656 options had been granted
under the Plan at an exercise prices ranging from $2.50 to $6.50 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 year ended June 30, 1999
is the same under APB 25 and SFAS 123. The weighted-average fair value of the
options granted under the Plan during the year ended June 30, 1999 was $1.81 per
share. As of June 30, 1999, there were 2,403,333 options available for future
grants under the Plan.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF 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....................................... 3,734,968 3.85
Canceled...................................... (100,000) 3.50
---------
Balance at June 30, 1999...................... 3,834,968 3.80
========= ====
</TABLE>
F-18
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) STOCK OPTIONS (CONTINUED)
The following table summarizes information about shares under option at
June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ---------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.46 to 3.71......... 1,808,636 9.01 years $ 2.56 670,930 $ 2.50
3.78 to 6.06.......... 1,824,406 9.53 years 4.76 212,880 4.11
6.15 to 7.75.......... 191,926 9.83 years 6.58 35,730 6.75
13.30................. 10,000 9.75 years 13.30 833 13.30
--------- -------
3,834,968.. 3.80 920,373 3.05
========= ====== ======= ======
</TABLE>
(11) INCOME TAXES
Income tax expense for the period March 4, 1998 (inception) through
June 30, 1998 and the year ended June 30, 1999 represents the California state
minimum franchise tax 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 year
ended June 30, 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..................... $(3,565,585) (1,554,458)
Decrease (increase) in income taxes resulting from:
State and local income tax benefit, net of federal
effect............................................ (618,227) (278,196)
Change in the valuation allowance for deferred tax
assets............................................ 4,139,728 1,859,974
Other............................................... 46,484 (26,520)
----------- ----------
Income tax expense.............................. $ 2,400 800
=========== ==========
</TABLE>
F-19
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
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 June 30,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards................. $ 4,620,070 1,669,316
Stock compensation expense........................ 1,128,171 179,872
Intangible assets, principally due to differences
in amortization................................. 16,902 10,290
Deferred compensation............................. 112,821 --
Accounts receivable principally due to allowance
for doubtful accounts........................... 1,200 --
Accrued expenses.................................. 106,640 --
Property and equipment, principally due to
differences in depreciation..................... -- 496
----------- ----------
Total gross deferred tax assets................. 5,985,804 1,859,974
Less valuation allowance........................ (5,968,503) (1,859,974)
Deferred tax liability:
Property and equipment, principally due to
differences in depreciation..................... (17,301) --
----------- ----------
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 $11,550,000 prior to the expiration of the carry forward 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 June 30, 1999, the Company had approximately $11,550,400 and
11,548,000 of net operating loss carry forwards available for Federal and state
income tax purposes, respectively, which expire between 2006 and 2018. The
ultimate realization of the net operating loss carry forwards 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 $424,700, $237,300, $135,300 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
$115,237 and $18,367 during the year ended June 30, 1999 and during the period
March 4, 1998 (inception) through June 30, 1998, respectively.
F-20
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SUBSEQUENT EVENTS
In July 1999, the Board of Directors adopted the 1999 Stock Option Plan for
Non-Executives. An aggregate of 2,000,000 shares were reserved for issuance
under the Plan. From July 1, 1999 through August 10, 1999, the Company granted
367,266 options under the Plan at exercise prices ranging from $5.25 to $14.50
per share. The Company also granted 200,000 options under the 1998 Executive
Plan in July 1999 at an exercise price of $8.18 per share.
In July 1999, the Company entered into a Cable Reseller and Mall agreement
with MediaOne of Colorado, Inc. (MediaOne) whereby the Company also issued to
MediaOne 50,000 shares of common stock and warrants to purchase 200,000 shares
of common stock. The exercise price of the warrants is dependent upon the market
price of the Company's common stock on the date that the warrants are earned
under certain performance criteria.
From July 21, 1999 through August 18, 1999, the Company issued $503,000 of
12% senior notes payable which are due the earlier of April 30, 2000 or upon the
close of a public sale of the Company's common stock and 50,300 shares of the
Company's common stock in exchange for $503,000. The net proceeds were allocated
to the notes payable and common stock based on their relative fair values. 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 through September 1999 private placement. If the Company is
required to rescind the May through September private placement in its entirety,
the Company would be required to refund all of the gross proceeds of the May
through September private placement to the investors.
Even following the repayment of the notes, based on the Securities Act, the
rule and regulations under the Securities Act, and the interpretations of the
Commission, the investors in the May through September private placement may
have the right to require the Company to repurchase the shares of common stock
which they received in the May through September private placement if they can
successfully argue that those shares were issued in lieu of a higher interest
rate on those notes.
(14) SUBSEQUENT EVENT--UNAUDITED
From August 24, 1999 through September 24, 1999, the Company issued
$3,075,500 of 12% senior notes payable which are due the earlier of April 30,
2000 or upon the close of a public sale of the Company's common stock and
307,550 shares of the Company's common stock in exchange for $3,075,500. The net
proceeds were allocated to the notes payable and common stock based on their
relative fair values. 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 through September 1999
private placement. If the Company is required to rescind the May through
September private placement in its entirety, the Company would be required to
refund all of the gross proceeds of the May trough September private placement
to the investors. Even following the repayment of the notes, based on the
Securities Act, the rule and regulations under the Securities Act, and the
interpretations of the Commission, the investors in the May through September
private placement may have the right to require the Company to repurchase the
shares of common stock which they received in the May through September private
placement if they can successfully argue that those shares were issued in lieu
of a higher interest rate on those notes.
F-21
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................ $ 8,739,972 569,472
Accounts receivable less allowance for doubtful accounts
of $600 and $3,000 at March 31, 2000 and June 30, 1999,
respectively............................................ 618,872 44,198
Unbilled receivables (note 6)............................. 679,134 --
Note receivable (note 6).................................. 450,000 --
Note receivable from officer.............................. -- 30,000
Debt issue costs.......................................... -- 336,288
Prepaid offering costs.................................... -- 325,887
Deferred acquisition costs................................ 361,628 --
Prepaid advertising....................................... 290,000 --
Prepaid expenses and other current assets................. 535,444 73,481
----------- -----------
Total current assets.................................. 11,675,050 1,379,326
Property and equipment, net................................. 2,496,883 496,536
Intangible assets, net 1,323,556 1,562,635
Other assets................................................ 27,284 19,853
----------- -----------
$15,522,773 3,458,350
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable (note 4)................. $ -- 1,496,000
Convertible debentures (note 4)........................... -- 200,000
Accounts payable.......................................... 813,444 278,723
Accrued wages and benefits................................ 1,233,125 278,741
Accrued interest.......................................... -- 44,301
Accrued liabilities....................................... 987,900 543,632
Deferred revenue.......................................... 115,529 67,694
Accrued contract losses -- 302,543
Current portion of notes payable to related parties....... -- 1,799
----------- -----------
Total current liabilities............................. 3,149,998 3,213,433
Shareholders' equity (note 5):
Common stock, par value $.001 per share. Authorized
40,000,000 shares; issued and outstanding 17,508,327 and
9,912,304 at March 31, 2000 and June 30, 1999,
respectively............................................ 17,508 9,913
Additional paid-in capital................................ 55,950,432 15,639,160
Deferred compensation..................................... (744,172) (52,919)
Accumulated other comprehensive loss...................... (4,396) (3,598)
Accumulated deficit....................................... (42,846,597) (15,347,639)
----------- -----------
Total shareholders' equity............................ 12,372,775 244,917
Commitments and subsequent events...........................
----------- -----------
Total liabilities and shareholders' equity............ $15,522,773 3,458,350
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue (note 3)............................ $ 2,042,315 42,208 3,214,997 122,392
Cost of sales............................... $ 508,464 33,525 1,399,025 102,489
----------- ---------- ----------- ----------
Gross profit................................ 1,533,851 8,683 1,815,972 19,903
----------- ---------- ----------- ----------
Product development......................... 2,342,665 257,589 4,104,599 911,236
Selling and marketing....................... 1,356,764 306,974 3,093,634 333,437
General and administrative.................. 1,993,223 1,976,326 16,873,064 6,514,569
Depreciation and amortization............... 294,708 97,321 608,621 144,702
----------- ---------- ----------- ----------
Total operating expenses.............. 5,987,360 2,638,210 24,679,918 7,903,944
----------- ---------- ----------- ----------
Loss from operations.................. (4,453,509) (2,629,527) (22,863,946) (7,884,041)
Loss on sale of equity securities........... -- -- -- 54,729
Interest (income) expense, net.............. (133,040) 697,244 4,635,012 679,274
----------- ---------- ----------- ----------
Net loss before extraordinary item.... (4,320,469) (3,326,771) (27,498,958) (8,618,044)
Extraordinary gain on debt extinguishment... -- -- -- 1,653,233
----------- ---------- ----------- ----------
Net loss.............................. $(4,320,469) (3,326,771) (27,498,958) (6,964,811)
=========== ========== =========== ==========
Basic and diluted extraordinary gain per
share..................................... $ -- -- -- 0.19
=========== ========== =========== ==========
Basic and diluted loss per share............ $ (0.25) (0.37) (2.02) (0.80)
=========== ========== =========== ==========
Weighted average common shares outstanding -
basic and diluted 17,183,314 9,027,916 13,589,267 8,659,851
=========== ========== =========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-23
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(27,498,958) (6,964,811)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 608,621 144,702
Common stock issued for services........................ 3,402,313 902,100
Loss on sale of equity securities....................... -- 54,729
Amortization of deferred compensation................... 466,147 89,260
Gain on extinguishment of debt.......................... -- (1,653,233)
Stock compensation paid by shareholders................. -- 400,000
Stock issued in exchange for cancellation of options.... 8,400,000 --
Amortization of debt issue costs........................ 585,592 --
Amortization of debt discount........................... 4,022,550 35,488
Interest expense on warrants issued as debt issue
costs.................................................. -- 668,904
Options and warrants issued for services................ 172,853 2,224,987
Provision for doubtful accounts......................... -- 23,876
Write-off of note receivable............................ -- 800,000
Changes in assets and liabilities:
Accounts receivable................................... (574,674) (18,921)
Unbilled receivables.................................. (679,134) --
Other assets.......................................... (494,385) 41,297
Accounts payable and accrued expenses................. 1,687,897 1,094,763
------------ -----------
Net cash used in operating activities............... (9,901,178) (2,156,859)
------------ -----------
Cash flows from investing activities:
Cash assumed in business acquisition...................... -- 4,781
Loan for notes receivable................................. (450,000) (800,000)
Repayment of notes receivable............................. 30,000 50,000
Purchase of equity securities............................. -- (100,733)
Proceeds from sale of equity securities................... -- 46,004
Purchase of property and equipment........................ (2,369,888) (118,927)
------------ -----------
Net cash used in investing activities............... (2,789,888) (918,875)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net............... 25,313,863 2,164,800
Proceeds from exercise of options and warrants............ 1,173,028 264,200
Proceeds from issuance of notes payable to related
parties................................................. -- 100,000
Repayment of notes payable................................ (6,633,500) --
Proceeds from issuance of notes payable and convertible
debentures.............................................. 1,114,950 1,160,000
Cash paid for debt issue costs............................ (104,178) --
Repayment of notes payable to related parties............. (1,799) (730,630)
------------ -----------
Net cash provided by financing activities........... 20,862,364 2,958,370
Effect of exchange rate changes on cash balances............ (798) (1,639)
------------ -----------
Net increase in cash................................ 8,170,500 (119,003)
Cash at beginning of period................................. 569,472 254,597
------------ -----------
Cash at end of period....................................... $ 8,739,972 135,594
============ ===========
Supplemental schedule of noncash activities:
Acquisition of StoresOnline............................... -- 1,021,429
Conversion of debt to common stock........................ $ 200,000 762,500
Common stock issued for prepaid advertising............... 300,000 --
Capital contributed upon extinguishment of debt........... -- 200,000
Warrants issued to settle an obligation................... 53,534 --
Warrants issued for debt issue costs...................... 145,876 746,076
Stock issued for debt issue costs......................... -- 75,000
============ ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-24
<PAGE>
NETGATEWAY INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN DEFERRED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION LOSS
----------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1999......... 9,912,304 $ 9,913 15,639,160 (52,919)
Common stock issued for prepaid
advertising.................... 50,000 50 299,950 -- --
Common stock issued for
services....................... 515,150 515 3,489,298 (87,500) --
Warrants issued to settle an
obligation..................... -- -- 53,534 -- --
Sale of common stock for cash,
net............................ 4,155,350 4,155 25,309,708 -- --
Warrants issued for debt issue
costs.......................... -- -- 145,876 -- --
Shares issued for debenture
conversion..................... 80,000 80 199,920 -- --
Options granted for services..... -- -- 172,853 -- --
Stock option compensation........ -- -- 1,069,900 (1,069,900) --
Amortization of deferred
compensation................... -- -- -- 466,147 --
Exercise of warrants............. 25,170 25 27,145 -- --
Cashless exercise of options and
warrants....................... 1,098,773 1,098 (1,098) -- --
Shares issued for cancellation of
options........................ 1,200,000 1,200 8,398,800 -- --
Shares issued for exercise of
options........................ 326,720 327 1,145,531 -- --
Shares issued upon conversion of
subsidiary common stock........ 144,860 145 (145) -- --
Comprehensive loss:
Net loss..................... -- -- -- -- (27,498,958)
Foreign currency translation
adjustment................. -- -- -- -- (798)
-----------
Total comprehensive loss......... (27,499,756)
----------- ------- ---------- ---------- ===========
Balance at March 31, 2000........ 17,508,327 $17,508 55,950,432 (744,172)
=========== ======= ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-25
<PAGE>
NETGATEWAY INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
DEFICIT LOSS EQUITY
----------- ------------- -------------
<S> <C> <C> <C>
Balance at June 30, 1999.............................. (15,347,639) (3,598) 244,917
Common stock issued for prepaid advertising........... -- -- 300,000
Common stock issued for services...................... -- -- 3,402,313
Warrants issued to settle an obligation............... -- -- 53,534
Sale of common stock for cash, net.................... -- -- 25,313,863
Warrants issued for debt issue costs.................. -- -- 145,876
Shares issued for debenture conversion................ -- -- 200,000
Options granted for services.......................... -- -- 172,853
Stock option compensation............................. -- -- --
Amortization of deferred compensation................. -- -- 466,147
Exercise of warrants.................................. -- -- 27,170
Cashless exercise of options and warrants............. -- -- --
Shares issued for cancellation of options............. -- -- 8,400,000
Shares issued for exercise of options................. -- -- 1,145,858
Shares issued upon conversion of subsidiary common
stock............................................... -- -- --
Comprehensive loss:
Net loss............................................ (27,498,958) -- (27,498,958)
Foreign currency translation adjustment............. -- (798) (798)
Total comprehensive loss..............................
----------- ------ -----------
Balance at March 31, 2000............................. (42,846,597) (4,396) 12,372,775
=========== ====== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-26
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Netgateway, Inc. and subsidiaries ("Netgateway" or the "Company"), was
formed on March 4, 1998 as a Nevada corporation. Netgateway provides eCommerce
services designed to enable clients to extend their business to the Internet to
conduct commercial transactions between business enterprises and between
business enterprises and consumers. The hub of Netgateway's eCommerce solution
is its proprietary Internet Commerce Center, which consists of the hardware,
proprietary and licensed software, and the related technical services necessary
for Netgateway's clients to transact eCommerce. Netgateway also designs and
builds custom interfaces, or spokes, to connect business clients to the Internet
Commerce Center. Netgateway's Internet Commerce Center 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 eCommerce with one or more specific
customers.
Prior to October 1, 1999, the Company was a development stage enterprise as
defined in Statement of Financial Accounting Standards ("SFAS") No. 7. Planned
principal operations commenced and began producing significant revenue on
October 1, 1999, and accordingly, Netgateway is no longer considered a
development stage company.
(2) 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
Revenues from the design and development of Internet Web sites and related
consulting projects are recognized using the percentage-of-completion
method. Unbilled receivables represent time and costs incurred on projects
in progress in excess of amounts billed, and are recorded as assets.
Deferred revenue represents amounts billed in excess of costs incurred, and
is recorded as a liability. To the extent costs incurred and anticipated
costs to complete projects in progress exceed anticipated billings, a loss
is recognized in the period such determination is made for the excess.
(c) 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. It 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, Ltd., in January 1999. Prior to that time, the Company
only had operations in the United States. All revenues during the three and
nine months ended March 31, 2000 and 1999 were generated in the United
States. Substantially all of the Company's long-lived assets were located in
the United States at March 31, 2000.
F-27
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) 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.
(e) FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's Canadian subsidiary,
StoresOnline.com, Ltd. 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, Ltd. are
translated at period-end exchange rates while income and expenses are
translated at actual exchange rates on the date of the transaction.
Translation gains or losses that related to StoresOnline.com, Ltd.'s net
assets are shown as a separate component of shareholders' equity 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 three and
nine months ended March 31, 2000 and 1999.
(f) 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 in accordance with SFAS No. 128
"Earnings Per Share". 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 2,933,407 options and 1,189,075 warrants to
purchase shares of common stock that were outstanding during the three and
nine months ended March 31, 2000 which were not included in the computation
of diluted loss per share because the impact would have been antidilutive.
There were 3,608,596 options and 1,468,300 warrants to purchase shares of
common stock that were outstanding during the three and 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.
(g) 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.
F-28
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) 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.
(i) RECLASSIFICATIONS
Certain amounts have been reclassified to conform with current year
presentation.
(j) CREDIT CONCENTRATION RISK
Revenue from one customer represented 49% and 31% of the Company's revenues
and from an additional customer, Galaxy Enterprises, Inc., (see Note 6)
represented 33% and 21% of the Company's revenue for the three months and
nine months ended March 31, 2000, respectively.
(3) CHANGE IN METHOD OF ACCOUNTING FOR REVENUE
Effective October 1, 1999, the Company changed its method of accounting for
revenue from the completed contract method to the percentage-of-completion
method. The Company believes the percentage-of-completion method more accurately
reflects the current earnings process under the Company's contracts. The
percentage-of-completion method is preferable according to Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, issued by the American Institute of Certified Public
Accountants. The new method has been applied retroactively by restating the
Company's consolidated financial statements for prior periods in accordance with
Accounting Principles Board Opinion No. 20.
The impact of the accounting change was a decrease in net loss and loss per
share as follows:
<TABLE>
<CAPTION>
NET LOSS LOSS PER SHARE
-------- --------------
<S> <C> <C>
Three months ended March 31, 2000.................... $ 80,978 .005
Nine months ended March 31, 2000..................... 665,279 .049
Three months ended March 31, 1999.................... 8,433 .001
Nine months ended December 31, 1999.................. 8,433 .001
</TABLE>
(4) NOTES PAYABLE AND CONVERTIBLE DEBENTURES
In August and September 1999, the Company obtained bridge financing whereby
12% senior notes payable and 357,850 shares of common stock were issued
generating proceeds of $2,744,290, net of $803,612 of issuance costs. The senior
notes payable are due the earlier of April 30, 2000 or upon the close of a
public sale of the Company's common stock. The Company also granted 149,375
warrants to purchase an equivalent number of shares of common stock at an
exercise price of $10 per share as additional issuance costs. The warrants are
exercisable for a period of four years commencing May 18, 2000. The fair value
of the warrants on the dates of issuance was estimated to be $469,402 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. The net proceeds from the bridge financing were allocated to
the senior notes payable and common stock based on their relative
F-29
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
fair values. Accordingly, $957,450 was recorded as notes payable, $2,035,140 as
equity, net of $555,313 of stock issuance costs, and $248,299 as debt issuance
costs.
In September 1999, the Company issued a 12% senior note payable of $500,000
and 50,000 shares of common stock valued at $350,000 stock, the proceeds of
which were received in October 1999. 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
October 1999, the Company issued a 12% senior note payable of $25,000 and 2,500
shares of common stock valued at $17,500 generating net proceeds of $22,500. The
note is due the earlier of April 30, 2000 or upon the close of a public sale of
the Company's common stock. The Company also granted 1,250 warrants valued at
$3,349. The net proceeds were allocated to the senior notes payable and common
stock based on their relative fair value.
In November 1999, the Company repaid all of the $6,633,500 12% senior notes
payable. Upon repayment of the senior notes, the remaining debt discount balance
of $3,253,469 was recognized as interest expense.
In October and November 1999, $200,000 of convertible debentures were
converted into 80,000 shares of common stock.
(5) SHAREHOLDERS' EQUITY
In July 1999, the Board of Directors adopted the 1999 Stock Option Plan for
Non-Executives (the "Plan"). An aggregate of 2,000,000 shares were reserved for
issuance under the Plan. Stockholder approval is necessary in order to adopt a
new plan. As stockholder approval had not been obtained prior to March 31, 2000,
all options granted are not considered outstanding and have not been included in
the preceding analysis. Management will seek stockholder approval at a special
meeting of the Company's stockholders on May 24, 2000. Once stockholder approval
is obtained, the additional options will be effectively granted and the
appropriate calculations to determine compensation can be completed. During the
nine months ended March 31, 2000, the Company granted 1,803,482 options under
the Plan at exercise prices ranging from $3.50 to $12.50 per share. The Company
also granted 535,714 options under the 1998 Executive Plan during the nine
months ended March 31, 2000 at exercise prices ranging from $3.50 to $8.18 per
share. The Company also granted 123,916 options under the 1998 Employee Stock
Option Plan during the nine months ended March 31, 2000 at exercise prices
ranging from $3.50 to $4.19 per share.
In July 1999, the Company entered into a Cable Reseller and Mall agreement
with MediaOne of Colorado, Inc. (MediaOne) whereby the Company also issued to
MediaOne 50,000 shares of common stock and warrants to purchase 200,000 shares
of common stock. The exercise price of the warrants is dependent upon the market
price of the Company's common stock on the date that the warrants are earned
under certain performance criteria. As of December 31, 1999, the performance
criteria had not been met.
During the nine months ended March 31, 2000, the Company issued 515,150
shares of common stock valued at $3,489,813 for services, of which 500,000
shares were issued to the chief executive officer of the Company.
In October, the Company issued 969,810 shares of common stock upon the
cashless exercise of warrants, 100 shares of common stock upon the exercise of
warrants for $100, 1,200,000 shares of
F-30
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SHAREHOLDERS' EQUITY (CONTINUED)
common stock valued at $8,400,000 to three executives upon the cancellation of
1,980,000 options, and 80,000 shares of common stock upon the conversion of
$200,000 of convertible debentures. In November 1999, the Company issued 270
shares of common stock upon the exercise of warrants for $270.
In November and December 1999, the Company sold 3,795,000 shares of common
stock in a public offering generating net proceeds of $23,057,844. The Company
also granted 190,250 warrants as stock issuance costs.
In December 1999, January, February, and March 2000, the Company issued
86,544, 10,586, 10,586, and 37,144 shares of common stock, respectively, upon
the conversion of common stock of its Storesonline.com subsidiary.
In January, February, and March 2000, the Company issued 128,963 shares of
common stock upon the cashless exercise of warrants and 24,800 shares of common
stock upon the exercise of warrants for $26,800.
In January, February, and March 2000, the Company issued 326,720 shares of
common stock upon the exercise of options under the Company's plans for
$1,145,858.
(6) GALAXY ACQUISITION
In March 1999, the Company signed a definitive agreement under which the
Company will acquire Galaxy Enterprises, Inc. ("Galaxy Enterprises") for total
consideration of approximately 3.9 million shares. Among other things, Galaxy
Enterprises, through its subsidiary Galaxy Mall, Inc., engages in the business
of selling electronic home pages, or "storefronts" on its Internet shopping
mall, and hosts those storefront sites on its Internet server. Galaxy
Enterprises also conducts Internet training seminars throughout the United
States for its customers and for others interested in extending their businesses
to the Internet.
In connection with the merger, on January 7, 2000, the Company advanced
$300,000 in bridge financing to Galaxy Enterprises for working capital purposes
and for the payment of certain professional fees incurred by Galaxy Enterprises
in connection with the merger. On February 4, 2000, the Company advanced an
additional $150,000 to Galaxy Enterprises for working capital purposes and for
the payment of certain professional fees incurred by Galaxy Enterprises in
connection with the merger. Each loan is secured by a pledge of Galaxy
Enterprises common stock from John J. Poelman, the chief executive officer and
largest shareholder of Galaxy Enterprises. The notes bear interest at 9.5% and
are due and payable on the earlier of June 1, 2000 or the consummation date of
the merger.
Pending completion of the merger, the Company has entered into certain
transactions in the normal course of business with Galaxy Enterprises, Inc. Such
transactions are at negotiated prices and on arm's length terms comparable to
transactions with other customers of the Company. For the three months ended
March 31, 2000, Netgateway's sales to Galaxy Enterprises totaled $679,134.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Galaxy Enterprises, Inc.
Orem, Utah
We have audited the accompanying consolidated balance sheets of Galaxy
Enterprises, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Galaxy
Enterprises, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
As discussed in Note 7 to the consolidated financial statements, the Company
changed its revenue recognition policies effective January 1, 1999.
WISAN, SMITH, RACKER & PRESCOTT LLP
Salt Lake City, Utah
March 15, 2000
F-32
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ $ 132,741 $ 24,719
Trade accounts receivable (net allowance of $677,551 and
$43,832 respectively)..................................... 1,112,947 40,838
Related party trade accounts receivable..................... 52,518 38,910
Inventories................................................. 102,203 --
Prepaid expenses............................................ 336,148 18,549
Prepaid income taxes........................................ 5,030 --
Employee advances........................................... 89,660 1,871
Deferred income tax asset................................... -- 14,200
Credit card reserves........................................ 248,431 129,205
------------ ----------
TOTAL CURRENT ASSETS...................................... 2,079,678 268,292
EQUIPMENT................................................... 259,577 171,868
OTHER ASSETS
Deferred charges............................................ -- 67,127
Goodwill.................................................... 850,434 794,753
Other....................................................... 40,940 32,815
------------ ----------
891,374 894,695
------------ ----------
TOTAL ASSETS............................................ $ 3,230,629 $1,334,855
============ ==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Trade accounts payable...................................... $ 1,808,482 $ 606,553
Related party trade accounts payable........................ -- 44,920
Bank overdraft.............................................. 348,907 179,301
Accrued expenses............................................ 469,286 108,536
Income taxes payable........................................ 1,100 7,900
Notes payable--current portion.............................. 161,486 115,000
Deferred revenue--current portion........................... 10,334,844 --
Customer deposits........................................... 285,226 6,060
------------ ----------
TOTAL CURRENT LIABILITIES................................. 13,409,331 1,068,270
DEFERRED INCOME TAXES....................................... -- 10,300
DEFERRED REVENUE............................................ 410,719 --
NOTES PAYABLE............................................... 4,269 --
STOCKHOLDERS' EQUITY
Common stock par value $.007, Authorized 25,000,000 shares,
5,947,514 and 5,281,652 shares issued and outstanding,
respectively.............................................. 41,632 36,971
Additional paid-in-capital.................................. 2,034,923 91,959
Unearned stock compensation................................. (159,000) --
Retained earnings (deficit)................................. (12,511,245) 127,355
------------ ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)...................... (10,593,690) 256,285
------------ ----------
TOTAL LIABILITIES AND EQUITY............................ $ 3,230,629 $1,334,855
============ ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
INCOME
Sales................................................. $ 17,934,277 $11,448,392 $ 2,495,096
Cost of sales......................................... 13,506,633 5,105,617 1,056,579
------------ ----------- -----------
GROSS PROFIT........................................ 4,427,644 6,342,775 1,438,517
OPERATING EXPENSES
Selling............................................... 8,064,631 4,758,694 856,073
General and administrative............................ 2,639,110 1,388,662 305,215
Bad debt expense...................................... 675,200 43,832 --
Depreciation.......................................... 97,591 53,260 6,592
Amortization.......................................... 61,974 80,175 36,826
Merger expenses....................................... 108,000
------------ ----------- -----------
11,538,506 6,324,623 1,312,706
------------ ----------- -----------
OPERATING INCOME (LOSS)............................. (7,110,862) 18,152 125,811
OTHER INCOME (EXPENSES)
Interest income....................................... 6,836 11 31
Other income (expenses)............................... (2,952) 5,403 --
Interest expense...................................... (11,152) (4,142) (433)
------------ ----------- -----------
(7,268) 1,272 (402)
------------ ----------- -----------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle.......... (7,118,130) 19,424 125,409
Income tax expense (benefit).......................... 2,692 (15,951) 38,081
------------ ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE........................... (7,120,822) 35,375 87,328
CUMULATIVE EFFECT ON PRIOR YEARS OF ACCOUNTING
CHANGE............................................ (5,517,778) --
------------ ----------- -----------
NET INCOME (LOSS)................................... $(12,638,600) $ 35,375 87,328
============ =========== ===========
Weighted average number of shares outstanding:
Basic................................................. 5,675,744 5,272,069 5,271,652
Diluted............................................... 5,675,744 5,724,683 5,271,652
Net income (loss) per share:
Basic................................................. $ (2.23) $ 0.01 $ 0.02
============ =========== ===========
Diluted............................................... $ (2.23) $ 0.01 $ 0.02
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statement.
F-34
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID IN RETAINED
SHARES AMOUNT CAPITAL OTHER EARNINGS
---------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1996........... 5,255,352 $36,787 $ 78,279 $ -- $ 4,652
Common stock issued for bonuses at
$.007 per share................... 16,300 114 -- -- --
Net income for the year ended
December 31, 1997................. -- -- -- -- 87,328
---------- ------- ---------- --------- ------------
Balance December 31, 1997........... 5,271,652 36,901 78,279 -- 91,980
Common stock issued for stock
options........................... 10,000 70 13,680 -- --
Net income for the year ended
December 31, 1998................. -- -- -- -- 35,375
---------- ------- ---------- --------- ------------
Balance December 31, 1998........... 5,281,652 36,971 91,959 -- 127,355
Common stock issued on conversion of
debt.............................. 169,192 1,184 448,816 -- --
Common stock issued for cash........ 478,570 3,350 1,111,651 -- --
Issuance of common stock warrants... -- -- 185,000 -- --
Common stock issued for stock
options........................... 11,800 83 8,767 -- --
Common stock issued for services
rendered.......................... 6,300 44 8,730 -- --
Deferred stock compensation......... -- -- 180,000 (159,000) --
Net loss for the year ended
December 31, 1999................. -- -- -- -- (12,638,600)
---------- ------- ---------- --------- ------------
Balance December 31, 1999........... 5,947,514 $41,632 $2,034,923 $(159,000) $(12,511,245)
========== ======= ========== ========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(12,638,600) $ 35,375 $ 87,328
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
Depreciation.............................................. 97,591 53,260 6,592
Amortization.............................................. 61,974 80,175 36,826
Deferred compensation..................................... 21,000 -- --
Deferred income taxes..................................... 3,900 (11,000) 7,100
Bad debt provision........................................ 675,200 43,832 --
Changes in operating assets and liabilities:
Increase in credit card reserves........................ (119,226) (82,416) (46,789)
Increase in trade accounts receivable................... (1,747,309) (43,561) (41,109)
Increase in employee advances........................... (87,789) (871) (1,000)
Increase in prepaid expenses............................ (317,599) (18,549) --
Increase in prepaid income taxes........................ (5,030) -- --
Increase in inventories................................. (89,070) -- --
(Increase) decrease in trade accounts
receivable--related entity............................ (13,608) (38,910) 87,787
Decrease in deferred charges............................ 67,127 -- --
Increase in other assets................................ (8,125) (16,799) (883,019)
Increase (decrease) in trade accounts payable........... 1,082,289 (66,491) 673,044
Increase (decrease) in trade accounts payable--related
entity................................................ (44,920) (20,040) 63,741
Increase (decrease) in accrued expenses................. 344,814 (171,507) 280,043
Increase (decrease) in income taxes payable............. (6,800) (19,736) 26,527
Increase in deferred revenue............................ 10,745,563 -- --
Increase (decrease) in customer deposits................ 279,166 (812) (80,915)
------------ --------- ---------
Net cash flows from (used by) operating activities.... (1,699,452) (278,050) 216,156
------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from purchase of subsidiary.......................... 16,905 -- --
Purchase of equipment..................................... (149,839) (103,426) (128,294)
------------ --------- ---------
Net cash used by investing activities................. (132,934) (103,426) (128,294)
------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash from notes payable................................... 11,951 100,000 15,000
Increase in bank overdraft................................ 169,606 179,301 --
Cash received from short-term debt........................ 450,000 -- --
Common stock and common stock warrants issued for cash.... 1,308,851 13,750 114
------------ --------- ---------
Net cash flows from financing activities.............. 1,940,408 293,051 15,114
------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 108,022 (88,425) 102,976
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 24,719 113,144 10,168
------------ --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 132,741 $ 24,719 $ 113,144
============ ========= =========
Supplemental schedule of non-cash investing and financing
activities:
Conversion of debt for common stock......................... $ 450,000 $ -- $ --
Deferred stock compensation included in additional paid-in
capital................................................... 21,000 -- --
Common stock issued for services rendered................... 8,774 -- --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE>
PART I--FINANCIAL INFORMATION
GALAXY ENTERPRISES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF
<TABLE>
<CAPTION>
UNAUDITED AUDITED
MARCH 31, 2000 DEC 31, 1999
-------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 81,455 $ 132,741
Trade accounts receivable (net of allowance of $984,249
and $677,551 respectively).............................. 2,089,525 1,112,947
Related party trade accounts receivable................... 136,405 52,518
Inventories............................................... 87,395 102,203
Prepaid expenses.......................................... 393,909 336,148
Prepaid income taxes...................................... 5,030 5,030
Employee advances......................................... 94,170 89,660
Credit card reserves...................................... 447,628 248,431
------------ ------------
TOTAL CURRENT ASSETS.................................. 3,335,517 2,079,678
EQUIPMENT................................................... 262,456 259,577
OTHER ASSETS
Goodwill.................................................. 833,889 850,434
Other..................................................... 41,342 40,940
------------ ------------
875,231 891,374
------------ ------------
TOTAL ASSETS.......................................... $ 4,473,204 $ 3,230,629
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Trade accounts payable.................................... $ 1,021,290 $ 1,808,482
Related party trade account payable....................... 92,269
Bank overdraft............................................ 420,274 348,907
Accrued expenses.......................................... 438,212 469,286
Income taxes payable...................................... 1,000 1,100
Notes payable--current portion............................ 543,347 161,486
Deferred revenue--current portion......................... 13,120,224 10,334,844
Customer deposits......................................... 532,439 285,226
------------ ------------
TOTAL CURRENT LIABILITIES............................. 16,169,055 13,409,331
DEFERRED REVENUE............................................ 780,661 410,719
NOTES PAYABLE............................................... 4,820 4,269
STOCKHOLDERS' EQUITY
Common stock par value $.007, Authorized 25,000,000
shares, 5,965,449 and 5,947,514 issued and outstanding
respectively............................................ 41,757 41,632
Additional paid-in-capital................................ 2,048,069 2,034,923
Unearned stock compensation............................... (153,000) (159,000)
Retained earnings......................................... (14,418,158) (12,511,245)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).................. (12,481,332) (10,593,690)
------------ ------------
TOTAL LIABILITIES AND EQUITY.......................... $ 4,473,204 $ 3,230,629
============ ============
</TABLE>
F-37
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
REVENUE
Sales..................................................... $ 6,282,626 $ 2,879,031
Cost of sales............................................. 4,563,186 1,944,500
----------- -----------
GROSS PROFIT.......................................... 1,719,440 934,531
OPERATING EXPENSES
Selling................................................... 2,405,087 1,281,558
General and administrative................................ 1,136,359 481,693
Depreciation.............................................. 33,611 25,724
Amortization.............................................. 16,545 14,450
----------- -----------
TOTAL OPERATING EXPENSES.............................. 3,591,602 1,803,425
----------- -----------
OPERATING INCOME (LOSS)............................... (1,872,162) (868,894)
OTHER INCOME (EXPENSES)
Interest income........................................... 35 2,229
Other income (expense).................................... (29,130) (6,169)
Interest expense.......................................... (4,856) (3,639)
----------- -----------
TOTAL OTHER INCOME (EXPENSES)......................... (33,951) (7,579)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES..................... (1,906,113) (876,473)
Income tax expense (benefit)................................ 800 (45,192)
----------- -----------
Income before cumulative effect of a change in accounting
principal................................................. (1,906,913) (831,281)
Cumulative effect on prior years of accounting change....... (5,450,651)
NET INCOME (LOSS)..................................... $(1,906,913) $(6,281,932)
=========== ===========
Weighted average shares outstanding:
Basic and Diluted......................................... 5,951,830 5,625,272
Net income per share:
Basic and Diluted......................................... $ (0.320) $ (1.117)
=========== ===========
</TABLE>
F-38
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDING MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... (1,906,913) (6,281,932)
Adjustments to reconcile net earnings to net cash flows from
(used by) operating activities:
Depreciation.............................................. 33,611 25,724
Amortization.............................................. 16,545 14,450
Deferred Compensation..................................... 6,000
Changes in operating assets and liabilities:
Increase in accounts receivable......................... (1,060,465) (168,781)
(Increase) decrease in inventories...................... 14,808 (26,000)
Increase in prepaid expenses............................ (57,761) (469,742)
(Increase) decrease in credit card reserves............. (199,197) (54,958)
Increase in employee advances........................... (4,510)
Decrease (increase) in other assets..................... (402) 19,800
Increase in bank overdraft.............................. 71,367
(Decrease) increase in accounts payable................. (694,924) (42,410)
Increase (decrease) in accrued expenses................. (31,074)
Increase in customer deposits........................... 247,213 51,561
(Decrease) increase in accrued income taxes payable..... (45,192)
Increase in deferred revenue............................ 3,155,322 6,183,745
Increase (decrease) in other current liabilities........ 30,784
---------- ----------
Net cash flows (used by) operating activities......... (410,380) (762,951)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment..................................... (36,589) (52,030)
---------- ----------
Net cash used by investing activities................. (36,589) (52,030)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash from notes payable................................... 450,000
Repayment of notes........................................ (67,588) (25,000)
Common stock issued for cash.............................. 13,271 1,454,500
---------- ----------
Net cash flows from financing activities.............. 395,683 1,429,500
---------- ----------
NET INCREASE (DECREASE) IN CASH............................. (51,286) 614,519
CASH AT THE BEGINNING OF THE PERIOD......................... 132,741 24,718
---------- ----------
CASH AT THE END OF THE PERIOD............................... 81,455 639,237
========== ==========
</TABLE>
F-39
<PAGE>
GALAXY ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position, and
results of operations and cash flows of Galaxy Enterprises, Inc. ("the
"Company") for the respective periods presented. The results of operations for
an interim period are not necessarily indicative of the results, which may be
expected for any other interim period, or for the year as a whole.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been omitted. The accompanying unaudited interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes in the Company's Form 10-KSB for the year ending
December 31, 1999. All inter-company accounts and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101--Revenue Recognition in Financial Statements (SAB
101). SAB 101 provided guidance on various revenue recognition issues including
nonrefundable fees received upon entering into arrangements to provide products
or services. The Company receives such fees on many of the products and services
it provides. In prior years, the Company recognized such fees at the time of
sale based on the belief that its ongoing obligation did not involve significant
cost or effort and should not impact revenue recognition. Upon evaluation of the
accounting requirements of SAB 101, the Company determined that it was required
to adopt SAB 101's provisions and that revenue recognition will more closely
parallel the time period over which the revenue is earned. Adoption of the
applicable provisions of SAB 101 is to be reported as a change in accounting
principle in accordance with APB Opinion No. 20, ACCOUNTING CHANGES.
As a result of applying SAB 101, the Company adopted new revenue recognition
policies. Such policies are as follows:
Revenue from customer web site hosting and related products and services is
deferred and recognized over a twenty-four month period which represents the
twelve months in which a customer can activate a web site plus twelve months of
free hosting upon activation. Revenue from web site hosting rights that expire
is recognized at the point of expiration. Revenue from manufactured multimedia
products is recognized when products are shipped. Fees received from the sale of
third-party merchant credit card processing services are reported on a net
basis. On a quarterly basis, management reviews all aspects of revenue
recognition and adjusts recognition of revenue as required, based on actual
activation and expiration experience.
At the time of adoption in December 1999, the Company recorded a charge of
$5.45 million, which represented the cumulative effect on prior years of the
change in accounting principle regarding revenue recognition. The adoption of
this change was reflected in the Company's annual report filed on Form 10-KSB
for the year ended December 31, 1999 and was effective for all of 1999.
Therefore, the accompanying unaudited consolidated financial statements for the
quarter ended March 31, 1999 have been adjusted to reflect the cumulative effect
adjustment and the adoption of the new revenue recognition policies.
F-40
<PAGE>
GALAXY ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CREDIT CARD RESERVES
Credit card reserves represent amounts of money due the Company from banks
and credit card processing companies who have handled Visa, Master Card,
American Express and Discover Card transactions. The Company establishes an
account receivable at the time the customer's credit card is charged. Later when
the cash is received from a credit card processing company and placed in a
Company bank account the receivable is credited. Some processing companies
require the Company to leave on deposit with them an amount of money equal to 5%
of daily credit card transactions until a limit is reached. The limit is
normally equal to one half month's processing volume. These deposits are also
included in this category.
CUSTOMER DEPOSITS
Customer Deposits represent advance payments made by some customers to the
Company at the time an order is placed. The prepayment is between 33% and 67% of
the total purchase price. The customer is invoiced for the difference when title
to the products transfers to the customer.
Also included in this category are amounts withheld from sales commissions
earned by outside telemarketing companies. It is anticipated that some customer
refunds will be made from these sales and the company retains a small percentage
of the commissions earned to assure recovery of the sales commissions in the
event that the telemarketing company is no longer earning commissions. There is
a contractual limit to the amount of reserve the Company is authorized to
retain. Six months after termination of services by the telemarketing company
any unused reserve will be given to the contractor.
F-41
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The Company, through its Galaxy Mall subsidiary, engages in the business of
leasing to its customers electronic home pages, or "storefronts," through
galaxymall.com, an Internet shopping mall, and hosts those storefront sites on
its Internet server. Galaxy Mall's business is to allow its customers (i) to
acquire a presence on the Internet and (ii) to advertise and sell their products
or services on the Internet. Storefronts designed by or for the customers are
programmed by Galaxy Mall for display on the mall. Galaxy Mall also contracts
with consultants and independent contractors, or creates and produces in-house,
various other internet business related products which it markets. The Company's
other subsidiary, Impact Media, is engaged in the design, manufacture and
marketing of multimedia brochure kits, shaped compact discs and similar products
and services intended to facilitate conducting business over the Internet.
Impact Media also performs custom website development. The Company markets its
products and services throughout the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include those of Galaxy
Enterprises, Inc. and its wholly-owned subsidiaries, Galaxy Mall and IMI (dba
Impact Media). IMI was purchased during 1999. All significant intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents are generally comprised of certain highly liquid
investments with maturities of less than three months.
PROPERTY AND EQUIPMENT
Depreciation expense is computed principally on the straight-line method in
amounts sufficient to write off the cost of depreciable assets over their
estimated useful lives.
Normal maintenance and repair items are charged to costs and expenses as
incurred. The cost and accumulated depreciation of property and equipment sold
or otherwise retired are removed from the accounts and gain or loss on
disposition is reflected in net income in the period of disposition.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventory consists mainly of manufactured multi-media products.
GOODWILL
Goodwill resulting from business acquisitions represents the excess of
purchase price over fair value of net assets acquired and is being amortized
over 15 years using the straight-line method. Periodically, the Company
re-evaluates goodwill whenever significant events or changes occur which might
impair recovery of recorded asset costs.
F-42
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 reported amounts of revenues and expenses during the
reporting period. Examples include provisions for bad debts and the length of
product life cycles and property and equipment lives. Actual results could
differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized when earned. The Company has adopted new revenue
recognition policies in 1999 (see Note 7). Such policies are as follows:
Revenue from customer web site hosting and related products and services is
deferred and recognized over a twenty-four month period which represents the
twelve months in which a customer can activate a web site plus twelve months of
free hosting upon activation. Revenue from web site hosting rights that expire
is recognized at the point of expiration. Revenue from manufactured multimedia
products is recognized when products are shipped. Fees received from the sale of
third-party merchant credit card processing services are reported on a net
basis.
On a quarterly basis, management reviews all aspects of revenue recognition
and adjusts recognition of revenue as required, based on actual activation and
expiration experience.
At December 31, 1999, deferred revenue under the aforementioned recognition
policies totaled $10.75 million.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
to financial accounting and reporting for income taxes. The difference between
the financial statement and tax bases of assets and liabilities is determined
annually. Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period plus
or minus the net change in the deferred tax assets and liabilities.
STOCK-BASED COMPENSATION
The Company applies the Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees", and the related interpretation in
accounting for all stock option plans. Under APB Opinion 25, compensation cost
is only recognized for stock options issued when the exercise price of the
Company's stock options granted is less than the market price of the underlying
common stock on the grant date. Such costs are expensed over the vesting period
of the stock options.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
Company to provide proforma information regarding net income as if compensation
cost for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed in SFAS
F-43
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
No. 123. To provide the required proforma information, the Company estimates the
fair value of each stock option at the grant date by using the Black-Scholes
option-pricing model.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Such costs were
approximately $146,000 in 1999, $250,000 in 1998; and $150,000 in 1997.
ADVERTISING AND PROMOTION
The Company expenses advertising and promotion costs as they are incurred,
except for direct-response advertising, which is capitalized and amortized over
its expected period of future benefits. Direct response advertising consists
primarily of advertising costs incurred in connection with the procurement of
leases for space in the Company's on-line mall. The costs capitalized in
connection with direct response advertising are amortized over the period in
which the events (workshops) that have been advertised are held. These events
are generally held during the three months following the advertising
expenditure.
Advertising expenses of $4,553,900, $2,414,500 and $524,055 were incurred
for the years ended December 31, 1999, 1998 and 1997, respectively. Direct
response advertising costs deferred and included in prepaid expenses amounted to
$200,764 and $19,800 at December 31, 1999 and 1998, respectively.
SEGMENT INFORMATION
Subsequent to the purchase of the assets of Impact Media, LLC, the company
adopted Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131). This
statement establishes standards for the reporting of information about operating
segments in annual and interim financial statements and requires restatement of
prior year information. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker(s) in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information, as presented in
Note 14.
RECLASSIFICATIONS
Certain amounts in 1998 and 1997 have been reclassified to conform with the
1999 financial statement presentation.
NOTE 2--ACQUISITION OF IMPACT MEDIA, LLC
Effective May 31, 1999, the Company acquired substantially all the net
assets of Impact Media, LLC (Impact) using the purchase method of accounting by
assuming the liabilities of Impact. The purchase of Impact resulted in the
recording of goodwill in the amount of $117,655, which was the extent to which
liabilities assumed exceeded the fair values of the assets acquired.
F-44
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITION OF IMPACT MEDIA, LLC (CONTINUED)
The terms of the acquisition provide for additional consideration of up to
250,000 shares of common stock to be paid if certain agreed-upon targets are met
during the years ended May 31, 2000 and May 31, 2001. As of December 31, 1999,
none of the targets had been met. If in the future any of the targets are met
and the additional consideration becomes issuable, it will be recorded as
additional goodwill.
Following are the summarized unaudited proforma combined results of
operations for the years ended December 31, 1999 and 1998, assuming the
acquisition had taken place at the beginning of each of those years. No proforma
amounts are presented for 1997 as Impact was not formed until 1998. The
unaudited proforma results are not necessarily indicative of future earnings or
earnings that would have been reported had the acquisition been completed when
assumed.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net sales.......................................... $18,657,177 $14,659,464
Income (loss) before income........................ (7,380,034) 139,062
Income taxes....................................... 2,692 (15,951)
Net income (loss).................................. (12,900,504) 155,013
Per basic share.................................... (2.27) 0.03
Per diluted share.................................. (2.27) 0.03
</TABLE>
NOTE 3--EQUIPMENT
Equipment as of December 31, 1999 and 1998 is detailed in the following
summary:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
1999 COST DEPRECIATION VALUE
- ---- -------- ------------ --------
<S> <C> <C> <C>
Computer equipment........................... $228,728 $112,730 $115,998
Computer software............................ 69,602 20,529 49,073
Office equipment............................. 60,865 16,408 44,457
Furniture and fixtures....................... 26,955 3,452 23,503
Leasehold improvements....................... 30,791 4,245 26,546
-------- -------- --------
$416,941 $157,364 $259,577
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
1998 COST DEPRECIATION VALUE
- ---- -------- ------------ --------
<S> <C> <C> <C>
Computer equipment........................... $157,351 $48,117 $109,234
Computer software............................ 32,189 2,263 29,926
Office equipment............................. 33,157 7,883 25,274
Furniture and fixtures....................... 6,104 505 5,599
Leasehold improvements....................... 2,840 1,005 1,835
-------- ------- --------
$231,641 $59,773 $171,868
======== ======= ========
</TABLE>
F-45
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--EQUIPMENT (CONTINUED)
Amounts included in property and equipment for assets capitalized under
capital lease obligations at December 31, 1999 and 1998 are $18,346 and $0,
respectively. Accumulated amortization for the items under capitalized leases
was $2,072 and $0 at December 31, 1999 and 1998, respectively. Amortization
expense, which is computed using the straight-line method over the term of each
lease, is included with depreciation expense.
NOTE 4--DEFERRED CHARGES (SEE NOTE 7)
Deferred charges consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Organization costs....................................... $ -- $ 7,955
Startup costs............................................ -- 103,923
------- --------
--..... 111,878
Accumulated amortization................................. -- (44,751)
------- --------
$ -- $ 67,127
======= ========
</TABLE>
NOTE 5--GOODWILL
Goodwill is comprised of the following amounts, resulting from the purchase
of assets from the corresponding entities:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Profit Education Systems (PES)......................... $ 793,393 $793,394
CO-OP Business Services (CO-OP)........................ 73,610 73,610
Impact Media (IMI)..................................... 117,655 --
--------- --------
984,658 867,004
Accumulated amortization............................... (134,224) (72,251)
--------- --------
$ 850,434 $794,753
========= ========
</TABLE>
NOTE 6--INCOME TAXES
The components of income tax expense (benefit) related to continuing
operations are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current.................................................. $1,100 $ (4,951) $30,981
Deferred................................................. 1,592 (11,000) 7,100
------ -------- -------
$2,692 $(15,951) $38,081
====== ======== =======
</TABLE>
F-46
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES (CONTINUED)
Differences between the U.S. statutory and effective tax rates
<TABLE>
<S> <C> <C> <C>
U.S. statutory rate.................................... $ -- $ 6,600 $29,692
State income taxes, net of federal tax effect.......... 1,100 3,300 3,500
Refund of prior year taxes............................. -- (17,650) --
Under (over) accrual of prior year tax................. 11,892 (3,750) --
Other, net............................................. (10,300) (4,451) 4,889
-------- -------- -------
Income tax expense..................................... $ 2,692 $(15,951) $38,081
======== ======== =======
Cash paid for income taxes............................. $ 4,003 $ 32,400 $ 4,500
======== ======== =======
</TABLE>
The net deferred income taxes in the accompanying balance sheets include the
following amounts of deferred income tax assets and liabilities:
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
DEFERRED TAX ASSETS
Receivable valuation.................................. $ 253,000 $ 14,200
Deferred revenue...................................... 4,008,000 --
Customer deposits..................................... 106,000 --
Net operating loss.................................... 210,000 --
Officer bonuses....................................... 40,300 --
Accrued vacation...................................... 7,400 --
Asset valuation....................................... 3,700 --
Deferred compensation................................. 7,800 --
----------- --------
4,636,200 14,200
Valuation allowance................................... (4,636,200) --
----------- --------
-- 14,200
----------- --------
DEFERRED TAX LIABILITIES
Depreciation.......................................... -- 10,300
----------- --------
-- 10,300
----------- --------
Net deferred tax asset (liability).................... $ -- $ 3,900
=========== ========
PRESENTATION IN FINANCIAL STATEMENTS
Current deferred tax asset............................ $ -- $ 14,200
Noncurrent deferred tax liability..................... -- (10,300)
----------- --------
Net deferred tax asset (liability).................... $ -- $ 3,900
=========== ========
</TABLE>
At December 31, 1999, the Company's deferred tax assets are fully offset by
a valuation allowance. 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 period in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
F-47
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES (CONTINUED)
assessment. Based on the projections for future taxable income over the periods
that 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.
At December 31, 1999, the Company has approximately $564,000 of net
operating loss carryforwards available to reduce future taxable income. These
carryforwards will expire beginning in 2019.
NOTE 7--CHANGES IN ACCOUNTING PRINCIPLES
REVENUE RECOGNITION
As of December 31, 1999, the Company recorded a charge of $5.45 million
($0.96 per share), which represents the cumulative effect of a change in
accounting principle regarding revenue recognition, in accordance with APB
Opinion No. 20, ACCOUNTING CHANGES. In December 1999, the Securities and
Exchange Commission released Staff Accounting Bulletin No. 101--Revenue
Recognition in Financial Statements (SAB 101), which provides guidance on
various revenue recognition issues including nonrefundable fees received upon
entering into arrangements to provide products or services. The Company receives
such fees on many of the products and services it provides. In prior years, the
Company recognized such fees at the time of sale based on the belief that its
ongoing obligation did not involve significant cost or effort and should not
impact revenue recognition. Upon evaluation of the accounting requirements of
SAB 101, the Company determined that it is required to adopt SAB 101's
provisions and that revenue recognition will more closely parallel the time
period over which the revenue is earned. The adoption of this change is
reflected in the accompanying 1999 financial statements. Fees received at the
time of sale are deferred and recognized systematically over the periods in
which they are earned. The Company's revenue recognition policies are disclosed
in Note 1.
The portion of the cumulative effect adjustment recognized in 1999 amounted
to $5.26 million with the remainder to be recognized in 2000. The following
table presents sales, income before income taxes, net income, and per share
information for the years ended December 31, 1998 and 1997 as if the new
principle had been applied during all periods presented.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Sales.............................................. $ 7,195,387 $ 1,297,450
Income (loss) before income taxes.................. $(4,233,581) $(1,072,237)
Net income (loss).................................. $(4,217,630) $(1,110,318)
Per basic share.................................... $ (.80) $ (.21)
Per diluted share.................................. $ (.80) $ (.21)
</TABLE>
F-48
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
START-UP COSTS
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. The Company was required to
adopt SOP 98-5 for the year ended December 31, 1999. Restatement of previously
issued financial statements is not permitted. Initial application of this SOP
was required to be reported as the cumulative effect of a change in accounting
principle, as described in APB Opinion No. 20, ACCOUNTING CHANGES. The SOP did
not require the Company to report the proforma effects of retroactive
application; however, the Company is required to disclose the effect of adopting
this SOP on net income and on the related per share amounts in the period of the
change. As a result of the change in accounting principle, the Company recorded
a charge of $67,127 ($0.01 per share) during the year ended December 31, 1999,
representing the balance in capitalized start-up and organization costs as of
December 31, 1998.
NOTE 8--NOTES PAYABLE
Notes payable as of December 31, 1999 and 1998 are detailed in the following
summary:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Note payable to an individual, interest at 8.5%,
unsecured................................................. $ -- $ 15,000
Note payable to a financial institution due in June 2000,
interest at 10.75% at December 31, 1999, unsecured........ 7,096 --
Note payable to a financial institution due September 14,
2000, interest at prime plus 3% (11.50% at December 31,
1999), secured by common stock pledged by a major
stockholder............................................... 148,347 100,000
Obligations under leases classified as capital leases due in
monthly installments of $548 including imputed interest at
7.0%...................................................... 10,312 --
--------- ---------
165,755 115,000
Less current portion........................................ (161,486) (115,000)
--------- ---------
Long-term portion........................................... $ 4,269 $ --
========= =========
</TABLE>
Interest paid during the years ended December 31, 1999, 1998 and 1997 was
approximately $11,200, $4,100 and $400, respectively.
Maturities of notes payable over the next five years are as follows:
<TABLE>
<S> <C>
2000........................................................ $161,486
2001........................................................ 4,269
2002........................................................ --
2003........................................................ --
2004........................................................ --
Thereafter.................................................. --
--------
$165,755
========
</TABLE>
F-49
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--NOTES PAYABLE (CONTINUED)
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum payments as of
December 31, 1999:
<TABLE>
<S> <C>
2000........................................................ $ 6,573
2001........................................................ 4,382
2002........................................................ --
2003........................................................ --
2004........................................................ --
Thereafter.................................................. --
-------
Total minimum lease payments................................ 10,955
Amount representing interest................................ (643)
-------
Present value of net minimum lease payments (including
$6,043 classified as current)............................. $10,312
=======
</TABLE>
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Company leases certain of its equipment and corporate offices under
long-term operating lease agreements expiring at various dates through 2004.
Future aggregate minimum obligations under operating leases as of December 31,
1999, exclusive of taxes and insurance, are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
Year ending December 31
2000........................................................ $ 467,700
2001........................................................ 379,000
2002........................................................ 298,800
2003........................................................ 301,800
2004........................................................ 154,200
----------
$1,601,500
==========
</TABLE>
Rental expense totaled approximately $276,000, $186,900 and $83,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Company is involved in various legal proceedings arising in the normal
course of its business. In the opinion of management the liabilities, if any,
resulting from these matters will not have a material effect on the consolidated
financial statements of the Company.
NOTE 10--RELATED ENTITY TRANSACTIONS
During 1998, in addition to its direct sales efforts, the Company utilized
the services of American Marketing Systems, Inc. ("AMS"), a Nevada corporation.
AMS provided telemarketing services to its various clients, including the
Company. It sold coaching (mentoring) services to Galaxy Mall merchants, and
coaching services and Company products to prospects who had not previously
purchased Company products. During the years ended December 31, 1999, 1998 and
1997, the Company paid AMS $0,
F-50
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--RELATED ENTITY TRANSACTIONS (CONTINUED)
$1,441,800 and $220,200 in sales commissions, respectively. John J. Poelman,
President, Chief Executive Officer and a Director of the Company is a 30%
shareholder of AMS.
The Company utilizes the services of Electronic Commerce
International, Inc. ("ECI"), a Utah corporation, which provides merchant
accounts and leasing services to small businesses. ECI processes the financing
of Company merchants' storefront leases and also wholesales software to the
Company used for on-line, realtime processing of credit card transactions. John
J. Poelman, President, Chief Executive Officer and a Director of the Company is
the sole stockholder of ECI. Total fees paid to ECI during the years ended
December 31, 1999 and 1998 totaled approximately $722,400 and $306,400,
respectively. The Company also has a receivable from ECI for leases in process
at December 31, 1999 of $52,518.
Effective October 1, 1997, Galaxy entered into a nonexclusive three year
consulting and marketing agreement with Profit Education Specialists which is
owned by Gary Cochran ("Cochran"), the husband of a shareholder who owns
approximately 3.1% (at December 31, 1999) of the Company's outstanding stock.
Such consulting and marketing agreement requires Mr. Cochran to provide services
to improve existing marketing programs of Galaxy, assist in developing
brochures, advertisements and other marketing materials, training potential
sales personnel and evaluating future business products, opportunities or
strategies. Compensation payable to Mr. Cochran is $60,000 per year commencing
January 1, 1998, and increasing 10% per year commencing the second year and
subsequent years. The agreement is automatically renewable unless terminated
prior thereto by consent of the parties. The Company further agrees to pay
Cochran royalties in various amounts on its sales of Cochran created training
and Internet educational materials. Payments to Cochran totaled $66,000 and
$60,000 in 1999 and 1998, respectively.
Effective May 1, 1998 Galaxy entered into a royalty and consulting agreement
with Cochran in which Galaxy agrees to pay Cochran a royalty on Galaxy's sales
of training manuals, audio tape presentations and related educational items on
marketing techniques for the Internet user created by Cochran. Such items are
designed to explain Internet banner advertising and are used by Galaxy to
promote sales of its banner impressions, BannerWeb License, and BannerWeb
Network. The agreement also calls for Cochran to receive speaker fees and
reimbursement of travel expenses when Cochran participates in Company-sponsored
seminars. The term of the agreement is for three years, and is renewable yearly
thereafter provided Galaxy continues to use or distribute such Cochran created
materials. The agreement can be cancelled at any time upon consent of both
parties. During the years ended December 31, 1999 and 1998, the Company paid
Cochran approximately $147,240 and $60,500, respectively for royalties and
speaker fees.
NOTE 11--STOCK PURCHASE WARRANTS
In January 1999, the Company sold a $500,000 convertible promissory note
bearing interest at 7% per annum to an institutional investor. During the first
quarter, the note was converted into 169,192 shares of the Company's common
stock. Along with the convertible promissory note, the Company issued the
institutional investor warrants to purchase 50,000 shares of common stock. The
warrants are exercisable at $7.05 per share and expire January 11, 2002.
F-51
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK PURCHASE WARRANTS (CONTINUED)
During February and March 1999, the Company entered into an agreement with
an institutional investor, whereby the investor invested $1 million in exchange
for 250,000 shares of common stock. The investor was also issued warrants to
purchase up to 250,000 additional shares of the Company's stock at an exercise
price of $2.84 per share. The warrants expire March 18, 2001.
NOTE 12--STOCK OPTION PLAN
The Company has a stock option plan under which officers, employees,
directors and others may be granted options to purchase the Company's common
stock. Under the Plan, the Company may grant up to 1,000,000 shares of common
stock. During 1998, the Company granted 928,250 options to certain employees and
directors at an exercise price of $0.63 to $3.50 per share. During 1999, the
Company granted 170,750 options to certain employees at an exercise price of
$1.00 to $2.63 per share.
Stock options expire ten years from the date of grant and vest ratably over
five years from the date of grant. There are no shares available for future
grants at December 31, 1999.
A summary of the status of the Company's stock option plan as of
December 31, 1999 and 1998 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED AVERAGE NUMBER
PRICE EXERCISE PRICE OF SHARES
---------- ---------------- ---------
<S> <C> <C> <C>
Balance, December 31, 1997 $ -- $ -- --
Granted................................................ 0.63-3.50 0.80 928,250
Exercised.............................................. 1.38 1.38 (10,000)
Cancelled or expired................................... 0.63-2.00 0.82 (76,500)
---------- ----- -------
Balance, December 31, 1998............................... 0.63-3.50 0.79 841,750
Granted................................................ 1.00-2.63 1.36 170,750
Exercised.............................................. 0.75 0.75 (11,800)
Cancelled or expired................................... 0.63-3.50 1.06 (22,500)
---------- ----- -------
Balance, December 31, 1999............................... $ .75-3.50 $0.88 978,200
========== ===== =======
</TABLE>
Options currently outstanding and exercisable are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER REMAINING NUMBER
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.75 to 1.00........................................... 887,700 8.36 years 291,252
1.01 to 2.00........................................... 78,000 9.43 years 16,278
2.01 to 3.50........................................... 12,500 9.26 years 1,882
------- ---------- -------
$0.75 to 3.50........................................... 978,200 8.46 years 309,412
------- ---------- -------
</TABLE>
The Company has elected to account for stock-based compensation under the
intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," (APB 25) under which no
compensation cost for stock options is recognized for stock option awards
granted at or above fair market value. During 1999, the Company recognized
$21,000 of
F-52
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCK OPTION PLAN (CONTINUED)
compensation expense for options granted below fair market value. During 1998,
the Company recognized no compensation expense.
An alternative method of accounting for stock options is SFAS 123,
Accounting for Stock-Based Compensation. Under SFAS 123, employee stock options
are valued at grant date using the Black-Scholes valuation model and
compensation cost is recognized ratably over the vesting period. Had
compensation cost for the Company's stock option and employee stock purchase
plans been determined based on the Black-Scholes value at the grant date for
awards, the Company's proforma net income and income per share would have been
as follows:
<TABLE>
<CAPTION>
1999 1998
------------ --------
<S> <C> <C>
Net income (loss) as reported........................ $(12,638,600) $ 35,375
Proforma net loss.................................... $(12,748,432) $ (3,059)
Basic EPS as reported................................ $ (2.23) $ 0.0067
Proforma basic EPS................................... $ (2.25) $(0.0006)
Diluted EPS as reported.............................. $ (2.23) $ 0.0062
Proforma diluted EPS................................. $ (2.25) $(0.0006)
</TABLE>
The fair value of the options was estimated using the Black-Scholes
option-pricing model based on the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Risk-free interest rate..................................... 6.50% 4.70%
Expected life, in years..................................... 8.46 9.25
Dividend yield.............................................. -- --
Volatility.................................................. 35.0% 4.40%
</TABLE>
The weighted average grant date fair value of stock options granted during
the year is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Weighted average fair value................................. $0.53 $0.27
</TABLE>
During 1999, the Company's board of directors granted an additional 788,750
options pending the approval of the Company's shareholders. Shareholder approval
is necessary in order to expand the number of shares authorized under the plan
from 1,000,000 to 2,000,000. As shareholder approval had not been obtained as of
December 31, 1999, all options granted in excess of the original 1,000,000
shares authorized are not considered outstanding and have not been included in
the preceding analysis. Management will seek shareholder approval at the next
annual meeting of shareholders. Once shareholder approval is obtained, the
additional options will be effectively granted and the appropriate APB 25 and
SFAS 123 calculations can be completed.
F-53
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--INCENTIVE COMPENSATION PLAN
During 1998, the Company adopted an Officers' Incentive Compensation Plan.
The Plan, as amended, provides that incentive compensation will be paid to the
Company's chief executive officer, chief operations officer and chief financial
officer if the Company achieves certain levels of revenues and pretax profits as
approved by the Board of Directors. During the years ended December 31, 1999 and
1998, $107,993 and $0 were earned under the Plan.
NOTE 14--SEGMENT INFORMATION
The Company has two principal business segments (Internet access and
expertise, and multimedia manufacturing). The first is primarily engaged in the
business of providing its customers with the ability to (i) acquire a presence
on the Internet and (ii) to advertise and sell their products or services on the
Internet. The second is primarily engaged in providing assistance in the design,
manufacture and marketing of multimedia brochure kits, shaped compact discs and
similar products and services intended to facilitate conducting business over
the Internet. Management evaluates segment performance based on the
contributions to earnings of the respective segment. An analysis and
F-54
<PAGE>
GALAXY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--SEGMENT INFORMATION (CONTINUED)
reconciliation of the Company's business segment information to the respective
information in the consolidated financial statements is as follows.
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Segment sales:
Internet services........................................... $ 14,341,616 $11,448,392
Multimedia products and services............................ 3,646,315 --
------------ -----------
17,987,931 11,448,392
Elimination of intersegment sales........................... (53,654) --
------------ -----------
Total consolidated net sales................................ $ 17,934,277 $11,448,392
============ ===========
Approximate contribution (charge) to earnings:
Internet services........................................... $ (5,823,695) $ 128,059
Multimedia products......................................... (825,387) --
Corporate................................................... (461,780) (109,907)
------------ -----------
(7,110,862) 18,152
Interest and other income (expense)......................... 3,884 5,414
Interest expense............................................ (11,152) (4,142)
------------ -----------
Income (loss) before income taxes........................... (7,118,130) 19,424
Income tax expense (benefit)................................ 2,692 (15,951)
------------ -----------
Income (loss) before cumulative effect...................... (7,120,822) 35,375
Cumulative effect adjustment................................ (5,517,778) --
------------ -----------
$(12,638,600) $ 35,375
============ ===========
Depreciation and Amortization:
Internet services........................................... $ 144,349 $ 106,741
Multimedia products......................................... 10,898 --
Corporate................................................... 4,318 26,694
------------ -----------
$ 159,565 $ 133,435
============ ===========
Capital expenditures:
Internet services........................................... $ 122,834 $ 103,426
Multimedia products......................................... 169,812 --
------------ -----------
$ 292,646 $ 103,426
============ ===========
Assets:
Internet services........................................... $ 2,525,344 $ 1,302,770
Multimedia products and services............................ 844,909 --
Corporate................................................... 1,397,599 101,793
------------ -----------
4,767,852 1,404,563
Less: Intersegment eliminations............................. (1,537,223) (69,708)
------------ -----------
Total consolidated assets................................... $ 3,230,629 $ 1,334,855
============ ===========
</TABLE>
Intersegment sales for 1999 were made up primarily of the reimbursement of
fees charged related to the fulfillment of orders. There was no profit added to
the fees. The Company did not have multiple segments in 1997.
NOTE 15--SUBSEQUENT EVENTS
On March 10, 2000 the Company signed a definitive merger agreement to be
acquired by Netgateway, Inc. for approximately 3.9 million shares in an
all-stock merger plus the assumption of all outstanding stock options. The
merger calls for Netgateway to issue about six-tenths of one Netgateway share
for each Galaxy share. The transaction is subject to shareholder approval of
both companies.
F-55
<PAGE>
APPENDIX A
------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NETGATEWAY, INC.,
GALAXY ACQUISITION CORP.
AND
GALAXY ENTERPRISES, INC.
DATED AS OF MARCH 10, 2000
------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<C> <S> <C>
ARTICLE I THE MERGER.................................................. A-2
1.01 THE MERGER.................................................. A-2
1.02 EFFECTIVE TIME, CLOSING..................................... A-2
1.03 EFFECT OF THE MERGER........................................ A-2
1.04 ARTICLES OF INCORPORATION; BYLAWS........................... A-2
1.05 DIRECTORS AND OFFICERS...................................... A-2
1.06 EFFECT ON CAPITAL STOCK..................................... A-2
1.07 SURRENDER OF CERTIFICATES................................... A-4
1.08 NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK......... A-6
1.09 LOST, STOLEN OR DESTROYED CERTIFICATES...................... A-6
1.10 TAX AND ACCOUNTING CONSEQUENCES............................. A-6
1.11 DISSENTING SHARES........................................... A-7
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-8
2.01 AUTHORITY................................................... A-8
2.02 DUE ORGANIZATION............................................ A-8
2.03 CAPITAL STOCK............................................... A-8
2.04 SUBSIDIARIES................................................ A-9
2.05 NO CONFLICTS................................................ A-9
2.06 BOOKS AND RECORDS........................................... A-10
2.07 SEC FILINGS................................................. A-10
2.08 ABSENCE OF CHANGES.......................................... A-11
2.09 NO UNDISCLOSED LIABILITIES.................................. A-12
2.10 LEGAL PROCEEDINGS........................................... A-12
2.11 COMPLIANCE WITH LAWS AND ORDERS............................. A-12
2.12 EMPLOYEE BENEFIT AND COMPENSATION PLANS..................... A-13
2.13 REAL PROPERTY............................................... A-14
2.14 TANGIBLE PERSONAL PROPERTY; INVESTMENT ASSETS............... A-15
2.15 INTELLECTUAL PROPERTY RIGHTS................................ A-15
2.16 CONTRACTS................................................... A-18
2.17 LICENSES.................................................... A-19
2.18 INSURANCE................................................... A-20
2.19 TRANSACTIONS WITH AFFILIATES................................ A-20
2.20 EMPLOYEES; LABOR RELATIONS.................................. A-20
2.21 BANK AND BROKERAGE ACCOUNTS; INVESTMENT ASSETS.............. A-21
2.22 NO POWERS OF ATTORNEY....................................... A-21
2.23 ACCOUNTS RECEIVABLE......................................... A-21
2.24 INVENTORY................................................... A-22
2.25 BROKERS OR FINDERS.......................................... A-22
2.26 DISCLOSURE.................................................. A-22
2.27 Y2K......................................................... A-23
2.28 CHANGE OF CONTROL PAYMENTS.................................. A-23
2.29 OPINION OF FINANCIAL ADVISOR................................ A-23
2.30 BOARD APPROVAL.............................................. A-23
2.31 POOLING OF INTERESTS........................................ A-23
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT.................... A-24
3.01 AUTHORITY................................................... A-24
3.02 ORGANIZATION................................................ A-24
3.03 CAPITAL STOCK............................................... A-24
3.04 SUBSIDIARIES................................................ A-24
3.05 NO CONFLICTS................................................ A-24
3.06 BOOKS AND RECORDS........................................... A-24
3.07 SEC FILINGS................................................. A-25
3.08 ABSENCE OF CHANGES.......................................... A-26
3.09 NO UNDISCLOSED LIABILITIES.................................. A-26
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<C> <S> <C>
3.10 LEGAL PROCEEDINGS........................................... A-26
3.11 COMPLIANCE WITH LAWS AND ORDERS............................. A-26
3.12 NO POWERS OF ATTORNEY....................................... A-26
3.13 BROKERS OR FINDERS.......................................... A-26
3.14 TAXES....................................................... A-27
3.15 DISCLOSURE.................................................. A-27
ARTICLE IV COVENANTS OF COMPANY........................................ A-28
4.01 REGULATORY AND OTHER APPROVALS.............................. A-28
4.02 INVESTIGATION BY PURCHASER.................................. A-28
4.03 NO SOLICITATIONS............................................ A-28
4.04 CONDUCT OF BUSINESS......................................... A-29
4.05 CERTAIN RESTRICTIONS........................................ A-29
4.06 AFFILIATE TRANSACTIONS...................................... A-30
4.07 NOTICE OF CERTAIN MATTERS................................... A-30
4.08 FULFILLMENT OF CONDITIONS; OTHER ACTIONS.................... A-30
ARTICLE V COVENANTS OF PARENT......................................... A-31
5.01 REGULATORY AND OTHER APPROVALS.............................. A-31
5.02 INVESTIGATION BY COMPANY.................................... A-31
5.03 CONDUCT OF BUSINESS......................................... A-31
5.04 CERTAIN RESTRICTIONS........................................ A-31
5.05 NOTICE OF CERTAIN MATTERS................................... A-31
5.06 FULFILLMENT OF CONDITIONS; OTHER ACTIONS.................... A-31
5.07 DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION...... A-32
ARTICLE VI ADDITIONAL AGREEMENT........................................ A-33
6.01 PROSPECTUS/PROXY STATEMENT; REGISTRATION STATEMENT; OTHER
FILINGS................................................... A-33
6.02 MEETING OF COMPANY STOCKHOLDERS............................. A-34
6.03 MEETING OF PARENT STOCKHOLDERS.............................. A-36
6.04 STATE STATUTES.............................................. A-37
ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER
SUB....................................................... A-37
7.01 REPRESENTATIONS AND WARRANTIES.............................. A-37
7.02 PERFORMANCE................................................. A-37
7.03 ORDERS AND LAWS............................................. A-37
7.04 REGULATORY CONSENTS AND APPROVALS........................... A-38
7.05 THIRD PARTY CONSENTS........................................ A-38
7.06 STOCKHOLDER APPROVAL........................................ A-38
7.07 OPINION OF COUNSEL.......................................... A-38
7.08 ANCILLARY AGREEMENTS........................................ A-38
7.09 REGISTRATION STATEMENT EFFECTIVE; PROXY STATEMENT........... A-38
7.10 NASDAQ LISTING.............................................. A-38
7.11 OFFICERS' CERTIFICATES...................................... A-38
7.12 FAIRNESS OPINION............................................ A-39
7.13 DISSENTING SHARES........................................... A-39
ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF COMPANY.............. A-39
8.01 REPRESENTATIONS AND WARRANTIES.............................. A-39
8.02 PERFORMANCE................................................. A-39
8.03 OPINION OF COUNSEL.......................................... A-39
8.04 REGULATORY CONSENTS AND APPROVALS........................... A-39
8.05 ORDERS AND LAWS............................................. A-39
8.06 STOCKHOLDER APPROVAL........................................ A-39
8.07 REGISTRATION STATEMENT EFFECTIVE; PROXY STATEMENT........... A-40
8.08 NASDAQ LISTING.............................................. A-40
8.09 OFFICERS' CERTIFICATES...................................... A-40
8.10 FAIRNESS OPINION............................................ A-40
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<C> <S> <C>
ARTICLE IX TAX MATTERS................................................. A-40
9.01 REPRESENTATIONS AND OBLIGATIONS REGARDING TAXES............. A-40
ARTICLE X SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS................................................ A-41
10.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS................................................ A-41
ARTICLE XI TERMINATION................................................. A-41
11.01 TERMINATION................................................. A-41
11.02 EFFECT OF TERMINATION....................................... A-42
ARTICLE XII DEFINITIONS................................................. A-43
12.01 DEFINITIONS................................................. A-43
ARTICLE XIII MISCELLANEOUS............................................... A-48
13.01 NOTICES..................................................... A-48
13.02 ENTIRE AGREEMENT............................................ A-49
13.03 PUBLIC ANNOUNCEMENTS........................................ A-49
13.04 CONFIDENTIALITY............................................. A-50
13.05 EXPENSES.................................................... A-50
13.06 WAIVER...................................................... A-50
13.07 AMENDMENT................................................... A-51
13.08 NO THIRD PARTY BENEFICIARY.................................. A-51
13.09 NO ASSIGNMENT; BINDING EFFECT............................... A-51
13.10 HEADINGS.................................................... A-51
13.11 CONSENT TO JURISDICTION AND SERVICE OF PROCESS.............. A-51
13.12 INVALID PROVISIONS.......................................... A-51
13.13 GOVERNING LAW............................................... A-51
13.14 COUNTERPARTS................................................ A-51
EXHIBITS
EXHIBIT A ARTICLES OF INCORPORATION OF THE COMPANY
EXHIBIT B BYLAWS OF THE COMPANY
EXHIBIT C FORM OF OPINION OF COUNSEL OF THE COMPANY
EXHIBIT D FORM OF EMPLOYMENT AGREEMENT
EXHIBIT E FORM OF AFFILIATE LOCK-UP AGREEMENT
EXHIBIT F FORM OF OPINION OF COUNSEL OF PARENT
EXHIBIT G FORM OF VOTING AGREEMENT
EXHIBIT H FORM OF OPTION AGREEMENT
DISCLOSURE SCHEDULE
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement And Plan Of Merger is made and entered into as of March 10,
2000, among Netgateway, Inc., a Delaware corporation ("Parent"), GALAXY
ACQUISITION CORP., a Delaware corporation and a wholly-owned Subsidiary of
Parent ("Merger Sub"), and GALAXY ENTERPRISES, INC., a Nevada corporation (the
"Company"). All terms not otherwise defined herein shall have the meanings given
such terms in ARTICLE XII.
RECITALS
A. Upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware General Corporation Law ("Delaware Law") and the
Nevada Revised Statutes ("Nevada Law"), Parent, Merger Sub and the Company
intend to enter into a business combination transaction.
B. The Board of Directors of the Company (i) has determined that the Merger
is fair to, and in the best interests of, the Company and its stockholders, (ii)
has approved this Agreement, the Merger and the other transactions contemplated
by this Agreement and the Ancillary Agreements and (iii) subject to the terms
and conditions of this Agreement, has determined to recommend that the
stockholders of the Company adopt and approve this Agreement and approve the
Merger.
C. The Board of Directors of Parent (i) has determined that the Merger is
fair to, and in the best interests of, Parent and its stockholders, (ii) has
approved this Agreement, the Merger and the other transactions contemplated by
this Agreement and (iii) has determined to recommend that the stockholders of
Parent approve the issuance of shares of Parent Common Stock pursuant to the
Merger, subject to and upon consummation of the Merger.
D. The parties intend, (i) by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Code and (ii) that the
Merger shall qualify for accounting treatment as a pooling of interests.
E. As a condition and inducement to Parent's and Merger Sub's willingness
to enter into this Agreement and incur the obligations set forth herein,
concurrently with the execution and delivery of this Agreement, (i) Parent and
John J. Poelman ("Poelman") have entered into a Voting Agreement in the form of
EXHIBIT G-1 hereto, pursuant to which, among other things, such stockholder of
the Company agrees to vote in favor of approval and adoption of this Agreement,
(ii) Parent and Sue Ann Cochran have entered into a Voting Agreement in the form
of EXHIBIT G-2 hereto pursuant to which, among other things, such stockholder of
the Company agrees to vote in favor of approval and adoption of this Agreement
(collectively, the "Voting Agreements"), (iii) Parent and Poelman have entered
into an Option Agreement in the form of EXHIBIT H hereto (the "Option
Agreement"), pursuant to which, among other things, Poelman grants to Parent an
option to purchase his shares of Company Common Stock representing 16% of the
total outstanding shares of Company Common Stock, (iv) each director, officer
and ten percent (10%) or greater shareholder of the Company shall have executed
the Affiliate Lock-Up Agreement, substantially in the form of EXHIBIT E hereto
(the "Lock-Up Agreements" and together with the Voting Agreements and the Option
Agreement, sometimes collectively referred to herein as the "Ancillary
Agreements"), and (v) the Company and Poelman, Brandon Lewis, Frank C. Heyman,
Robert Green, David Wise and Benjamin Roberts have entered into employment
agreements in the form of EXHIBIT D hereto (the "Employment Agreements"), the
effectiveness of which are conditioned upon the consummation of the transactions
contemplated hereby.
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NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.01 THE MERGER. At the Effective Time (as defined in SECTION 1.02)
and subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law and Nevada Law, Merger Sub shall be
merged with and into the Company (the "Merger"), the separate corporate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation. The Company as the surviving corporation after the
Merger is hereinafter sometimes referred to as the "Surviving Corporation."
1.02 EFFECTIVE TIME; CLOSING. Subject to the provisions of this
Agreement, the parties hereto shall cause the Merger to be consummated by
filing a Certificate of Merger with the Secretary of State of the State of
Delaware and Articles of Merger with the Secretary of State of the State of
Nevada in accordance with the relevant provisions of Delaware Law and Nevada
Law (the "Certificate of Merger") (the time of such filing with the
Secretary of State of the State of Nevada (or such later time as may be
agreed in writing by the Company and Parent and specified in the Certificate
of Merger) being the "Effective Time") as soon as practicable on or after
the Closing Date (as herein defined). The closing of the Merger (the
"Closing") shall take place at the offices of Parent, at a time and date to
be specified by the parties, which shall be no later than the second
Business Day after the satisfaction or waiver of the conditions set forth in
ARTICLES VII and VIII, or at such other time, date and location as the
parties hereto agree in writing (the "Closing Date").
1.03 EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement and the applicable provisions
of Delaware Law and Nevada Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property,
rights, privileges, powers and franchises of the Company and Merger Sub
shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
1.04 ARTICLES OF INCORPORATION; BYLAWS. Unless otherwise agreed to in
writing by the Company and Parent prior to the Effective Time:
(a) the Articles of Incorporation of the Surviving Corporation shall
be amended and restated as of the Effective Time to conform to EXHIBIT A;
and
(b) the By-Laws of the Surviving Corporation shall be amended and
restated as of the Effective Time to conform to EXHIBIT B.
1.05 DIRECTORS AND OFFICERS. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or
appointed and qualified. The initial officers of the Surviving Corporation
shall be the officers of Merger Sub immediately prior to the Effective Time,
until their respective successors are duly appointed.
1.06 EFFECT ON CAPITAL STOCK. Subject to SECTION 1.11 and the other
terms and conditions of this Agreement, at the Effective Time, by virtue of
the Merger and without any action on the part of Merger Sub, the Company or
the holders of any of the following securities, the following shall occur:
(a) CONVERSION OF THE COMPANY COMMON STOCK. Subject to Section
1.06(d) and except for Dissenting Shares, each share of Common Stock, par
value $0.007 per share, of the Company
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("Company Common Stock") issued and outstanding immediately prior to the
Effective Time will be canceled and extinguished and is automatically
converted (subject to SECTION 1.06(D)) into the right to receive that
number of shares of the Common Stock, par value $0.001 per share, of
Parent ("Parent Common Stock") equal to (i) [(x) 5,000,000 LESS (y) (a)
the total number of Company Plan Options outstanding at the Effective
Time MULTIPLIED BY (b) (I) 5,000,000 DIVIDED BY (II) the SUM of (A) the
total number of shares of Company Common Stock and (B) the total number
of Company Plan Options issued and outstanding at the Effective Time]
DIVIDED BY (ii) the total number of shares of Company Common Stock issued
and outstanding at the Effective Time (rounded to the nearest five
decimal places) (the "Exchange Ratio"), upon surrender of the certificate
representing such share of the Company Common Stock in the manner
provided in SECTION 1.07 (or in the case of a lost, stolen or destroyed
certificate, upon delivery of an affidavit (and bond, if required) in the
manner provided in SECTION 1.09). If any shares of the Company Common
Stock outstanding immediately prior to the Effective Time are unvested or
are subject to a repurchase option, risk of forfeiture or other condition
under any applicable restricted stock purchase agreement or other
agreement with the Company, then the shares of Parent Common Stock issued
in exchange for such shares of the Company Common Stock will also be
unvested and subject to the same repurchase option, risk of forfeiture or
other condition, and the certificates representing such shares of Parent
Common Stock may accordingly be marked with appropriate legends. The
Company shall take all action that may be necessary to ensure that, from
and after the Effective Time, Parent is entitled to exercise any such
repurchase option or other right set forth in any such restricted stock
purchase agreement or other agreement.
(b) Stock Options and Warrants.
(i) At the Effective Time, all Company Options issued under the
Company's 1997 Employee Stock Option Plan (the "Company Plan") and
the Special Grant disclosed in SECTION 2.03(B) OF THE DISCLOSURE
SCHEDULE (the "Company Plan Options"), whether or not vested and
exercisable, shall be assumed by Parent. Each Company Plan Option
assumed by Parent shall be subject to, and exercisable upon, the same
terms and conditions as under the applicable Company Plan Option and
the applicable option agreement issued thereunder (including without
limitation any vesting, expiration or termination provisions), except
that (a) each assumed Company Plan Option shall be exercisable for,
and represent the right to acquire, that number of shares of Parent
Common Stock (rounded down to the nearest whole share) equal to (i)
the number of shares of Company Common Stock subject to such Company
Plan Option immediately prior to the Effective Time multiplied by
(ii) the Exchange Ratio; and (b) the option price per share of Parent
Common Stock subject to each assumed Company Plan Option shall be an
amount equal to (i) the option price per share of Company Common
Stock subject to such Company Plan Option in effect immediately prior
to the Effective Time divided by (ii) the Exchange Ratio (rounded up
to the nearest whole cent). The Company represents and warrants that
as of the Closing each of the foregoing actions may be taken and
effected by the Company without the consent of any holder of any
Company Plan Option.
(ii) At the Effective Time, all Company Options then outstanding,
whether or not vested and exercisable, under the Invest Linc Emerging
Growth Fund I Warrant, dated March 18, 1999, and the Bridgewater
Corporation Warrant, dated as of January 11, 1999, in each case as
amended (collectively, the "Company Warrant"), shall be assumed by
Parent. Each Company Warrant assumed by Parent shall be subject to,
and exercisable upon, the same terms and conditions as under the
applicable Company Warrant and the applicable warrant agreement
issued thereunder (including without limitation any vesting,
expiration or termination provisions), except that (a) each assumed
Company Warrant
A-3
<PAGE>
shall be exercisable for, and represent the right to acquire, that
number of shares of Parent Common Stock (rounded down to the nearest
whole share) equal to (i) the number of shares of Company Common
Stock subject to such Company Warrant immediately prior to the
Effective Time multiplied by (ii) the Exchange Ratio; and (b) the
option price per share of Parent Common Stock subject to each assumed
Company Warrant shall be an amount equal to (i) the option price per
share of Company Common Stock subject to such Company Warrant in
effect immediately prior to the Effective Time divided by (ii) the
Exchange Ratio (rounded up to the nearest whole cent). The Company
represents and warrants that as of the Closing each of the foregoing
actions may be taken and effected by the Company without the consent
of any holder of any Company Warrant.
(c) CAPITAL STOCK OF MERGER SUB. Each share of Common Stock of Merger
Sub (the "Merger Sub Common Stock") issued and outstanding immediately
prior to the Effective Time shall be converted into one validly issued,
fully paid and nonassessable share of Common Stock of the Surviving
Corporation. Each certificate evidencing ownership of shares of Merger
Sub Common Stock shall evidence ownership of such shares of capital stock
of the Surviving Corporation.
(d) FRACTIONAL SHARES. No fraction of a share of Parent Common Stock
will be issued by virtue of the Merger, but in lieu thereof, each holder
of shares of the Company Common Stock who would otherwise be entitled to
a fraction of a share of Parent Common Stock (after aggregating all
fractional shares of Parent Common Stock that otherwise would be received
by such holder) shall, upon surrender of such holder's Certificate(s) (as
defined in SECTION 1.07(C)), receive from Parent an amount of cash
(rounded to the nearest whole cent), without interest, equal to the
product of (i) such fraction, multiplied by (ii) the average closing
price of one share of Parent Common Stock for the twenty (20) most recent
days that Parent Common Stock has traded ending on the trading day ending
one day prior to the Effective Time (the "Closing Price").
(e) ADJUSTMENTS TO EXCHANGE RATIO. The Exchange Ratio shall be
adjusted to reflect fully the appropriate effect of any stock split,
reverse stock split, stock dividend (including any dividend or
distribution to Parent securityholders of securities convertible into or
exercisable for Parent Common Stock or Company Common Stock),
extraordinary dividend, reorganization, recapitalization,
reclassification or other like change with respect to Parent Common Stock
or Company Common Stock occurring (or with a record date) on or after the
date hereof and prior to the Effective Time.
(f) CANCELLATION OF TREASURY STOCK AND PARENT-OWNED STOCK.
Notwithstanding any other provision of this SECTION 1.06, each share of
Company Common Stock that is owned by the Company and each share of
Company Common Stock that is owned by Parent or Merger Sub shall
automatically be cancelled and retired and shall cease to exist, and no
Parent Common Stock or other consideration shall be delivered in exchange
therefor.
1.07 SURRENDER OF CERTIFICATES.
(a) EXCHANGE AGENT. Parent shall select an institution reasonably
satisfactory to the Company to act as the exchange agent (the "Exchange
Agent") in the Merger.
(b) PARENT TO PROVIDE COMMON STOCK. Within ten (10) Business Days
after the Effective Time, Parent shall make available to the Exchange
Agent for exchange in accordance with this Article I, the shares of
Parent Common Stock issuable pursuant to Section 1.06 in exchange for
outstanding shares of the Company Common Stock, and cash in an amount
sufficient for payment in lieu of fractional shares pursuant to Section
1.06(d) and any dividends or
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<PAGE>
distributions which holders of shares of the Company Common Stock may be
entitled pursuant to Section 1.07(d).
(c) Exchange Procedures. Promptly after the Effective Time, Parent
shall cause the Exchange Agent to mail to each holder of record (as of
the Effective Time) of a certificate or certificates (the "Certificates")
which immediately prior to the Effective Time represented outstanding
shares of the Company Common Stock whose shares were converted into the
right to receive shares of Parent Common Stock pursuant to SECTION
1.06(A), cash in lieu of any fractional shares pursuant to SECTION
1.06(D) and any dividends or other distributions pursuant to
SECTION 1.07(D), (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions
as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Common Stock pursuant to SECTION 1.06(A),
cash in lieu of any fractional shares pursuant to SECTION 1.06(D) and any
dividends or other distributions pursuant to SECTION 1.07(D). Upon
surrender of Certificates for cancellation to the Exchange Agent or to
such other agent or agents as may be appointed by Parent, together with
such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the holders of such
Certificates shall be entitled to receive in exchange therefor
certificates representing the number of whole shares of Parent Common
Stock pursuant to SECTION 1.06(A), payment in lieu of fractional shares
which such holders have the right to receive pursuant to SECTION 1.06(D)
and any dividends or distributions payable pursuant to SECTION 1.07(D),
and the Certificates so surrendered shall forthwith be canceled. Until so
surrendered, outstanding Certificates will be deemed from and after the
Effective Time, for all corporate purposes, subject to SECTION 1.07(D) as
to the payment of dividends, to evidence the ownership of the number of
full shares of Parent Common Stock into which such shares of the Company
Common Stock shall have been so converted pursuant to SECTION 1.06(A),
the right to receive an amount in cash in lieu of the issuance of any
fractional shares in accordance with SECTION 1.06(D) and any dividends or
distributions payable pursuant to SECTION 1.07(D).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement
with respect to Parent Common Stock with a record date after the
Effective Time or cash in lieu of fractional shares will be paid to the
holders of any unsurrendered Certificates with respect to the shares of
Parent Common Stock represented thereby until the holders of record of
such Certificates shall surrender such Certificates. Subject to
applicable Law, following surrender of any such Certificates, the
Exchange Agent shall deliver to the record holders thereof, without
interest, certificates representing whole shares of Parent Common Stock
issued in exchange therefor along with payment in lieu of fractional
shares pursuant to SECTION 1.06(D) hereof and the amount of any such
dividends or other distributions with a record date after the Effective
Time payable with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If certificates for shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be
a condition of the issuance thereof that the Certificates so surrendered
will be properly endorsed and otherwise in proper form for transfer and
that the persons requesting such exchange will have paid to Parent or any
agent designated by it any transfer or other taxes required by reason of
the issuance of certificates for shares of Parent Common Stock in any
name other than that of the registered holder of the Certificates
surrendered, or established to the satisfaction of Parent or any agent
designated by it that such tax has been paid or is not payable.
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<PAGE>
(f) Required Withholding. Each of the Exchange Agent, Parent and the
Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement
to any holder or former holder of the Company Common Stock such amounts
as may be required to be deducted or withheld therefrom under the Code or
under any provision of state, local or foreign tax Law or under any other
applicable Laws. To the extent such amounts are so deducted or withheld,
such amounts shall be treated for all purposes under this Agreement as
having been paid to the person to whom such amounts would otherwise have
been paid.
(g) No Liability. Notwithstanding anything to the contrary in this
SECTION 1.07, neither the Exchange Agent, Parent, the Surviving
Corporation nor any party hereto shall be liable to a holder of shares of
Parent Common Stock or Company Common Stock for any amount properly paid
to a public official pursuant to any applicable abandoned property,
escheat or similar Law. If any Certificate shall not have been
surrendered prior to the date immediately prior to the date on which such
property would otherwise escheat to or become the property of any
Governmental or Regulatory Authority, any such property, to the extent
permitted by applicable Law, shall become the property of the Surviving
Corporation, free and clear of all claims or interest of any person
previously entitled thereto.
(h) Termination. Any property provided to the Exchange Agent which
remains undistributed to holders of the Certificates for twelve (12)
months after the Effective Time shall be delivered to Parent, upon
demand, and any holders of the Certificates who have not theretofore
complied with this Article I shall thereafter look only to Parent or the
Surviving Corporation for, and Parent shall remain liable for, payment of
their claim for Parent Common Stock, any cash in lieu of fractional
shares of Parent Common Stock and any dividends or distributions with
respect to Parent Common Stock, without interest thereon.
1.08 NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares
of Parent Common Stock issued upon the surrender for exchange of shares of
the Company Common Stock in accordance with the terms hereof (including any
cash paid in respect thereof pursuant to SECTION 1.06(D) and 1.07(D)) shall
be deemed to have been issued in full satisfaction of all rights pertaining
to such shares of the Company Common Stock, and there shall be no further
registration of transfers on the records of the Surviving Corporation of
shares of the Company Common Stock which were outstanding immediately prior
to the Effective Time. If, after the Effective Time, Certificates are
presented to the Surviving Corporation for any reason, they shall be
canceled and exchanged as provided in this ARTICLE I.
1.09 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed Certificates,
upon the making of an affidavit of that fact by the holder thereof, such
shares of Parent Common Stock, cash for fractional shares, if any, as may be
required pursuant to SECTION 1.06(D) and any dividends or distributions
payable pursuant to SECTION 1.07(D); provided, however, that Parent may, in
its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed Certificates to deliver a bond
in such sum as it may reasonably direct as indemnity against any claim that
may be made against Parent, the Company or the Exchange Agent with respect
to the Certificates alleged to have been lost, stolen or destroyed.
1.10 TAX AND ACCOUNTING CONSEQUENCES. It is intended by the parties
hereto that the Merger shall constitute a reorganization within the meaning
of Section 368(a)(1)(a) and 368(a)(2)(E) of the Code. The parties hereto
adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax
Regulations. The parties shall consistently treat the Merger as such a
reorganization for all Tax reporting purposes.
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The parties also intend that the Merger be treated as a pooling of interests
for accounting purposes.
1.11 DISSENTING SHARES. Notwithstanding anything to the contrary
contained in this Agreement, any shares of the Company Common Stock
outstanding immediately prior to the Effective Time that were not voted in
favor of the Merger and which are held by stockholders who have complied
with the applicable provisions of Nevada Law (the "Dissenting Shares") shall
not be converted into or represent the right to receive Parent Common Stock
in accordance with SECTION 1.06(A) (or cash in lieu of fractional shares in
accordance with SECTION 1.06(D)and any dividends or other distributions
pursuant to SECTION 1.07(D)), and each holder of Dissenting Shares shall be
entitled only to such rights as may be granted to such holder under Nevada
Law. From and after the Effective Time, a holder of Dissenting Shares shall
not have and shall not be entitled to exercise any of the voting rights or
other rights of a stockholder of the Surviving Corporation. If any holder of
Dissenting Shares shall fail to assert or perfect, or shall waive, rescind,
withdraw or otherwise lose, such holder's right to dissent and obtain
payment under Nevada Law, then, as of the later of the Effective Time or the
occurrence of such event, such shares shall automatically be converted into
and shall represent only the right to receive (upon the surrender of
Certificate(s) previously representing such Company Common Stock) Parent
Common Stock in accordance with SECTION 1.06(A) (and cash in lieu of any
fractional share in accordance with SECTION 1.06(D) and any dividends or
other deductions pursuant to SECTION 1.07(D)); provided that if such holder
effectively withdraws or loses his right to receive payment for such shares
after the Effective Time, then, at such time Parent will comply with
SECTIONS 1.06(A), 1.06(D) and 1.07(D) with respect to such shares and
deliver additional certificates representing the appropriate number of
shares. The Company shall give Parent (x) prompt notice of any written
demands for appraisal, withdrawals of demands for appraisal and any other
instruments served pursuant to the applicable provisions of Nevada Law
relating to the appraisal process received by the Company and (y) the
opportunity to participate in all negotiations and proceedings with respect
to demands for appraisal under Nevada Law. The Company will not voluntarily
make any payment with respect to any demands for appraisal and will not,
except with the prior written consent of Parent, settle or offer to settle
any such demands.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent as follows:
2.01 AUTHORITY. This Agreement has been duly and validly executed and
delivered by the Company, constitutes a legal, valid and binding obligation
of the Company, and is enforceable against the Company in accordance with
its terms, except as enforcement thereof may be limited by (i) Laws of
general application relating to bankruptcy, insolvency moratorium,
reorganization or other similar Laws, both state and federal, affecting the
enforcement of creditors' rights or remedies in general, and (ii) rules of
Law governing specific performance, injunctive relief and other equitable
remedies.
2.02 DUE ORGANIZATION. Each of the Company, and its two wholly owned
Subsidiaries, Galaxy Mall, Inc., a Wyoming corporation ("Galaxy Mall"), and
IMI, Inc., a Utah corporation ("IMI") is a corporation duly organized,
validly existing and in good standing under the Laws of the jurisdiction of
its incorporation and is duly authorized, qualified and licensed under all
applicable Laws, regulations, ordinances and orders of public authorities to
own, operate and lease its Assets and Properties and to carry on its
business in the places and in the manner as presently conducted. SECTION
2.02 OF THE DISCLOSURE SCHEDULE lists the principal lines of business in
which Company, Galaxy Mall and IMI is participating or engaged (the
"Business"). Each of the Company, Galaxy Mall, and IMI is duly qualified,
licensed or admitted to do business and is in good standing in those
jurisdictions specified in SECTION 2.02 OF THE DISCLOSURE SCHEDULE, which
are the only jurisdictions in which the ownership, use or leasing of its
Assets and Properties, or the conduct or nature of its business, makes such
qualification, licensing or admission necessary, except for those
jurisdictions in which the adverse effects of all such failures by Company,
Galaxy Mall and IMI to be qualified, licensed or admitted and in good
standing can in the aggregate be eliminated without material cost or expense
by Company, Galaxy Mall and IMI, as the case may be, becoming qualified or
admitted and in good standing. The name of each director and officer of the
Company, Galaxy Mall and IMI on the date hereof, and the position with
Company, Galaxy Mall and IMI held by each, are listed in SECTION 2.02 OF THE
DISCLOSURE SCHEDULE. Each of the Company, Galaxy Mall and IMI has prior to
the execution of this Agreement delivered to Parent true and complete copies
of their articles of incorporation, bylaws, and other charter documents as
in effect on the date hereof.
2.03 CAPITAL STOCK.
(a) The authorized capital stock of the Company consists of:
25,000,000 shares of the Company Common Stock, of which 6,206,514 shares
had been issued and were outstanding as of the date hereof. As of the
date of this Agreement, there are no shares of the Company Common Stock
held in treasury by the Company.
(b) As of the date of this Agreement: (i) 1,702,750 shares of the
Company Common Stock are subject to issuance pursuant to outstanding
Company Options to purchase Company Common Stock under the Company Plan
or otherwise for an aggregate exercise price of $1,985,445; and (ii)
307,250 shares of the Company Common Stock are reserved for future
issuance under the Company Plan. (Stock options or other securities
convertible into the Company Common Stock granted by the Company pursuant
to the Company Plan or otherwise are referred to in this Agreement as
"Company Options"). SECTION 2.03(B) OF THE DISCLOSURE SCHEDULE sets forth
the following information with respect to each Company Option outstanding
as of the date of this Agreement: (i) the name of the optionee; (ii) the
particular plan pursuant to which such Company Option was granted; (iii)
the number of shares of the
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Company Common Stock subject to such Company Option; (iv) the exercise
price of such Company Option; (v) the date on which such Company Option
was granted or assumed; and (vi) the date on which such Company Option
expires. The Company has made available to Parent accurate and complete
copies of all stock option plans pursuant to which the Company has
granted stock options that are currently outstanding, the form of all
stock option agreements evidencing such options and the applicable
vesting schedule for each such option. All shares of the Company Common
Stock subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are
issuable, would be duly authorized, validly issued, fully paid and
nonassessable. Except as set forth in SECTION 2.03(B)(I) OF THE
DISCLOSURE SCHEDULE, there are no commitments or agreements of any
character to which the Company is bound obligating the Company to
accelerate the vesting of any Company Option as a result of the Merger.
(c) Except as set forth in SECTION 2.03(C) OF THE DISCLOSURE
SCHEDULE, all outstanding shares of the Company Common Stock, all
outstanding Company Options, and all outstanding shares of capital stock
of each Subsidiary of the Company have been issued and granted in
substantial compliance with (i) all applicable securities Laws and, to
the knowledge of the Company, all other applicable Laws and (ii) all
material requirements set forth in applicable Contracts.
(d) Except as set forth in SECTION 2.03(D) OF THE DISCLOSURE SCHEDULE
or except for securities the Company owns free and clear of all material
claims and Liens, directly or indirectly through one or more
Subsidiaries, and except for shares of capital stock or other similar
ownership interests of certain Subsidiaries of the Company that are owned
by certain nominee equity holders as required by the applicable Law of
the jurisdiction of organization of such Subsidiaries (which shares or
other interests do not materially affect the Company's control of such
Subsidiaries), as of the date of this Agreement, there are no equity
securities, partnership interests or similar ownership interests of any
class of equity security of any Subsidiary of the Company, or any
security exchangeable or convertible into or exercisable for such equity
securities, partnership interests or similar ownership interests, issued,
reserved for issuance or outstanding. Except as set forth in SECTIONS
2.03(B) and 2.03(D) OF THE DISCLOSURE SCHEDULE, there are no
subscriptions, options, warrants, equity securities, partnership
interests or similar ownership interests, calls, rights (including
preemptive rights), commitments or agreements of any character to which
the Company or any of its Subsidiaries is a party or by which it is bound
obligating the Company or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, or repurchase, redeem or
otherwise acquire, or cause the repurchase, redemption or acquisition of,
any shares of capital stock, partnership interests or similar ownership
interests of the Company or any of its Subsidiaries or obligating the
Company or any of its Subsidiaries to grant, extend, accelerate the
vesting of or enter into any such subscription, option, warrant, equity
security, call, right, commitment or agreement. As of the date of this
Agreement, except as contemplated by this Agreement, there are no
registration rights and there is no voting trust, proxy, rights plan,
antitakeover plan or other agreement or understanding to which the
Company is a party or by which it is bound with respect to any equity
security of any class of the Company or with respect to any equity
security, partnership interest or similar ownership interest of any class
of any of its Subsidiaries.
2.04 SUBSIDIARIES. The Company's only Subsidiaries are Galaxy Mall and
IMI. Galaxy Mall and IMI do not have, nor have they ever had, any
Subsidiaries.
2.05 NO CONFLICTS. Subject to the Company obtaining the approval of
and adoption of this agreement by the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock (the "Company
Stockholder Approval"), the execution and delivery by
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the Company of this Agreement does not, and the performance by it of each of
its obligations under this Agreement and the consummation of the
transactions contemplated hereby will not:
(a) Conflict with or result in a violation or breach of any of the
terms, conditions or provisions of any articles of incorporation or
bylaws of the Company, Galaxy Mall, or IMI;
(b) Conflict with or result in a violation or breach of any term or
provision of any Law or Order applicable to the Company, Galaxy Mall or
IMI or any of their respective Assets and Properties; or
(c) Except as set forth in SECTION 2.05(C) OF THE DISCLOSURE
SCHEDULE, (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default
under, (iii) require the Company, Galaxy Mall, or IMI to obtain any
consent, approval or action of, make any filing with or give any notice
to any Person as a result or under the terms of, (iv) result in or give
to any Person any right of termination, cancellation, acceleration or
modification in or with respect to, (v) result in or give to any Person
any additional rights or entitlement to increased, additional,
accelerated or guaranteed payments under, or (vi) result in the creation
or imposition of any Lien upon any of the Company, Galaxy Mall, or IMI or
any of their respective Assets and Properties under, any material
Contract or material License to which any of the Company, Galaxy Mall, or
IMI are a party or by which any of their respective Assets and Properties
is bound.
2.06 BOOKS AND RECORDS. The minute books and other similar records of
the Company, Galaxy Mall, and IMI have been made available to Parent prior
to the execution of this Agreement, and contain a true and complete record,
in all material respects, of all action taken at all meetings and by all
written consents in lieu of meetings of the stockholders, the boards of
directors and committees of the board of directors of each of the Company,
Galaxy Mall, and IMI. The stock transfer ledgers and other similar records
of the Company, Galaxy Mall, and IMI as made available to Parent prior to
the execution of this Agreement accurately reflect all record transfers
prior to the execution of this Agreement in the capital stock of each of the
Company, Galaxy Mall, and IMI. The Company, Galaxy Mall, and IMI do not have
any of their Books and Records recorded, stored, maintained, operated or
otherwise wholly or partly dependent upon or held by any means (including
any electronic, mechanical or photographic process, whether computerized or
not) which (including all means of access thereto and therefrom) are not
under their exclusive ownership and direct control or the control of the
Company's transfer agent.
2.07 SEC FILINGS.
Except as set forth on SECTION 2.07 OF THE DISCLOSURE SCHEDULE:
(a) The Company has filed all forms, reports and documents required
to be filed by Company with the SEC since January 1, 1998 and has made
available to Parent such forms, reports and documents in the form filed
with the SEC. All such required forms, reports and documents (including
those that Company may file subsequent to the date hereof), as amended,
are referred to herein as the "Company SEC Reports." As of their
respective dates (or, if amended, as of the date of the last such
amendment), the Company SEC Reports (i) were prepared in accordance and
complied (or, with respect to those Company SEC Reports that may be filed
subsequent to the date hereof, will be prepared in accordance and will
comply) in all material respects with the requirements of the Securities
Act of 1933, as amended (the "Securities Act"), or the Exchange Act of
1934, as amended (the "Exchange Act"), as the case may be, and the rules
and regulations of the SEC thereunder applicable to such Company SEC
Reports and (ii) did not at the time they were filed (or, with respect to
those Company SEC Reports that may be filed subsequent to the date
hereof, will not) contain any untrue statement of a material fact or omit
to state a material fact required to be
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stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, except to the extent corrected or superseded prior to the
date hereof by a subsequently filed Company SEC Report. None of the
Company's Subsidiaries are required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Company SEC Reports
(the "Company Financials"), including each Company SEC Report filed after
the date hereof until the Closing, (i) complied (or, with respect to
those Company SEC Reports that may be filed subsequent to the date
hereof, will comply) as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (ii) was
prepared (or, with respect to those Company SEC Reports that may be filed
subsequent to the date hereof, will be prepared) in accordance with GAAP
applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes thereto or, in the case of unaudited
interim financial statements, as may be permitted by the SEC on Form
10-QSB, 10-KSB or any successor form under the Exchange Act) and (iii)
fairly presented (or, with respect to those Company SEC Reports that may
be filed subsequent to the date hereof, will fairly present) in all
material respects the consolidated financial position of the Company and
its consolidated Subsidiaries as of the respective dates thereof and the
consolidated results of the Company's operations and cash flows for the
periods indicated, except that the unaudited interim financial statements
may not contain footnotes and were or are subject to normal and recurring
year-end adjustments. The balance sheet of the Company as of September
30, 1999 contained in the Form 10-QSB filed November 15, 1999 is
hereinafter referred to as the "Company Balance Sheet." Except as
disclosed in the Company Financials, since the date of the Company
Balance Sheet neither the Company nor any of its Subsidiaries has any
liabilities required under GAAP to be set forth on a consolidated balance
sheet (absolute, accrued, contingent or otherwise) which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of the Company and its Subsidiaries,
taken as a whole, except for liabilities incurred since the date of the
Company Balance Sheet in the ordinary course of business consistent with
past practices and liabilities incurred pursuant to this Agreement.
(c) The Company has heretofore furnished (or, with respect to copies
which are not yet available, will furnish) to Parent a complete and
correct copy of any amendments or modifications, which have not yet been
filed with the SEC but which are required to be filed, to agreements,
documents or other instruments which previously had been filed by the
Company with the SEC pursuant to the Securities Act or the Exchange Act.
2.08 ABSENCE OF CHANGES. Except for the execution and delivery of this
Agreement and the transactions to take place pursuant hereto on or prior to
the Closing Date or as disclosed in SECTION 2.08 OF THE DISCLOSURE SCHEDULE,
since December 31, 1998, there has not been (i) any Material Adverse Effect
on the Company, Galaxy Mall, or IMI, (ii) any declaration, setting aside or
payment of any dividend on, or other distribution (whether in cash, stock or
property) in respect of any of the Company's, Galaxy Mall's or IMI's capital
stock, or any purchase, redemption or other acquisition by the Company,
Galaxy Mall, or IMI of any of Galaxy Mall's or IMI's capital stock, any
other securities, or any options, warrants, calls or rights to acquire any
such shares or other securities except for repurchases from employees
following their termination pursuant to the terms of their pre-existing
stock option or purchase agreements, (iii) any split, combination or
reclassification of any of the Company's, Galaxy Mall or IMI's capital
stock, (iv) any granting by the Company, Galaxy Mall or IMI of any increase
in compensation or fringe benefits, except for normal increases of cash
compensation in the ordinary course of business consistent with past
practice, or any payment by the Company, Galaxy Mall or IMI of any bonus,
except for bonuses
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made in the ordinary course of business consistent with past practice, or
any granting by the Company, Galaxy Mall or IMI of any increase in severance
or termination pay or any entry by the Company, Galaxy Mall or IMI into any
currently effective employment, severance, termination or indemnification
agreement or any agreement the benefits of which are contingent or the terms
of which are materially altered upon the occurrence of a transaction
involving the Company, Galaxy Mall or IMI of the nature contemplated hereby,
(v) entry by the Company, Galaxy Mall or IMI into any licensing or other
agreement with regard to the acquisition or disposition of any material
Intellectual Property other than licenses, distribution agreements,
advertising agreements, sponsorship agreements or merchant program
agreements entered into in the ordinary course of business consistent with
past practice, (vi) any amendment or consent with respect to any licensing
agreement filed or required to be filed with the SEC, (vii) any material
change by the Company, Galaxy Mall, or IMI in its accounting methods,
principles or practices, except as required by concurrent changes in GAAP,
or (viii) any material revaluation by any of the Company, Galaxy Mall, or
IMI of any of its assets, including, without limitation, writing down the
value of capitalized inventory or writing off notes or accounts receivable
other than in the ordinary course of business.
2.09 NO UNDISCLOSED LIABILITIES. Except as reflected or reserved
against in the balance sheet and accompanying notes included in the
Financial Statements or as set forth on SECTION 2.09 OF THE DISCLOSURE
SCHEDULE, there are no Liabilities against, relating to or affecting each of
the Company, Galaxy Mall, and IMI or any of their respective Assets and
Properties, other than Liabilities incurred since September 30 1999 in the
ordinary course of business, none of which, individually or in the
aggregate, would constitute a Material Adverse Effect on the Company, Galaxy
Mall or IMI, taken as a whole.
2.10 LEGAL PROCEEDINGS. Except as set forth in SECTION 2.10 OF THE
DISCLOSURE SCHEDULE:
(a) There are no Actions or Proceedings pending or, to the Knowledge
of the Company, threatened against, relating to or affecting each of the
Company, Galaxy Mall, or IMI or any of their Assets and Properties which
(i) could reasonably be expected to result in the issuance of an Order
restraining, enjoining or otherwise prohibiting or making illegal the
consummation of any of the transactions contemplated by this Agreement or
otherwise result in a material diminution of the benefits contemplated by
this Agreement to Parent, or (ii) if determined adversely against the
Company, Galaxy Mall, or IMI, could reasonably be expected to result in
(x) any injunction or other equitable relief against the Company, Galaxy
Mall or IMI that would interfere in any material respect with their
business or operations or (y) Losses by the Company, Galaxy Mall or IMI,
individually or in the aggregate, exceeding $100,000.00;
(b) There are no facts or circumstances Known to any of the Company,
Galaxy Mall, and IMI that could reasonably be expected to give rise to
any Action or Proceeding that would be required to be disclosed pursuant
to clause (a) above; and
(c) There are no Orders outstanding against any of the Company,
Galaxy Mall, and IMI.
2.11 COMPLIANCE WITH LAWS AND ORDERS. Except as set forth in SECTION
2.11 OF THE DISCLOSURE SCHEDULE, each of the Company, Galaxy Mall, and IMI
is not, nor has at any time been, nor has it received any notice that it is
nor has at any time been, in violation of or in default under, in any
material respect, any Law or Order applicable to each of the Company, Galaxy
Mall , and IMI or any of its Assets and Properties, the consequences of
which will have a Material Adverse Effect on the Company, Galaxy Mall or
IMI.
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2.12 EMPLOYEE BENEFIT AND COMPENSATION PLANS.
(a) SECTION 2.12(A) OF THE DISCLOSURE SCHEDULE provides a description
of each of the following, if any, which is sponsored, maintained or
contributed to by the Company or its Subsidiaries for the benefit of the
employees or agents of the Company or its Subsidiaries, or has been so
sponsored, maintained or contributed to at any time during the Company's
or its Subsidiaries' existence:
(i) each "Employee Plan," as such term is defined in SECTION 3(3)
of the Employee Retirement Income Security Act of 1974 ("ERISA")
(including, but not limited to, employee plans, such as foreign
plans, which are not subject to the provisions of ERISA) ("PLAN");
and,
(ii) each personnel policy, employee manual or other written
statements of rules or policies concerning employment, stock option
plan, collective bargaining agreement, bonus plan or arrangement,
incentive award plan or arrangement, vacation and sick leave policy,
severance pay policy or agreement, deferred compensation agreement or
arrangement, consulting agreement, employment contract and each other
employee plan, agreement, arrangement, program, practice or
understanding which is not described in SECTION 2.12(A)(I) ("BENEFIT
PROGRAM OR AGREEMENT").
(b) True, correct and complete copies of each of the Plans and
Benefit Programs or Agreements (if any), and related trusts, if
applicable, including all amendments thereto, have been furnished to
Parent. There has also been furnished to Parent, with respect to each
Plan required to file such report and description, the three most recent
reports on Form 5500 and the summary plan description. True, correct and
complete copies or descriptions of all Benefit Programs or Agreements
have also been furnished to Parent.
(c) The Company and its Subsidiaries do not contribute to or have an
obligation to contribute to, and the Company and its Subsidiaries have
not at any time contributed to or had an obligation to contribute to, a
multiemployer plan within the meaning of Section 3(37) of ERISA or a
multiple employer plan within the meaning of Section 413(b) and (c) of
the Code.
(d) Except as otherwise set forth in SECTION 2.12(D) OF THE
DISCLOSURE SCHEDULE:
(i) The Company and its Subsidiaries have substantially performed
all obligations, whether arising by operation of Law or by contract,
required to be performed by it in connection with the Plans and the
Benefit Programs and Agreements, and, to the Knowledge of the
Company, there have been no defaults or violations by any other party
to the Plans or Benefit Programs or Agreements;
(ii) All reports and disclosures relating to the Plans required
to be filed with or furnished to governmental agencies, Plan
participants or Plan beneficiaries have been filed or furnished in
accordance with applicable Law in a timely manner, and each Plan and
each Benefit Program or Agreement has been administered in
substantial compliance with its governing documents;
(iii) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the Knowledge of the Company,
threatened against, or with respect to, any of the Plans or Benefit
Programs or Agreements or their assets;
(iv) All contributions required to be made to the Plans and
Benefit Programs or Agreements pursuant to their terms and provisions
and applicable Law have been made timely;
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(v) The Company and its Subsidiaries do not have, nor have they
ever had, a Plan or Benefit Program or Agreement intended to be
qualified under Section 401 of the Code or subject to Title IV of
ERISA;
(vi) None of the Plans nor any trust created thereunder or with
respect thereto has engaged in any "prohibited transaction" or
"party-in-interest transaction" as such terms are defined in Section
4975 of the Code and Section 406 of ERISA which could subject any
Plan, the Company or any officer, director or employee thereof to a
tax or penalty on prohibited transactions or party-in-interest
transactions pursuant to Section 4975 of the Code or Section 502(i)
of ERISA;
(vii) There is no matter pending (other than routine
qualification determination filings) with respect to any of the Plans
or Benefit Programs or Agreements before the Internal Revenue
Service, the Department of Labor or the PBGC;
(viii)The Company and its Subsidiaries do not have, nor have they
ever had, a trust funding a Plan.
(ix) The Company does not have any obligation to provide health
benefits to former employees, except as specifically required by Law;
(x) Neither the execution and delivery of this Agreement nor the
consummation of any or all of the transactions contemplated hereby
will: (A) entitle any current or former employee of the Company to
severance pay, unemployment compensation or any similar payment, (B)
accelerate the time of payment or vesting or increase the amount of
any compensation due to any such employee or former employee, or (C)
directly or indirectly result in any payment made to or on behalf of
any person to constitute a "parachute payment" within the meaning of
Section 280G of the Code;
(xi) Since January 1, 1997, there have not been any (i) work
stoppages, labor disputes or other significant controversies between
Company and its employees, (ii) labor union grievances or
organizational efforts, or (iii) unfair labor practice or labor
arbitration proceedings pending or threatened.
(e) Except as set forth in SECTION 2.12(E) OF THE DISCLOSURE
SCHEDULE, the Company is not a party to any agreement, and has not
established any policy or practice, requiring the Company to make a
material payment or provide any other material form of compensation or
benefit to any person performing services for the Company upon
termination of such services which would not be payable or provided in
the absence of the consummation of the transactions contemplated by this
Agreement.
(f) SECTION 2.12(F) OF THE DISCLOSURE SCHEDULE sets forth by number
and employment classification the approximate numbers of employees
employed by Company as of the date of this Agreement, and, except as set
forth therein, none of said employees are subject to union or collective
bargaining agreements with Company.
(g) Neither the Parent nor any of its Affiliates shall have any
liability or obligations under or with respect to the Workers Adjustment
Retraining Notification Act in connection with any of the transactions
contemplated in connection herewith.
2.13 REAL PROPERTY.
(a) SECTION 2.13 OF THE DISCLOSURE SCHEDULE contains a true and
correct list of each parcel of real property leased by the Company,
Galaxy Mall or IMI (as lessor or lessee). The Company, Galaxy Mall and
IMI do not own any real property.
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(b) The Company, Galaxy Mall and IMI have a valid and subsisting
leasehold estate in and the right to quiet enjoyment of the real
properties leased by it for the full term of the lease thereof. Each
lease referred to in paragraph (a) above is a legal, valid and binding
agreement, enforceable in accordance with its terms, except as
enforcement thereof may be limited by (i) Laws of general application
relating to bankruptcy, insolvency moratorium, reorganization or other
similar Laws, both state and federal, affecting the enforcement of
creditors' rights or remedies in general, and (ii) rules of Law governing
specific performance, injunctive relief and other equitable remedies, of
the Company, Galaxy Mall and IMI and of each other Person that is a party
thereto, and except as set forth in SECTION 2.13 OF THE DISCLOSURE
SCHEDULE, there is no, and the Company, Galaxy Mall or IMI have not
received any notice of default (or any condition or event which, after
notice or lapse of time or both, would constitute a default) thereunder.
The Company, Galaxy Mall and IMI do not owe any brokerage commissions
with respect to any such leased space.
(c) The Company has delivered to Parent prior to the execution of
this Agreement true and complete copies of all such leases (including any
amendments and renewal letters).
(d) The improvements on the real property identified in SECTION 2.13
OF THE DISCLOSURE SCHEDULE are in good operating condition, are adequate
and suitable for the purposes for which they are presently being used
and, to the Knowledge of the Company, there are no condemnation or
appropriation proceedings pending or threatened against any of such real
property or the improvements thereon.
2.14 TANGIBLE PERSONAL PROPERTY; INVESTMENT ASSETS.
(a) Each of the Company, Galaxy Mall and IMI is in possession of and
has good title to, or has valid leasehold interests in or valid rights
under Contract to use, all tangible personal property used in or
reasonably necessary for the conduct of their business, including all
tangible personal property reflected on the balance sheet included in the
Financial Statements and tangible personal property acquired since
September 30, 1999 other than property disposed of since such date in the
ordinary course of business consistent with past practice. All such
tangible personal property is free and clear of all Liens, other than
Permitted Liens, and is in good working order and condition, ordinary
wear and tear excepted, and its use complies in all material respects
with all applicable Laws.
(b) SECTION 2.14 OF THE DISCLOSURE SCHEDULE describes each Investment
Asset owned by the Company, Galaxy Mall or IMI on the date hereof. All
such Investment Assets are owned by the Company, Galaxy Mall or IMI free
and clear of all Liens other than Permitted Liens.
2.15 INTELLECTUAL PROPERTY RIGHTS. The only Intellectual Property
owned or exclusively licensed by the Company, Galaxy Mall and IMI, as the
case may be, is the Company Intellectual Property, the Company Registered
Intellectual Property, Galaxy Mall Intellectual Property, Galaxy Mall
Registered Intellectual Property, IMI Intellectual Property, and IMI
Registered Intellectual Property. SECTION 2.15 OF THE DISCLOSURE SCHEDULE
sets forth a complete and accurate list of all Company Registered
Intellectual Property, Galaxy Mall Registered Intellectual Property and IMI
Registered Intellectual Property. No other material Intellectual Property or
material Registered Intellectual Property, claimed by the Company, Galaxy
Mall or IMI, is used in the conduct of the business of the Company, Galaxy
Mall or IMI as it is presently conducted.
Except as set forth on SECTION 2.15 OF THE DISCLOSURE SCHEDULE:
(a) No Company Intellectual Property, Galaxy Mall Intellectual
Property or IMI Intellectual Property or product or service of the
Company, Galaxy Mall or IMI is subject to any proceeding or outstanding
decree, order, judgment, agreement, or stipulation restricting in any
manner the use, transfer, or licensing thereof by the Company, Galaxy
Mall or IMI, or
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which may affect the validity, use or enforceability of such Company
Intellectual Property, Galaxy Mall Intellectual Property or IMI
Intellectual Property, which in any such case would be reasonably likely
to have a Material Adverse Effect on the Company, Galaxy Mall or IMI.
(b) Each material item of the Company Registered Intellectual
Property, Galaxy Mall Registered Intellectual Property and IMI Registered
Intellectual Property is valid and subsisting. All necessary
registration, maintenance and renewal fees currently due in connection
with such Registered Intellectual Property have been made and all
necessary documents, recordations and certificates in connection with
such Registered Intellectual Property have been filed with the relevant
patent, copyright, trademark or other authorities in the United States or
foreign jurisdictions, as the case may be, for the purposes of
maintaining such Registered Intellectual Property, except where the
failure to do so would not be reasonably likely to have a Material
Adverse Effect on the Company, Galaxy Mall or IMI.
(c) Each of the Company, Galaxy Mall and IMI owns and has good and
exclusive title to, or has license (sufficient for the conduct of its
business as currently conducted and as proposed to be conducted) to, each
item of the Company Intellectual Property, Galaxy Mall Intellectual
Property and IMI Intellectual Property, respectively, used in connection
with the conduct of its business as currently conducted and as proposed
to be conducted free and clear of any Liens (excluding licenses and
related restrictions); and, except as disclosed in SECTION 2.15(C) OF THE
DISCLOSURE SCHEDULE, each of the Company, Galaxy Mall and IMI is the
exclusive owner of all trademarks and trade names used in connection with
and material to the operation or conduct of the business of the Company,
Galaxy Mall and IMI, respectively, including the sale of any products or
the provision of any services by the Company, Galaxy Mall and IMI.
(d) Each of the Company, Galaxy Mall and IMI owns exclusively, and
has good title to, all copyrighted works that are Galaxy Mall's products
or IMI's products or which the Company, Galaxy Mall or IMI otherwise
expressly purports in writing to own.
(e) To the extent that any Intellectual Property has been developed
or created by a third party for the Company, Galaxy Mall or IMI, the
Company, Galaxy Mall or IMI, as the case may be, has a written agreement
with such third party with respect thereto and the Company, Galaxy Mall
or IMI thereby either (i) has obtained ownership of and is the exclusive
owner of, or (ii) has obtained a license (sufficient for the conduct of
its business as currently conducted and as proposed to be conducted) to
all such third party's Intellectual Property in such work, material or
invention by operation of Law or by valid assignment.
(f) SECTION 2.15 OF THE DISCLOSURE SCHEDULE lists all material
contracts, licenses and agreements to which each of the Company, Galaxy
Mall and IMI is a party (i) with respect to the Company Intellectual
Property, Galaxy Mall Intellectual Property or IMI Intellectual Property
licensed or transferred to any third party (other than end-user licenses
in the ordinary course); or (ii) pursuant to which a third party has
licensed or transferred any material Intellectual Property to the
Company, Galaxy Mall or IMI other than non-exclusive licenses to use
commercially available software products.
(g) All material contracts, licenses and agreements relating to the
Company Intellectual Property, the Galaxy Mall Intellectual Property and
IMI Intellectual Property are in full force and effect. The consummation
of the transactions contemplated by this Agreement will neither violate
nor result in the breach, modification, cancellation, termination, or
suspension of such contracts, licenses and agreements in accordance with
its terms, the effect of which would have a Material Adverse Effect on
the Company, Galaxy Mall or IMI. Each of the Company, Galaxy Mall and IMI
is in material compliance with, and has not materially breached any term
of any of such contracts, licenses and agreements and, to the knowledge
of each of the
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Company, Galaxy Mall and IMI, all other parties (other than end users or
customers under standard form agreements) to such contracts, licenses and
agreements are in compliance in all material respects with, and have not
materially breached any term of, such contracts, licenses and agreements.
Following the Closing Date, Parent will be permitted to exercise all of
the Company's, Galaxy Mall's and IMI's rights under such contracts,
licenses and agreements to the same extent the Company, Galaxy Mall and
IMI would have been able to had the transactions contemplated by this
Agreement not occurred and without the payment of any additional amounts
or consideration other than ongoing fees, royalties or payments which the
Company, Galaxy Mall and IMI would otherwise be required to pay.
(h) The operation of the business of each of the Company, Galaxy Mall
and IMI as such business currently is conducted, including each of the
Company's, Galaxy Mall's and IMI's design, development, marketing and
sale of the products or services of the Company, Galaxy Mall and IMI
(including with respect to products currently under development), to the
Knowledge of the Company, has not, does not and will not infringe or
misappropriate the Intellectual Property of any third party or, to the
Knowledge of the Company, Galaxy Mall and IMI, constitute unfair
competition or trade practices under the Laws of any jurisdiction.
(i) Each of the Company, Galaxy Mall and IMI has not received written
notice from any third party, and to the Knowledge of the Company, Galaxy
Mall and IMI, no other pending overt threat from any third party, that
the operation of the business of the Company, Galaxy Mall or IMI or any
act, product or service of the Company, Galaxy Mall or IMI, infringes or
misappropriates the Intellectual Property of any third party or
constitutes unfair competition or trade practices under the Laws of any
jurisdiction.
(j) To the Knowledge of the Company, Galaxy Mall and IMI, no person
has been or is infringing or misappropriating any Company Intellectual
Property, Galaxy Mall Intellectual Property or IMI Intellectual Property.
(k) Each of the Company, Galaxy Mall and IMI has taken reasonable
steps to protect its confidential information and trade secrets that they
wish to protect or any trade secrets or confidential information of third
parties provided to the Company, Galaxy Mall or IMI, and, without
limiting the foregoing, the Company, Galaxy Mall and IMI have and enforce
a policy requiring each employee and contractor to execute a proprietary
information/confidentiality agreement in substantially the form provided
to Parent, and except under confidentiality obligations, there has been
not disclosure by the Company, Galaxy Mall or IMI of any such trade
secrets or confidential information.
(l) Each of the Company, Galaxy Mall and IMI has delivered to Parent
prior to the execution of this Agreement documentation in its possession
with respect to any material invention, process, design, computer program
or other know how or trade secret included in the Intellectual Property
and Registered Intellectual Property, which documentation is accurate in
all material respects and reasonably sufficient in detail and content to
identify and explain such invention, process, design, computer program or
other know how or trade secret and to facilitate its full and proper use
without reliance on the special knowledge or memory of any Person.
Nothing is this SECTION 2.15(L) shall be construed to require the Company
or any Subsidiary to prepare any documentation which they do not already
have in their possession.
(m) Notwithstanding anything to the contrary in this Agreement, the
only representations and warranties being furnished by the Company,
Galaxy Mall and IMI with respect to Company Intellectual Property,
Company Registered Intellectual Property, Galaxy Mall Intellectual
Property, Galaxy Mall Registered Intellectual Property, IMI Intellectual
Property and IMI Registered Intellectual Property are those set forth in
this SECTION 2.15 or as may be
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necessary in connection with the representations and warranties set forth
in SECTIONS 2.07, 2.08, 2.09, 2.11, 2.26 or 2.27.
2.16 CONTRACTS.
(a) SECTION 2.16(A) OF THE DISCLOSURE SCHEDULE (with paragraph
references corresponding to those set forth below) contains a true and
complete list of each of the following Contracts or other arrangements
(true and complete copies or, if none, reasonably complete and accurate
written descriptions of which, together with all amendments and
supplements thereto and all waivers of any terms thereof, have been
delivered to Parent prior to the execution of this Agreement) to which
the Company, Galaxy Mall or IMI is a party or by which any of their
Assets and Properties are bound:
(i) (A) all Contracts (excluding Plans and Benefit Programs or
Agreements) providing for a commitment of employment or consultation
services for a specified or unspecified term to, or otherwise
relating to employment or the termination of employment of, any
Employee, the name, position and rate of compensation of each
Employee party to such a Contract and the expiration date of each
such Contract exceeding $50,000; and (B) any written or unwritten
representations, commitments, promises, communications or courses of
conduct (excluding Plans and Benefit Programs or Agreements and any
such Contracts referred to in clause (A)) involving an obligation of
the Company, Galaxy Mall or IMI to make payments in any year, other
than with respect to salary or incentive compensation payments in the
ordinary course of business, to any Employee exceeding $100,000 or
any group of Employees exceeding $100,000 in the aggregate;
(ii) all Contracts with any Person containing any provision or
covenant prohibiting or limiting the ability of the Company, Galaxy
Mall or IMI to engage in any business activity or compete with any
Person in connection with the Business or prohibiting or limiting the
ability of any Person to compete with the Company, Galaxy Mall or IMI
in connection with the Business;
(iii) all partnership, joint venture, shareholders' or other
similar Contracts with any Person in connection with the Business;
(iv) all Contracts with distributors, dealers, manufacturer's
representatives, sales agencies or franchises with whom the Company,
Galaxy Mall or IMI deals in connection with the Business;
(v) all Contracts relating to the future disposition or
acquisition of any Assets and Properties, other than dispositions or
acquisitions of inventory in the ordinary course of business
consistent with past practice;
(vi) all collective bargaining or similar labor Contracts
covering any Employee;
(vii) all other Contracts (other than Plans and Benefit Programs
or Agreements, the Real Property Leases and insurance policies listed
in SECTION 2.18 OF THE DISCLOSURE SCHEDULE and those Contracts listed
on SECTION 2.15 or 2.17 OF THE DISCLOSURE SCHEDULE) with respect to
the Business that (A) involve the payment or potential payment,
pursuant to the terms of any such Contract, by or to Galaxy Mall or
IMI of more than $25,000 annually and (B) cannot be terminated within
thirty (30) days after giving notice of termination without resulting
in any material cost or penalty to the Company, Galaxy Mall or IMI;
and
(viii)without limiting any of the foregoing, all Contracts
relating to any strategic alliance with another Person, including,
without limitation, Earthlink, Professional
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Marketing International, United Marketing Solutions, and
International Television Products.
Notwithstanding the foregoing, the Company represents and warrants that
it or its Subsidiaries have entered into approximately 40,000 Contracts with
online merchants and, with the consent of Parent, will not be required to
list each such Contract on the DISCLOSURE SCHEDULE unless any such Contract,
individually, is material to the Business or Condition of the Company. The
Company has hereto furnished to Parent representative examples of all of the
types of online merchant Contracts presently used by the Company or its
Subsidiaries. The Company further represents and warrants that IMI has
entered into approximately 100 customer Contracts and, with the consent of
Parent, will not be required to list each such Contract on the DISCLOSURE
SCHEDULE unless any such Contract, individually, exceeds $10,000.
(b) Each Contract required to be disclosed in SECTION 2.16(A) OF THE
DISCLOSURE SCHEDULE is in full force and effect and constitutes a legal,
valid and binding agreement, enforceable in accordance with its terms, of
each party thereto, except as enforcement thereof may be limited by (i)
Laws of general application relating to bankruptcy, insolvency
moratorium, reorganization or other similar Laws, both state and federal,
affecting the enforcement of creditors' rights or remedies in general,
and (ii) rules of Law governing specific performance, injunctive relief
and other equitable remedies; and except as disclosed in SECTION 2.16(B)
OF THE DISCLOSURE SCHEDULE, neither the Company, Galaxy Mall nor IMI nor,
to the Knowledge of the Company, Galaxy Mall or IMI, any other party to
such Contract is, or has received notice that it is, in violation or
breach of or default under any such Contract (or with notice or lapse of
time or both, would be in violation or breach of or default under any
such Contract) in any material respect.
(c) Except as disclosed in SECTION 2.16(C) OF THE DISCLOSURE
SCHEDULE, (i) the execution, delivery and performance by the Company of
this Agreement, and the consummation of the transactions contemplated
hereby, will not (A) result in or give to any Person any right of
termination, cancellation, acceleration or modification in or with
respect to, (B) result in or give to any Person any additional rights or
entitlement to increased, additional, accelerated or guaranteed payments
under, or (C) result in the creation or imposition of any Lien upon the
Company, Galaxy Mall or IMI or any of their Assets and Properties under,
any Contract, and (ii) Company, Galaxy Mall, and IMI are not parties to
or bound by any Contract that has been or could reasonably be expected to
be, individually or in the aggregate with any other Contracts, materially
adverse to the Business or Condition of the Company, Galaxy Mall, or IMI.
2.17 LICENSES. SECTION 2.17 OF THE DISCLOSURE SCHEDULE contains a true and
complete list of all Licenses used in and material, individually or in the
aggregate, to the business or operations of the Company, Galaxy Mall and IMI
(and all pending applications for any such Licenses), setting forth the grantor,
the grantee and the function. Prior to the execution of this Agreement, each of
the Company, Galaxy Mall or IMI has delivered to Parent true and complete copies
of all such Licenses. Except as disclosed in SECTION 2.17 OF THE DISCLOSURE
SCHEDULE:
(i) Each of the Company, Galaxy Mall and IMI owns or validly
holds all Licenses that are material, individually or in the
aggregate, to its business or operations;
(ii) Each License listed in SECTION 2.17 OF THE DISCLOSURE
SCHEDULE is valid, binding and in full force and effect; and
(iii) Neither the Company, Galaxy Mall nor IMI is not, nor has it
received any notice that it is, in default (or with the giving of
notice or lapse of time or both, would be in default) under any such
License.
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2.18 INSURANCE. SECTION 2.18 OF THE DISCLOSURE SCHEDULE contains a
true and complete list (including the names and addresses of the insurers,
the names of the Persons to whom such Policies have been issued, the
expiration dates thereof, the annual premiums and payment terms thereof,
whether it is a "claims made" or an "occurrence" policy and a brief
description of the interests insured thereby) of all liability, property,
workers' compensation and other insurance policies currently in effect that
insure the Business, the employees or the Assets and Properties. Each such
insurance policy is valid and binding and in full force and effect, all
premiums due thereunder have been paid and neither the Company nor its
Subsidiaries have received any notice of cancellation or termination in
respect of any such policy or is in default thereunder. Such insurance
policies are placed with financially sound and reputable insurers and, in
light of the nature of the business and the Assets and Properties, are in
amounts and have coverages that are reasonable and customary for Persons
engaged in such business and having such Assets and Properties. Neither the
Company, its Subsidiaries nor any other Person to whom such policies have
been issued have received notice that any insurer under any policy referred
to in this Section is denying liability with respect to a claim thereunder
or defending under a reservation of rights clause.
2.19 TRANSACTIONS WITH AFFILIATES. Except as set forth in the Company
SEC Reports, no event has occurred that would be required to be reported by
the Company pursuant to Item 404 of Regulation S-K promulgated by the SEC.
SECTION 2.19 OF THE DISCLOSURE SCHEDULE identifies each person who is an
"affiliate" (as that term is used in Rule 145 promulgated under the
Securities Act) of the Company as of the date of this Agreement.
2.20 EMPLOYEES; LABOR RELATIONS.
(a) SECTION 2.20(A) OF THE DISCLOSURE SCHEDULE contains a list of the
name of each officer and employee of Galaxy Mall and IMI at the date
hereof, together with each such person's position or function, annual
base salary or wages and any incentive or bonus arrangement with respect
to such person in effect on such date.
Except as set forth on SCHEDULE 2.20(B) OF THE DISCLOSURE SCHEDULE:
(b) Neither the Company, Galaxy Mall, nor IMI has received any
information that would lead it to believe that a material number of such
persons will or may cease to be employees, or will refuse offers of
employment from Parent, because of the consummation of the transactions
contemplated by this Agreement. All employees, consultants, officers and
directors of the Company, Galaxy Mall and IMI that have had access to the
Business are parties to a written agreement, under which each such person
or entity (i) is obligated to disclose and transfer to the Company
without the receipt by such person of any additional value therefor
(other than normal salary or fees for consulting services), all
inventions, developments and discoveries which, during the period of
employment with or performance of services for the Company, Galaxy Mall
or IMI, he or she makes or conceives of either solely or jointly with
others, that relate to any subject matter with which his or her work for
the Company, Galaxy Mall or IMI in the Business may be concerned, and
(ii) is obligated to maintain the confidentiality of proprietary
information of the Business. To each of the Company's, Galaxy Mall's and
IMI's Knowledge, none of the Company's, Galaxy Mall's or IMI's employees,
consultants, officers or directors is obligated under any contract
(including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would conflict with their obligation to
promote the interests of the Company, Galaxy Mall or IMI with regard to
the Business or the Assets and Properties or that would conflict with the
Business or the Assets and Properties. Neither the execution nor the
delivery of this Agreement, nor the carrying on of the Business by the
employees and consultants of the Company and its Subsidiaries, will
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conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such persons or entities are now obligated.
To the Knowledge of the Company, it is currently not necessary nor will
it be necessary for the Company, Galaxy Mall or IMI to utilize in the
Business any inventions of any of such persons or entities (or people it
currently intends to hire) made or owned prior to their employment by or
affiliation with the Company, Galaxy Mall or IMI, nor, to the Knowledge
of the Company, is it or will it be necessary to utilize any other assets
or rights of any such persons or entities (or people it currently intends
to hire) made or owned prior to their employment with or engagement by
the Company, Galaxy Mall or IMI, in violation of any registered patents,
trade names, trademarks or copyrights or any other limitations or
restrictions to which any such persons or entity is a party or to which
any of such assets or rights may be subject. To the Company's Knowledge,
none of the Company's, Galaxy Mall's or IMI's employees, consultants,
officers, directors or shareholders that has had knowledge or access to
information relating to their Assets and Properties has taken, removed or
made use of any proprietary documentation, manuals, products, materials,
or any other tangible item from his or her previous employer relating to
their Assets and Properties by such previous employer which has resulted
in the Company's, Galaxy Mall's or IMI's access to or use of such
proprietary items included in the Assets and Properties, and the Company,
Galaxy Mall and IMI will not gain access to or make use of any such
proprietary items in the business.
2.21 BANK AND BROKERAGE ACCOUNTS; INVESTMENT ASSETS. SECTION 2.21 OF THE
DISCLOSURE SCHEDULE sets forth (a) a true and complete list of the names and
locations of all banks, trust companies, securities brokers and other financial
institutions at which the Company, Galaxy Mall or IMI has an account or safe
deposit box or maintains a banking, custodial, trading or other similar
relationship; (b) a true and complete list and description of each such account,
box and relationship, indicating in each case the account number and the names
of the respective officers, employees, agents or other similar representatives
of the Company, Galaxy Mall or IMI having signatory power with respect thereto;
and (c) a list of each Investment Asset, the name of the record and beneficial
owner thereof, the location of the certificates, if any, therefor, the maturity
date, if any, and any stock or bond powers or other authority for transfer
granted with respect thereto.
2.22 NO POWERS OF ATTORNEY. Except in the ordinary course of business
consistent with past practice, neither the Company, Galaxy Mall nor IMI have any
powers of attorney or comparable delegations of authority outstanding.
2.23 ACCOUNTS RECEIVABLE. Except as otherwise set forth on SECTION 2.23 OF
THE DISCLOSURE SCHEDULE, the accounts and notes receivable of the Company,
Galaxy Mall and IMI reflected on the balance sheets included in the Financial
Statements, and all accounts and notes receivable arising subsequent to December
31, 1998, (i) arose from bona fide sales transactions in the ordinary course of
business and are payable on ordinary trade terms, except as enforcement thereof
may be limited by (x) Laws of general application relating to bankruptcy,
insolvency moratorium, reorganization or other similar Laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in general,
and (y) rules of Law governing specific performance, injunctive relief and other
equitable remedies, (ii) are legal, valid and binding obligations of the
respective debtors enforceable in accordance with their terms, except as
enforcement thereof may be limited by (x) Laws of general application relating
to bankruptcy, insolvency moratorium, reorganization or other similar Laws, both
state and federal, affecting the enforcement of creditors' rights or remedies in
general, and (y) rules of Law governing specific performance, injunctive relief
and other equitable remedies, (iii) are not subject to any valid set-off or
counterclaim, (iv) do not represent obligations for goods sold on consignment,
on approval or on a sale-or-return basis or subject to any other repurchase or
return arrangement, (v) are collectible in the ordinary course of business
consistent with past practice in the aggregate recorded
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amounts thereof, net of any applicable reserve reflected in the balance sheet
included in the Financial Statements, and (vi) are not the subject of any
Actions or Proceedings brought by or on behalf of the Company, Galaxy Mall or
IMI. SECTION 2.23 OF THE DISCLOSURE SCHEDULE sets forth a description of any
security arrangements and collateral securing the repayment or other
satisfaction of receivables of the Company, Galaxy Mall or IMI. All steps
reasonably necessary to render all such security arrangements legal, valid,
binding and enforceable, and to give and maintain for the Company, Galaxy Mall
or IMI a security interest in the related collateral, have been taken.
2.24 INVENTORY. All inventory of the Company, Galaxy Mall and IMI
reflected on the balance sheet included in the Financial Statements consisted,
and all such inventory acquired since September 30, 1999 consists, of a quality
and quantity usable and salable in the ordinary course of business consistent
with past practice, subject to normal and customary allowances in the industry
for spoilage, damage and outdated items. Except as disclosed in SECTION 2.24 OF
THE DISCLOSURE SCHEDULE or the notes to the Financial Statements, all items
included in the inventory of the Company, Galaxy Mall or IMI are the property of
the Company, Galaxy Mall or IMI, respectively, free and clear of any Lien other
than Permitted Liens, have not been pledged as collateral, are not held by the
Company, Galaxy Mall or IMI on consignment from others and conform in all
material respects to all standards applicable to such inventory or its use or
sale imposed by Governmental or Regulatory Authorities.
2.25 BROKERS OR FINDERS. The Company represents, as to itself, its
Subsidiaries and its Affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person, other than as set forth on SECTION
2.25 OF THE DISCLOSURE SCHEDULE, is or will be entitled to any brokers' or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement, and the Company agrees to
indemnify and hold Parent and Merger Sub harmless from and against any and all
claims, liabilities or obligations with respect to any other commissions or
similar fees in connection with any of the transactions contemplated by this
Agreement which are asserted by any person on the basis of any act or statement
alleged to have been made by or on behalf of the Company. The Company has
heretofore furnished to Parent a complete and correct copy of all agreements
between the Company and the parties set forth on SECTION 2.25 OF THE DISCLOSURE
SCHEDULE pursuant to which such party would be entitled to any payment relating
to the transactions contemplated hereby.
2.26 DISCLOSURE. All material facts relating to the Business or Condition
of the Company, Galaxy Mall and IMI have been disclosed to Parent in or in
connection with this Agreement. No representation or warranty contained in this
Agreement, and no statement contained in the DISCLOSURE SCHEDULE or in any
certificate, list or other writing furnished to Parent pursuant to any provision
of this Agreement (including without limitation the Financial Statements),
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein, in the light
of the circumstances under which they were made, not misleading. None of the
information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference in the registration statement on Form
S-4 (or similar successor form) to be filed with the SEC by Parent in connection
with the issuance of Parent Common Stock in the Merger (including amendments or
supplements thereto) (the "Registration Statement") will, at the time the
Registration Statement becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading, except
that no representation or warranty is made by the Company with respect to
statements made or incorporated by reference therein about Parent or Merger Sub
supplied by Parent for inclusion or incorporation by reference in the
Registration Statement. None of the information supplied or to be supplied by or
on behalf of the Company for inclusion or incorporation by reference in the
Prospectus/ Proxy Statement to be filed with the SEC as part of the Registration
Statement (the "Prospectus/Proxy Statement"), will, at the time the
Prospectus/Proxy Statement is first mailed to the stockholders of the
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Company or Parent, at the time of the Company Stockholders' Meeting or Parent
Stockholders' Meeting or as of the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they are made, not misleading. The
Prospectus/Proxy Statement will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations promulgated by
the SEC thereunder, except that no representation or warranty is made by the
Company with respect to statements made or incorporated by reference therein
about Parent or Merger Sub supplied by Parent for inclusion or incorporation by
reference in the Prospectus/Proxy Statement.
2.27 Y2K. To the Knowledge of the Company, all Intellectual Property and
Registered Intellectual Property in the form of computer software that is
utilized by the Company, Galaxy Mall, or IMI in the operation of each of their
respective Businesses is capable of processing date data between and within 1999
and 2000.
2.28 CHANGE OF CONTROL PAYMENTS. SECTION 2.28 OF THE DISCLOSURE SCHEDULE
sets forth each plan or agreement pursuant to which any amounts may become
payable (whether currently or in the future) to current or former employees and
directors of the Company or any of its Subsidiaries as a result of or in
connection with the Merger.
2.29 OPINION OF FINANCIAL ADVISOR. The Company has been advised in writing
by its financial advisor, Houlihan Lokey Howard & Zukin, that in its opinion, as
of the date of this Agreement, the Exchange Ratio is fair to the holders of
shares of the Company Common Stock from a financial point of view.
2.30 BOARD APPROVAL. The Board of Directors of the Company has, as of the
date of this Agreement, unanimously (i) approved, subject to shareholder
approval, this Agreement and the transaction contemplated hereby, (ii)
determined that the Merger is in the best interests of the shareholders of the
Company and is on the terms that are fair to such shareholders and (iii)
recommended that the shareholders of the Company approve this Agreement and the
Merger.
2.31 POOLING OF INTERESTS. To its Knowledge, based on consultation with
its independent accountants, neither the Company nor any of its directors,
officers or affiliates has taken any action which would interfere with Parent's
ability to account for the Merger as a pooling of interests.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
3.01 AUTHORITY. This Agreement has been duly and validly executed and
delivered by Parent and Merger Sub constitutes a legal, valid and binding
obligation of Parent and Merger Sub, and is enforceable against Parent and
Merger Sub in accordance with its terms, except as enforcement thereof may
be limited by (i) Laws of general application relating to bankruptcy,
insolvency moratorium, reorganization or other similar Laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in
general, and (ii) rules of Law governing specific performance, injunctive
relief and other equitable remedies.
3.02 ORGANIZATION. Parent and Merger Sub are corporations duly
organized, validly existing and in good standing under the Laws of the State
of Delaware . Parent has full corporate power and authority to conduct its
business as and to the extent now conducted and to own, use and lease its
Assets and Properties. Parent has prior to the execution of this Agreement
delivered to the Company true and complete copies of Parent's and Merger
Sub's charter documents as in effect on the date hereof.
3.03 CAPITAL STOCK. The authorized capital stock of Parent consists of
40,000,000 shares of common stock. As of March 7, 2000, the number of
outstanding shares of common stock was 17,333,217 shares. The Parent Common
Stock, when issued by Parent to the Company's Stockholders in accordance
with the terms of this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable, and will be free and clear of any preemptive
or similar rights with respect thereto.
3.04 SUBSIDIARIES. In addition to Merger Sub, Parent has the
Subsidiaries listed on SECTION 3.04 OF THE DISCLOSURE SCHEDULE.
3.05 NO CONFLICTS. Subject to Parent obtaining the approval and
adoption of this Agreement by the affirmative vote of the holders of a
majority of the outstanding shares of Parent Common Stock (the "Parent
Stockholder Approval"), the execution and delivery by Parent of this
Agreement does not, and the performance of its obligations under this
Agreement and the consummation of the transactions contemplated hereby will
not:
(a) Conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the articles of incorporation or
bylaws (or other comparable corporate charter documents) of Parent;
(b) Conflict with or result in a violation or breach of any term or
provision of any Law or Order applicable to Parent or any of its
respective Assets and Properties; or
(c) (i) Conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default
under, (iii) require Parent to obtain any consent, approval or action of,
make any filing with or give any notice to any Person as a result or
under the terms of, (iv) result in or give to any Person any right of
termination, cancellation, acceleration or modification in or with
respect to, (v) result in or give to any Person any additional rights or
entitlement to increased, additional, accelerated or guaranteed payments
under, or (vi) result in the creation or imposition of any Lien upon
Parent or any of its respective Assets and Properties under, any Contract
or License to which Parent is a party or by which any of its respective
Assets and Properties is bound.
3.06 BOOKS AND RECORDS. The minute books and other similar records of
Parent were made available to the Company prior to the execution of this
Agreement, and contain a true and
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complete record, in all material respects, of all action taken at all
meetings and by all written consents in lieu of meetings of the
stockholders, the boards of directors and committees of the board of
directors of Parent.
3.07 SEC FILINGS.
(a) Parent has filed all forms, reports and documents required to be
filed by Parent with the SEC since June 30, 1999 and has made available
to the Company such forms, reports and documents in the form filed with
the SEC. All such required forms, reports and documents (including those
that Parent may file subsequent to the date hereof), as amended, are
referred to herein as the "Parent SEC Reports." As of their respective
dates (or, if amended, as of the date of the last such amendment), Parent
SEC Reports (i) were prepared in accordance and complied (or, with
respect to those Parent SEC Reports that may be filed subsequent to the
date hereof, will be prepared in accordance and will comply) in all
material respects with the requirements of the Securities Act, or the
Exchange Act, as the case may be, and the rules and regulations of the
SEC thereunder applicable to such Parent SEC Reports and (ii) did not at
the time they were filed (or, with respect to those Parent SEC Reports
that may be filed subsequent to the date hereof, will not) contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, except to the extent corrected or superseded
prior to the date hereof by a subsequently filed Parent SEC Report. None
of Parent's Subsidiaries are required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Parent SEC Reports (the
"Parent Financials"), including each Parent SEC Report filed after the
date hereof until the Closing, (i) complied (or, with respect to those
Parent SEC Reports that may be filed subsequent to the date hereof, will
comply) as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, (ii) was prepared (or, with
respect to those Parent SEC Reports that may be filed subsequent to the
date hereof, will be prepared) in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be
indicated in the notes thereto or, in the case of unaudited interim
financial statements, as may be permitted by the SEC on Form 10-QSB,
10-KSB or any successor form under the Exchange Act) and (iii) fairly
presented (or, with respect to those Parent SEC Reports that may be filed
subsequent to the date hereof, will fairly present) in all material
respects the consolidated financial position of Parent and its
consolidated Subsidiaries as at the respective dates thereof and the
consolidated results of Parent's operations and cash flows for the
periods indicated, except that the unaudited interim financial statements
may not contain footnotes and were or are subject to normal and recurring
year-end adjustments. The balance sheet of Parent contained in Parent SEC
Report as of September 30, 1999 is hereinafter referred to as (the
"Parent Balance Sheet"). Except as disclosed in the Parent Financials,
since the date of the Parent Balance Sheet neither Parent nor any of its
Subsidiaries has any liabilities required under GAAP to be set forth on a
consolidated balance sheet (absolute, accrued, contingent or otherwise)
which are, individually or in the aggregate, material to the business,
results of operations or financial condition of Parent and its
Subsidiaries taken as a whole, except for liabilities incurred since the
date of the Parent Balance Sheet in the ordinary course of business
consistent with past practices and liabilities incurred pursuant to this
Agreement.
(c) Parent has heretofore furnished (or, with respect to copies which
are not yet available, will furnish) to the Company a complete and
correct copy of any amendments or modifications, which have not yet been
filed with the SEC but which are required to be filed,
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to agreements, documents or other instruments which previously had been
filed by Parent with the SEC pursuant to the Securities Act or the
Exchange Act.
3.08 ABSENCE OF CHANGES. Except for the execution and delivery of this
Agreement and the transactions to take place pursuant hereto on or prior to
the Closing Date, or as disclosed on SECTION 3.08 OF THE DISCLOSURE
SCHEDULE, since September 30, 1999, there has not been (i) any Material
Adverse Effect on Parent, (ii) any declaration, setting aside or payment of
any dividend on, or other distribution (whether in cash, stock or property)
in respect of any of Parent's capital stock, or any purchase, redemption or
other acquisition by Parent of any of Parent's capital stock, any other
securities, or any options, warrants, calls or rights to acquire any such
shares or other securities except for repurchases from employees following
their termination pursuant to the terms of their pre-existing stock option
or purchase agreements, (iii) any split, combination or reclassification of
any of the Parent's capital stock, (iv) any material change by Parent in its
accounting methods, principles or practices, except as required by
concurrent changes in GAAP, or (v) any material revaluation by Parent of any
of its assets, including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business.
3.09 NO UNDISCLOSED LIABILITIES. Except as reflected or reserved
against in the balance sheet included in the Parent Financials, there are no
Liabilities against, relating to or affecting Parent or any of its
respective Assets and Properties, other than Liabilities incurred since
September 30, 1999 in the ordinary course of business, none of which,
individually or in the aggregate, are material to the Business or Condition
of Parent.
3.10 LEGAL PROCEEDINGS.
(a) Except as disclosed in SECTION 3.10 OF THE DISCLOSURE SCHEDULE,
there are no Actions or Proceedings pending or, to the Knowledge of
Parent, threatened against, relating to or affecting Parent or any of its
Assets and Properties which (i) could reasonably be expected to result in
the issuance of an Order restraining, enjoining or otherwise prohibiting
or making illegal the consummation of any of the transactions
contemplated by this Agreement or otherwise result in a material
diminution of the benefits contemplated by this Agreement to the Company,
or (ii) if determined adversely against the Parent, could reasonably be
expected to result in (x) any injunction or other equitable relief
against Parent that would interfere in any material respect with its
business or operations or (y) Losses by Parent, individually or in the
aggregate with Losses in respect of other such Actions or Proceedings,
exceeding $100,000.00;
(b) There are no facts or circumstances Known to Parent that could
reasonably be expected to give rise to any Action or Proceeding that
would be required to be disclosed pursuant to clause (a) above; and
(c) There are no Orders outstanding against Parent.
3.11 COMPLIANCE WITH LAWS AND ORDERS. Parent is not, nor has at any
time been, nor has it received any notice that it is nor has at any time
been, in violation of or in default under, in any material respect, any Law
or Order applicable to any or any of its Assets and Properties, the
consequences of which could have a Material Adverse Effect on Parent.
3.12 NO POWERS OF ATTORNEY. Parent does not have any powers of
attorney or comparable delegations of authority outstanding.
3.13 BROKERS OR FINDERS. Parent represents, as to itself, its
Subsidiaries and its Affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person, other than as set forth on
SECTION 3.13 OF THE DISCLOSURE SCHEDULE, is or will be entitled to any
brokers' or finder's fee
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or any other commission or similar fee in connection with any of the
transactions contemplated by this Agreement, and Parent agrees to indemnify
and hold the Company harmless from and against any and all claims,
liabilities or obligations with respect to any other commissions or similar
fees in connection with any of the transactions contemplated by this
Agreement which are asserted by any person on the basis of any act or
statement alleged to have been made by or on behalf of Parent. Parent has
heretofore furnished to the Company a complete and correct copy of all
agreements between Parent and the parties set forth on SECTION 3.13 OF THE
DISCLOSURE SCHEDULE pursuant to which such party would be entitled to any
payment relating to the transactions contemplated hereby.
3.14 TAXES. Except as otherwise disclosed in the Parent SEC Reports,
Parent has filed all Tax Returns which are required to have been filed in
any jurisdiction, and has paid all Taxes shown to be due and payable on such
returns and all other Taxes payable by Parent to the extent the same have
become due and payable and before they have become delinquent. Parent knows
of no proposed material assessment for Taxes against Parent and in the
opinion of Parent, all liabilities for Taxes are adequately provided for on
the books of Parent.
3.15 DISCLOSURE. All material facts relating to the Business or
Condition of Parent have been disclosed to the Company in or in connection
with this Agreement. No representation or warranty contained in this
Agreement, and no statement contained in the DISCLOSURE SCHEDULE or in any
certificate, list or other writing furnished to the Company pursuant to any
provision of this Agreement (including without limitation the Parent
Financials), contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements herein or
therein, in the light of the circumstances under which they were made, not
misleading. None of the information supplied or to be supplied by or on
behalf of Parent for inclusion or incorporation by reference in the
Registration Statement will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they are made, not misleading, except that
no representation or warranty is made by Parent with respect to statements
made or incorporated by reference therein about the Company supplied by the
Company for inclusion or incorporation by reference in the Registration
Statement. None of the information supplied or to be supplied by or on
behalf of Parent for inclusion or incorporation by reference in the
Prospectus/Proxy Statement, will, at the time the Prospectus/Proxy Statement
is first mailed to the stockholders of the Company or Parent, at the time of
the Company Stockholders' Meeting or Parent Stockholders' Meeting or as of
the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they are made, not misleading. The Prospectus/Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations promulgated by the SEC
thereunder, except that no representation or warranty is made by Parent with
respect to statements made or incorporated by reference therein about the
Company supplied by the Company for inclusion or incorporation by reference
in the Prospectus/Proxy Statement.
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ARTICLE IV
COVENANTS OF THE COMPANY
The Company covenants and agrees with Parent that, at all times from and
after the date hereof until the Effective Time (unless and until this Agreement
is earlier terminated in accordance with ARTICLE XI), the Company will comply
with all covenants and provisions of this ARTICLE IV, except to the extent
Parent may otherwise consent in writing.
4.01 REGULATORY AND OTHER APPROVALS. The Company will as promptly as
practicable (a) take all commercially reasonable steps necessary or
desirable to obtain all consents, approvals or actions of, make all filings
with and give all notices to Governmental or Regulatory Authorities or any
other Person required of the Company to consummate the transactions
contemplated hereby, (b) provide such other information and communications
to such Governmental or Regulatory Authorities or other Persons as Parent or
such Governmental or Regulatory Authorities or other Persons may reasonably
request in connection therewith, and (c) cooperate with Parent in connection
with the performance of its obligations hereunder.
4.02 INVESTIGATION BY PURCHASER. The Company will, and will cause
Galaxy Mall and IMI to (a) provide Parent and its officers, directors,
employees, agents, counsel, accountants, financial advisors, consultants and
other representatives (together "Representatives") with full access, upon
reasonable prior notice and during normal business hours, to all officers,
employees, agents and accountants of the Company, Galaxy Mall, and IMI and
their Assets and Properties and Books and Records, and (b) furnish Parent
and such Representatives with all such information and data (including
without limitation copies of contracts, Benefit Plans and other Books and
Records) concerning the business and operations of the Company, Galaxy Mall,
and IMI as Parent or any of such Representatives reasonably may request in
connection with such investigation.
4.03 NO SOLICITATIONS.
(a) Except for discussions, negotiations and due diligence with DJ
Limited ("DJL") and with investors with whom it works related to a $2.5
million convertible debt offering, provided, however, that the Company
shall not consummate such offering without Parent's consent, from and
after the date of this Agreement until the Effective Time or termination
of this Agreement pursuant to Article XII, the Company and its
Subsidiaries will not, nor will they authorize or permit any of their
respective officers, directors, affiliates or employees or any investment
banker, attorney or other advisor or representative retained by any of
them to, directly or indirectly, (i) solicit, initiate, encourage or
induce the making, submission or announcement of any Acquisition
Proposal, (ii) participate in any discussions or negotiations regarding,
or furnish to any person any non-public information with respect to, or
take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to, any
Acquisition Proposal, (iii) engage in discussions with any person with
respect to any Acquisition Proposal, except as to the existence of these
provisions, (iv) approve, endorse or recommend any Acquisition Proposal
or (v) enter into any letter of intent or similar document or any
contract agreement or commitment contemplating or otherwise relating to
any Acquisition Proposal; provided, however, that nothing contained in
this Agreement shall prohibit or restrict the Board of Directors of the
Company from furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited (from
and after the date of this Agreement) Superior Offer. The Company shall
provide Parent with a copy of any correspondence to be delivered by the
Company in connection with such Superior Offer prior to sending such
correspondence to any third party (but not any attachments thereto
previously provided by the Company to Parent in connection herewith).
Except for discussions, negotiations and due diligence with DJL and with
investors with whom it works related to a $2.5 million convertible debt
offering, provided,
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however, that the Company shall not consummate such offering without
Parent's consent, the Company and its Subsidiaries will immediately cease
any and all existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any Acquisition Proposal.
Without limiting the foregoing, it is understood that any violation of
the restrictions set forth in the preceding two sentences by any officer,
director or employee of the Company or any of its Subsidiaries or any
investment banker, attorney or other advisor or representative of the
Company or any of its Subsidiaries shall be deemed to be a breach of this
SECTION 4.03 by the Company.
(b) In addition to the obligations of the Company set forth in
paragraph (a) of this SECTION 4.03, the Company as promptly as
practicable shall advise Parent orally and in writing of any Acquisition
Proposal or any request for non-public information or inquiry which the
Company reasonably believes would lead to an Acquisition Proposal, the
material terms and conditions of such Acquisition Proposal, request or
inquiry, and the identity of the person or group making any such
Acquisition Proposal, request or inquiry. The Company will keep Parent
informed as promptly as practicable in all material respects of the
status of any such Acquisition Proposal, request or inquiry.
4.04 CONDUCT OF BUSINESS. The Company will, and will cause its
Subsidiaries to, conduct business only in the ordinary course consistent
with past practice.
4.05 CERTAIN RESTRICTIONS. Except as disclosed in SECTION 4.05 OF THE
DISCLOSURE SCHEDULE, the Company will, and will cause its Subsidiaries to,
refrain from:
(a) Amending their articles of incorporation or bylaws (or other
comparable corporate charter documents) or taking any action with respect
to any such amendment or any recapitalization, reorganization,
liquidation or dissolution of any such corporation;
(b) Except with respect to the issuance of shares upon exercise of
existing Options, authorizing, issuing, selling or otherwise disposing of
any shares of capital stock of or any Option with respect to the Company
or its Subsidiaries, or modifying or amending any right of any holder of
outstanding shares of capital stock of or Option with respect to the
Company or its Subsidiaries;
(c) Declaring, setting aside or paying any dividend or other
distribution in respect of the capital stock of the Company or its
Subsidiaries, or directly or indirectly redeeming, purchasing or
otherwise acquiring any capital stock of or any Option with respect to
the Company or its Subsidiaries;
(d) Acquiring or disposing of, or incurring any Lien (other than a
Permitted Lien) on, any Assets and Properties, other than in the ordinary
course of business consistent with past practice;
(e) (i) Entering into, amending, modifying, terminating (partially or
completely), granting any waiver under or giving any consent with respect
to (A) any material Contract or (B) any material License or (ii) granting
any irrevocable powers of attorney;
(f) Violating, breaching or defaulting under in any material respect,
or taking or failing to take any action that (with or without notice or
lapse of time or both) would constitute a material violation or breach
of, or default under, any term or provision of any material License held
or used by the Company, Galaxy Mall and IMI or any Contract to which the
Company, Galaxy Mall or IMI is a party or by which any of its Assets and
Properties is bound;
(g) Incurring Indebtedness in excess of $50,000;
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(h) Engaging with any Person in any merger or other Acquisition
Proposal, except as otherwise permitted by and subject to this Agreement
;
(i) Making capital expenditures in excess of $100,000;
(j) Writing off or writing down any of the Company's, Galaxy Mall's
and IMI's' Assets and Properties;
(k) entering into any Contract to do or engage in any of the
foregoing; or
(l) engaging in any action that could reasonably be expected to (i)
cause the Merger to fail to qualify as a "reorganization" under Section
368(a) of the Code or (ii) interfere with Parent's ability to account for
the Merger as a pooling of interests, whether or not (in each case)
otherwise permitted by the provisions of this Agreement.
4.06 AFFILIATE TRANSACTIONS. Prior to the Closing, the Company, Galaxy
Mall and IMI will not enter into any Contract or amend or modify any
existing Contract and will not engage in any transaction, outside the
ordinary course of business consistent with past practice or not on an
arm's-length basis, with any officer, director or Affiliate thereof.
4.07 NOTICE OF CERTAIN MATTERS. The Company will notify Parent in
writing of, and contemporaneously will provide Parent with true and complete
copies of any and all information or documents relating to, the occurrence
or non-occurrence of any event, transaction or circumstance, as soon as
practicable after it becomes known to the Company, after the date of this
Agreement, the occurrence or non-occurrence of which causes or will cause
any material failure of the Company to comply with or satisfy any covenant
or agreement of the Company that renders or will render untrue or inaccurate
in any material respect, at or prior to the Effective Time, any
representation or warranty of the Company under this Agreement. No notice
given pursuant to this Section shall have any effect on the representations,
warranties, covenants or agreements contained in this Agreement for purposes
of determining satisfaction of any condition contained herein.
4.08 FULFILLMENT OF CONDITIONS; OTHER ACTIONS. Company will take all
commercially reasonable steps necessary or desirable and proceed diligently
and in good faith to (i) satisfy each condition to the obligations of Parent
contained in this Agreement and will not, and will not permit Company or any
Subsidiary to, take or fail to take any action that could reasonably be
expected to result in the nonfulfillment of any such condition, (ii) permit
the parties to realize their intentions as set forth in SECTION 1.10 and
(iii) subject to the terms and conditions herein provided, the Company
agrees to use all reasonable efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or
advisable, whether under applicable Laws or otherwise, or to remove any
injunctions or other impediments or delays, legal or otherwise, to
consummate and make effective the Merger and the other transactions
contemplated by this Agreement and the Ancillary Agreements.
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ARTICLE V
COVENANTS OF PARENT
Parent covenants and agrees with Company that, at all times from and after
the date hereof until the Effective Time (unless and until this Agreement is
earlier terminated in accordance with Article XI), Parent will comply with all
covenants and provisions of this Article V, except to the extent the Company may
otherwise consent in writing.
5.01 REGULATORY AND OTHER APPROVALS. Parent will as promptly as
practicable (a) take all commercially reasonable steps necessary or
desirable to obtain all consents, approvals or actions of, make all filings
with and give all notices to Governmental or Regulatory Authorities or any
other Person required of Parent to consummate the transactions contemplated
hereby, (b) provide such other information and communications to such
Governmental or Regulatory Authorities or other Persons as the Company or
such Governmental or Regulatory Authorities or other Persons may reasonably
request in connection therewith, and (c) cooperate with the Company in
connection with the performance of its obligations hereunder.
5.02 INVESTIGATION BY COMPANY. Parent will (a) provide the Company and
its Representatives with full access, upon reasonable prior notice and
during normal business hours, to all officers, employees, agents and
accountants of the Parent and its Assets and Properties and Books and
Records, and (b) furnish Company and such Representatives with all such
information and data (including without limitation copies of contracts,
Benefit Plans and other Books and Records) concerning the business and
operations of Parent as Company or any of such Representatives reasonably
may request in connection with such investigation.
5.03 CONDUCT OF BUSINESS. Parent will conduct business only in the
ordinary course consistent with past practice.
5.04 CERTAIN RESTRICTIONS. Parent will refrain from:
(a) Declaring, setting aside or paying any dividend or other
distribution in respect of the capital stock of Parent;
(b) Engaging in any action that could reasonably be expected to cause
the Merger to fail to qualify as a "reorganization" under Section 368(a)
of the Code.
5.05 NOTICE OF CERTAIN MATTERS. Parent will notify the Company in
writing of, and contemporaneously will provide the Company with true and
complete copies of any and all information or documents relating to, the
occurrence or non-occurrence of any event, transaction or circumstance, as
soon as practicable after it becomes known to Parent, after the date of this
Agreement, the occurrence or non-occurrence of which causes or will cause
any material failure of the Company to comply with or satisfy any covenant
or agreement of Parent that renders or will render untrue or inaccurate in
any material respect, at or prior to the Effective Time, any representation
or warranty of Parent under this Agreement. No notice given pursuant to this
Section shall have any effect on the representations, warranties, covenants
or agreements contained in this Agreement for purposes of determining
satisfaction of any condition contained herein but shall not give rise to
any other rights of the Company hereunder.
5.06 FULFILLMENT OF CONDITIONS; OTHER ACTIONS. Parent will take all
commercially reasonable steps necessary or desirable and proceed diligently
and in good faith to (i) satisfy each condition to the obligations of the
Company contained in this Agreement, and will not take or fail to take any
action that could reasonably be expected to result in the nonfulfillment of
any such condition, (ii) permit the parties to realize their intentions as
set forth in SECTION 1.10 and (iii) subject to the terms and conditions
herein provided, Parent agrees to use all reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable,
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whether under applicable Laws or otherwise, or to remove any injunctions or
other impediments or delays, legal or otherwise, to consummate and make
effective the Merger and the other transactions contemplated by this
Agreement and the Ancillary Agreements.
5.07 DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION.
(a) Parent agrees that at all times after the Effective Time, it
shall indemnify, or shall cause the Company (or the Surviving Corporation
if after the Effective Time) and its Subsidiaries to indemnify, each
person who is now, or has been at any time prior to the date hereof, a
director or officer of the Company or of any of the Company's
Subsidiaries, successors and assigns (individually an "Indemnified Party"
and collectively the "Indemnified Parties"), to the same extent and in
the same manner as is now provided in the respective certificates of
incorporation or by-laws or in the indemnity agreements, copies of which
agreements have been previously provided to Parent, of the Company and
such Subsidiaries or otherwise in effect on the date hereof, with respect
to any claim, liability, loss, damage, cost or expense (whenever asserted
or claimed) ("Indemnified Liability") based in whole or in part on, or
arising in whole or in part out of, any matter existing or occurring at
or prior to the Effective Time. Parent shall, and shall cause the Company
(or the Surviving Corporation if after the Effective Time) to, maintain
in effect for not less than six years after the Effective Time the
current policies of directors' and officers' liability insurance
maintained by the Company and its Subsidiaries on the date hereof
(provided that Parent may substitute therefor policies having at least
the same coverage and containing terms and conditions which are no less
advantageous to the persons currently covered by such policies as
insured) with respect to matters existing or occurring at or prior to the
Effective Time; provided, however, that if the aggregate annual premiums
for such insurance at any time during such period shall exceed 150% of
the per annum rate of premium currently paid by the Company and its
Subsidiaries for such insurance on the date of this Agreement, which
amount is set forth in SECTION 5.07 OF THE DISCLOSURE SCHEDULE, then
Parent shall cause the Company (or the Surviving Corporation if after the
Effective Time) to, and the Company (or the Surviving Corporation if
after the Effective Time) shall, provide the maximum coverage that shall
then be available at an annual premium equal to 150% of such rate.
Without limiting the foregoing, in the event any Indemnified Party
becomes involved in any capacity in any action, proceeding or
investigation based in whole or in part on, or arising in whole or in
part out of, any matter, including, without limitation, the transactions
contemplated hereby or any personal guarantee they may have given with
respect to any liability, obligation or contract of the Company or any of
its Subsidiaries, existing or occurring at or prior to the Effective
Time, then to the extent permitted by law Parent shall, or shall cause
the Company (or the Surviving Corporation if after the Effective Time)
to, periodically advance to such Indemnified Party its legal and other
expenses (including the cost of any investigation and preparation
incurred in connection therewith), subject to the provision by such
Indemnified Party of an undertaking to reimburse the amounts so advanced
in the event of a final determination by a court of competent
jurisdiction that such Indemnified Party is not entitled thereto.
Promptly after receipt by an Indemnified Party of notice of the assertion
(an "Assertion") of any claim or the commencement of any action against
him in respect to which indemnity or reimbursement may be sought against
Parent, the Company, the Surviving Corporation or a Subsidiary of the
Company or the Surviving Corporation ("Indemnitors") hereunder, such
Indemnified Party shall notify any Indemnitor in writing of the
Assertion, but the failure to so notify any Indemnitor shall not relieve
any Indemnitor of any liability it may have to such Indemnified Party
hereunder except where such failure shall have materially prejudiced
Indemnitor in defending against such Assertion. Indemnitors shall be
entitled to participate in and, to the extent Indemnitors elect by
written notice to such Indemnified Party within 30 days after receipt by
any Indemnitor of notice of such Assertion, to assume, the defense of
such
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Assertion, at their own expense, with counsel chosen by Indemnitors and
reasonably satisfactory to such Indemnified Party. Notwithstanding that
Indemnitors shall have elected by such written notice to assume the
defense of any Assertion, such Indemnified Party shall have the right to
participate in the investigation and defense thereof, with separate
counsel chosen by such Indemnified Party, but, until there is a conflict
between the positions of the Indemnified Party and the Indemnitors, the
fees and expenses of such counsel shall be paid by such Indemnified
Party. No Indemnified Party shall settle any Assertion without the prior
written consent of Parent, which consent may not be unreasonably
withheld, nor shall Parent settle any Assertion without either (i) the
written consent of all Indemnified Parties against whom such Assertion
was made, or (ii) obtaining a general release from the party making the
Assertion for all Indemnified Parties as a condition of such settlement.
The provisions of this SECTION 5.07 are intended for the benefit of, and
shall be enforceable by, the respective Indemnified Parties.
(b) The articles of incorporation and the bylaws of the Surviving
Corporation shall contain the provisions with respect to indemnification,
payment of fees and expenses and exculpation from liability set forth in
the Company's articles of incorporation and bylaws on the date of this
Agreement, which provisions shall not be amended, repealed or otherwise
modified for a period of six years from the Effective Time in any manner
that would adversely affect the rights thereunder of individuals who on
or at any time prior to the Effective Time were directors, officers,
employees or agents of the Company, unless such modification is required
by law. Parent shall guarantee the obligations of the Surviving
Corporation with respect to the indemnification and payment of fees and
expenses provisions contained in the Surviving Corporation's articles of
incorporation and bylaws with respect to acts occurring at or before the
Effective Time (including the transactions contemplated by this
Agreement).
(c) In the event Parent, the Surviving Corporation or any of their
successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity
of such consolidation or merger or (ii) transfers all or substantially
all of its properties and assets to any person, then and in each such
case, proper provisions shall be made so that the successors and assigns
of Parent of the Surviving Corporation, as the case may be, shall assume
the obligations set forth in this SECTION 5.07.
(d) Parent shall use reasonable efforts from and after the Effective
Time to obtain the release of any personal guarantee made by any officer
or director of the Company with respect to any obligations, liabilities
or contracts of the Company or any of its Subsidiaries.
(e) RETIREMENT OF INTERCOMPANY DEBT. Parent shall cause, and
the Surviving Corporation shall, promptly after the Effective Time,
pay to Parent any outstanding balance remaining with regard to any
loan from Parent to Company made prior to the Effective Time.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.01 PROSPECTUS/PROXY STATEMENT; REGISTRATION STATEMENT; OTHER
FILINGS. As promptly as practicable after the execution of this Agreement,
the Company and Parent will prepare and file with the SEC, the
Prospectus/Proxy Statement, and Parent will prepare and file with the SEC
the Registration Statement in which the Prospectus/Proxy Statement will be
included as a prospectus. Each of the Company and Parent will respond to any
comments of the SEC, will use its respective commercially reasonable efforts
to have the Registration Statement declared effective under the Securities
Act as promptly as practicable after such filing and each of the Company and
Parent will
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cause the Prospectus/Proxy Statement to be mailed to its respective
stockholders at the earliest practicable time after the Registration
Statement is declared effective by the SEC. As promptly as practicable after
the date of this Agreement, if required, each of the Company and Parent will
prepare and file (i) any pre-merger notification forms required by the
merger notification or control Laws and regulations of any applicable
jurisdiction, as agreed to by the parties (the "Antitrust Filings") and (ii)
any other filings required to be filed by it under the Exchange Act, the
Securities Act or any other Federal, state or foreign Laws relating to the
Merger and the transactions contemplated by this Agreement (the "Other
Filings"). The Company and Parent each shall promptly supply the other with
any information which may be required in order to effectuate any filings
pursuant to this SECTION 6.01. Each of the Company and Parent will notify
the other promptly upon the receipt of any comments from the SEC or its
staff or any other government officials in connection with any filing made
pursuant hereto and of any request by the SEC or its staff or any other
government officials for amendments or supplements to the Registration
Statement, the Prospectus/ Proxy Statement or any Antitrust Filings or Other
Filing or for additional information and will supply the other with copies
of all correspondence between such party or any of its representatives, on
the one hand, and the SEC, or its staff or any other government officials,
on the other hand, with respect to the Registration Statement, the
Prospectus/ Proxy Statement, the Merger or any Antitrust Filing or Other
Filing. Whenever any event occurs which is required to be set forth in an
amendment or supplement to the Prospectus/ Proxy Statement, the Registration
Statement or any Antitrust Filing or Other Filing, the Company or Parent, as
the case may be, will promptly inform the other of such occurrence and
cooperate in filing with the SEC or its staff or any other government
officials, and/or mailing to stockholders of the Company and/or Parent, such
amendment or supplement. No amendment shall be made to the Registration
Statement or Prospectus/Proxy Statement without consultation with the other
party and no filing shall be made on a successor form to form S-4 not
permitted under current Law without the prior approval of both parties.
6.02 MEETING OF THE COMPANY STOCKHOLDERS.
(a) Promptly after the date hereof, the Company will take all action
necessary in accordance with Nevada Law and its Articles of Incorporation
and ByLaws to convene a meeting of the Company's stockholders to consider
adoption and approval of this Agreement and approval of the Merger (the
"Company Stockholders' Meeting") to be held as promptly as practicable,
and in any event (to the extent permissible under applicable Law) within
45 days after the declaration of effectiveness of the Registration
Statement. Subject to SECTION 6.02(c) hereof, the Company will use its
commercially reasonable efforts to solicit from its stockholders proxies
in favor of the adoption and approval of this Agreement and the approval
of the Merger and will take all other action necessary or advisable to
secure the vote or consent of its stockholders required by Nevada Law to
obtain such approvals. Notwithstanding anything to the contrary contained
in this Agreement, the Company may adjourn or postpone the Company
Stockholders' Meeting to the extent necessary to ensure that any
necessary supplement or amendment to the Prospectus/Proxy Statement is
provided to the Company's stockholders in advance of a vote on the Merger
and this Agreement or, if as of the time for which the Company
Stockholders' Meeting is originally scheduled (as set forth in the
Prospectus/Proxy Statement) there are insufficient shares of the Company
Common Stock represented (either in person or by proxy) to constitute a
quorum necessary to conduct the business of the Company's Stockholders'
Meeting. The Company shall ensure that the Company Stockholders' Meeting
is called, noticed, convened, held and conducted, and that all proxies
solicited by the Company in connection with the Company Stockholders'
Meeting are solicited, in compliance with Nevada Law, the Company's
Articles of Incorporation and By-Laws, and all other applicable Laws. The
Company's obligation to call, give notice of, convene and hold the
Company Stockholders' Meeting in accordance with this
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SECTION 6.02(a) shall not be limited to or otherwise affected by the
commencement, disclosure, announcement or submission to the Company of
any Acquisition Proposal, or by any withdrawal, amendment or modification
of the recommendation of the Board of Directors of the Company with
respect to the Merger and/or this Agreement.
(b) Subject to SECTION 6.02(c): (i) the Board of Directors of the
Company shall unanimously recommend that the Company's stockholders vote
in favor of and adopt and approve this Agreement and approve the Merger
at the Company Stockholders' Meeting; (ii) the Prospectus/Proxy Statement
shall include a statement to the effect that the Board of Directors of
the Company has unanimously recommended that the Company's stockholders
vote in favor of and adopt and approve this Agreement and the Merger at
the Company Stockholders' Meeting; and (iii) neither the Board of
Directors of the Company nor any committee thereof shall withdraw, amend
or modify, or propose or resolve to withdraw, amend or modify in a manner
adverse to Parent, the unanimous recommendation of the Board of Directors
of the Company that the Company's stockholders vote in favor of and adopt
and approve this Agreement and the Merger. For purposes of this
Agreement, said recommendation of the Board of Directors shall be deemed
to have been modified in a manner adverse to Parent if said
recommendation shall no longer be unanimous, provided that, for all
purposes of this Agreement, an action by any Board of Directors or
committee thereof shall be unanimous if each member of such Board of
Directors or committee has approved such action other than (i) any such
member who has appropriately abstained from voting on such matter because
of an actual or potential conflict of interest and (ii) any such member
who is unable to vote in connection with such action as a result of death
or disability.
(c) Nothing in this Agreement shall prevent the Board of Directors of
the Company from withholding, withdrawing, amending or modifying its
unanimous recommendation in favor of the Merger if (i) a Superior Offer
(as defined below) is made to the Company and is not withdrawn, (ii) the
Company shall have provided written notice to Parent (a "Notice of
Superior Offer") advising Parent that the Company has received a Superior
Offer, specifying the material terms and conditions of such Superior
Offer and identifying the person or entity making such Superior Offer,
(iii) Parent shall not have, within three (3) Business Days of Parent's
receipt of the Notice of Superior Offer, made an offer that the Company
Board by a majority vote determines in its good faith judgment to be at
least as favorable to the Company's Stockholders as such Superior Offer
(it being agreed that the Company Board shall convene a meeting to
consider any such offer by Parent promptly following the receipt
thereof), (iv) the Board of Directors of the Company concludes in good
faith, after consultation with its outside counsel, that, in light of
such Superior Offer, the withholding, withdrawal, amendment or
modification of such recommendation is required in order for the Board of
Directors of the Company to properly discharge its fiduciary obligations
to the Company's Stockholders under applicable Law and (v) the Company
shall not have violated any of the restrictions set forth in SECTION 4.03
or this SECTION 6.02. The Company shall provide Parent with at least
three (3) Business Days prior notice (or such lesser prior notice as
provided to the members of the Company's Board of Directors but in no
event less than twenty-four hours) of any meeting of the Company's Board
of Directors at which the Company's Board of Directors is reasonably
expected to consider any Acquisition Proposal. For purposes of this
Agreement, "Superior Offer" shall mean an unsolicited, bona fide written
offer made by a third party to consummate any of the following
transactions: (i) a merger or consolidation involving the Company
pursuant to which the stockholders of the Company immediately preceding
such transaction hold less than 50% of the equity interest in the
surviving or resulting entity of such transaction, (ii) the acquisition
by any person or group (including by way of a tender offer or an exchange
offer or a two step transaction involving a tender offer or exchange
offer followed with reasonable promptness by a cash-out merger
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involving the Company), directly or indirectly, of ownership of 100% of
the then outstanding shares of capital stock of the Company, or (iii) the
sale or disposition of all or substantially all the assets of the Company
to a third party, in each case on terms that the Board of Directors of
the Company determines, in its reasonable judgment, to be more favorable
to the Company stockholders than the terms of the Merger; provided,
however, that any such offer shall not be deemed to be a "Superior Offer"
if any financing required to consummate the transaction contemplated by
such offer is not committed and is not likely in the reasonable judgment
of the Company's Board of Directors to be obtained by such third party on
a timely basis.
(d) Nothing contained in this Agreement shall prohibit the Company or
its Board of Directors from taking and disclosing to its stockholders a
position contemplated by Rules 14d-9 and 14e-2(a) promulgated under the
Exchange Act or making any other disclosure to its stockholders as
required by Law.
6.03 MEETING OF PARENT STOCKHOLDERS.
(a) Promptly after the date hereof, Parent will take all action
necessary in accordance with the Delaware Law and its Certificate of
Incorporation and ByLaws to convene a meeting of Parent's stockholders to
consider the issuance of the shares of Parent Common Stock pursuant to
the Merger and an amendment to Parent's Certificate of Incorporation to
increase the authorized number of shares of Parent Common Stock so as to
permit the transactions contemplated hereby, subject to and upon
consummation of the Merger, (the "Parent Stockholders' Meeting") to be
held as promptly as practicable, and in any event (to the extent
permissible under applicable Law) within 45 days after the declaration of
effectiveness of the Registration Statement. Parent will use its
commercially reasonable efforts to solicit from its stockholders proxies
in favor of the issuance of the shares of Parent Common Stock pursuant to
the Merger and an amendment to Parent's Certificate of Incorporation to
increase the authorized number of shares of Parent Common Stock so as to
permit the transactions contemplated hereby, subject to and upon
consummation of the Merger, and will take all other action necessary or
advisable to secure the vote or consent of its stockholders required by
the rules of Nasdaq or Delaware Law to obtain such approvals.
Notwithstanding anything to the contrary contained in this Agreement,
Parent may adjourn or postpone the Parent Stockholders' Meeting to the
extent necessary to ensure that any necessary supplement or amendment to
the Prospectus/Proxy Statement is provided to Parent's stockholders in
advance of a vote on the issuance of the shares of Parent Common Stock
pursuant to the Merger or a vote on the approval of an amendment to
Parent's Certificate of Incorporation to increase the authorized number
of shares of Parent Common Stock so as to permit the transactions
contemplated hereby, subject to and upon consummation of the Merger, or,
if as of the time for which Parent Stockholders' Meeting is originally
scheduled (as set forth in the Prospectus/ Proxy Statement) there are
insufficient shares of Parent Common Stock represented (either in person
or by proxy) to constitute a quorum necessary to conduct the business of
the Parent's Stockholders' Meeting. Parent shall ensure that the Parent
Stockholders' Meeting is called, noticed, convened, held and conducted,
that all proxies solicited by the Company in connection with the Parent
Stockholders' Meeting are solicited in compliance with the Delaware Law,
its Certificate of Incorporation and ByLaws, the rules of Nasdaq and all
other applicable Laws.
(b) The Board of Directors of Parent shall unanimously recommend that
Parent's stockholders vote in favor of the issuance of the shares of
Parent Common Stock pursuant to the Merger and an amendment to Parent's
Certificate of Incorporation to increase the authorized number of shares
of Parent Common Stock so as to permit the transactions contemplated
hereby, subject to and upon consummation of the Merger. The Prospectus/
Proxy Statement shall include a statement to the effect that the Board of
Directors of Parent
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has unanimously recommended that Parent's stockholders vote in favor of
such matters at the Parent Stockholders' Meeting. Neither the Board of
Directors of Parent nor any committee thereof shall withdraw, amend or
modify, or propose or resolve to withdraw, amend or modify in a manner
adverse to the Company, the unanimous recommendation of the Board of
Directors of Parent that Parent's stockholders vote in favor of such
matters. For purposes of this Agreement, said recommendation of the Board
of Directors shall be deemed to have been modified in a manner adverse to
the Company if said recommendation shall no longer be unanimous.
(c) Nothing contained in this Agreement shall prohibit Parent or its
Board of Directors from taking and disclosing to its stockholders a
position contemplated by Rules 14d-9 and 14e-2(a) promulgated under the
Exchange Act or making any other disclosure to its stockholders as
required by Law.
6.04 STATE STATUTES. The Company and its Board of Directors shall, if
any state takeover statute or similar Law is or becomes applicable to the
Merger, this Agreement or any of the transactions contemplated by this
Agreement, use all reasonable efforts to ensure that the Merger and the
other transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such statute or regulation on the
Merger, this Agreement and the transactions contemplated hereby.
Notwithstanding anything herein to the contrary, nothing in this Agreement
shall be deemed to require Parent or the Company or any Subsidiary or
Affiliate thereof to agree to any divestiture by itself or any of its
affiliates of shares of capital stock or of any business, assets or
property, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub hereunder to consummate the Merger
are subject to the fulfillment, at or before the Closing, of each of the
following conditions (all or any of which may be waived in whole or in part by
Parent in its sole discretion):
7.01 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company shall have been true and accurate both when made
and (except for those representations and warranties that address matters
only as of a particular date which need only be true and accurate as of such
date) as of the Effective Time as if made at and as of such time, except
where the failure of such representations and warranties to be so true and
correct (without giving effect to any limitation as to "materiality" or
"Material Adverse Effect" set forth therein), does not have, and is not
likely to have, individually or in the aggregate, a Material Adverse Effect
on the Company and its Subsidiaries taken as a whole; provided, that the
representations and warranties set forth in SECTIONS 2.01, 2.02, 2.03 and
2.04 shall be true and correct in all respects.
7.02 PERFORMANCE. The Company shall have performed and complied with,
in all material respects, each agreement, covenant and obligation required
by this Agreement to be so performed or complied with by it at or before the
Closing.
7.03 ORDERS AND LAWS. There shall not be in effect on the Closing Date
any Order or Law restraining, enjoining or otherwise prohibiting or making
illegal the consummation of the Merger or which could reasonably be expected
to otherwise result in a material diminution of the benefits of the Merger
to Parent, and there shall not be pending on the Closing Date any Action or
Proceeding in, before or by any Governmental or Regulatory Authority which
could reasonably be
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expected to result in the issuance of any such Order or the enactment,
promulgation or deemed applicability to Parent, the Company, any Subsidiary
or the Merger of any such Law.
7.04 REGULATORY CONSENTS AND APPROVALS. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory
Authority necessary to permit Parent and the Company to perform their
obligations under this Agreement and to consummate the transactions
contemplated hereby (as set forth in SECTION 7.04 OF THE DISCLOSURE
SCHEDULE) (a) shall have been duly obtained, made or given, (b) shall be in
form and substance reasonably satisfactory to Parent, (c) shall not be
subject to the satisfaction of any condition that has not been satisfied or
waived and (d) shall be in full force and effect, and all terminations or
expirations of waiting periods imposed by any Governmental or Regulatory
Authority necessary for the consummation of the transactions contemplated by
this Agreement shall have occurred.
7.05 THIRD PARTY CONSENTS. All consents (or in lieu thereof waivers)
to the performance by Parent and Company of their obligations under this
Agreement or to the consummation of the transactions contemplated hereby as
are required under any Contract to which Parent, the Company or any
Subsidiary is a party or by which any of their respective Assets and
Properties are bound (as set forth in SECTION 7.05 OF THE DISCLOSURE
SCHEDULE) (a) shall have been obtained, (b) shall be in form and substance
reasonably satisfactory to Parent, (c) shall not be subject to the
satisfaction of any condition that has not been satisfied or waived and (d)
shall be in full force and effect, except where the failure to obtain any
such consent (or in lieu thereof waiver) could not reasonably be expected,
individually or in the aggregate with other such failures, to materially
adversely affect Parent or the Business or Condition of the Company, Galaxy
Mall and IMI or otherwise result in a material diminution of the benefits of
the transactions contemplated by this Agreement to Parent.
7.06 STOCKHOLDER APPROVAL. The Company Stockholder Approval and the
Parent Stockholder Approval shall have been obtained. The issuance of the
shares of Parent Common Stock pursuant to the Merger shall have been duly
approved by the stockholders of Parent under applicable Nasdaq rules.
7.07 OPINION OF COUNSEL. Parent shall have received the opinion of
Parsons Behle & Latimer, P.C., counsel to the Company, dated the Closing
Date, substantially in the form and to the effect of EXHIBIT C hereto.
7.08 ANCILLARY AGREEMENTS. The Ancillary Agreements shall be in full
force and effect and shall have been complied with in all material respects.
7.09 REGISTRATION STATEMENT EFFECTIVE; PROXY STATEMENT. The SEC shall
have declared the Registration Statement effective. No stop order suspending
the effectiveness of the Registration Statement or part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding in
respect of the Prospectus/Proxy Statement, shall have been initiated or
threatened in writing by the SEC.
7.10 NASDAQ LISTING. The shares of Parent Common Stock to be issued in
the Merger shall have been authorized for listing on Nasdaq, subject to
notice of issuance.
7.11 OFFICERS' CERTIFICATES. The Company shall have delivered to
Parent certificates, dated the Closing Date and executed by the Chairman of
the Board, the President or any Vice President of the Company, in form
reasonably acceptable to Parent, and a certificate, dated the Closing Date
and executed by the Secretary or any Assistant Secretary of the Company, in
form reasonably acceptable to Parent.
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7.12 FAIRNESS OPINION. Parent shall have received, in a form
acceptable to Parent, its legal counsel and Parent's independent
accountants, a fairness opinion issued by Cruttenden Roth Incorporated.
7.13 DISSENTING SHARES. Holders of no more than two percent (2%) of
the outstanding shares of the Company Common Stock shall have exercised (and
not subsequently waived their rights or allowed them to lapse), nor shall
they have any continued right to exercise, appraisal, dissenters' or similar
rights under applicable Law with respect to their shares by virtue of the
Merger.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company hereunder to consummate the Merger are
subject to the fulfillment, at or before the Closing, of each of the following
conditions (all or any of which may be waived in whole or in part by Company in
its sole discretion):
8.01 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Parent shall have been true and accurate both when made and
(except for those representations and warranties that address matters only
as of a particular date which need only be true and accurate as of such
date) as of the Effective Time as if made at and as of such time, except
where the failure of such representations and warranties to be so true and
correct (without giving effect to any limitation as to "materiality" or
"Material Adverse Effect" set forth therein), does not have, and is not
likely to have, individually or in the aggregate, a Material Adverse Effect
on Parent and its Subsidiaries taken as a whole; provided, that the
representations and warranties set forth in SECTION 3.01 shall be true and
correct in all respects.
8.02 PERFORMANCE. Parent shall have performed and complied with, in
all material respects, each agreement, covenant and obligation required by
this Agreement to be so performed or complied with by Parent at or before
the Closing.
8.03 OPINION OF COUNSEL. Company shall have received the opinion of
Nida & Maloney, LLP, counsel to Parent, dated the Closing Date,
substantially in the form of Exhibit F hereto.
8.04 REGULATORY CONSENTS AND APPROVALS. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory
Authority necessary to permit Parent and the Company to perform their
obligations under this Agreement and to consummate the transactions
contemplated hereby (as set forth in SECTION 7.04 OF THE DISCLOSURE
SCHEDULE) (a) shall have been duly obtained, made or given, (b) shall be in
form and substance reasonably satisfactory to the Company, (c) shall not be
subject to the satisfaction of any condition that has not been satisfied or
waived and (d) shall be in full force and effect, and all terminations or
expirations of waiting periods imposed by any Governmental or Regulatory
Authority necessary for the consummation of the transactions contemplated by
this Agreement shall have occurred.
8.05 ORDERS AND LAWS. There shall not be in effect on the Closing Date
any Order or Law restraining, enjoining or otherwise prohibiting or making
illegal the consummation of the Merger or which could reasonably be expected
to otherwise result in a material diminution of the benefits of the Merger
to the Company, and there shall not be pending on the Closing Date any
Action or Proceeding in, before or by any Governmental or Regulatory
Authority which could reasonably be expected to result in the issuance of
any such Order or the enactment, promulgation or deemed applicability to
Parent, the Company, any Subsidiary or the Merger of any such Law.
8.06 STOCKHOLDER APPROVAL. The Company Stockholder Approval and the
Parent Stockholder Approval shall have been obtained. The issuance of the
shares of Parent Common Stock pursuant
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to the Merger shall have been duly approved by the stockholders of Parent
under applicable Nasdaq rules.
8.07 REGISTRATION STATEMENT EFFECTIVE; PROXY STATEMENT. The SEC shall
have declared the Registration Statement effective. No stop order suspending
the effectiveness of the Registration Statement or part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding in
respect of the Prospectus/Proxy Statement, shall have been initiated or
threatened in writing by the SEC.
8.08 NASDAQ LISTING. The shares of the Company Common Stock to be
issued in the Merger shall have been authorized for listing on the Nasdaq
National Market System, subject to notice of issuance.
8.09 OFFICERS' CERTIFICATES. Parent shall have delivered to the
Company certificates, dated the Closing Date and executed by the Chairman of
the Board, the President or any Vice President of the Parent, in form
reasonably acceptable to the Company, and a certificate, dated the Closing
Date and executed by the Secretary or any Assistant Secretary of the Parent,
in form reasonably acceptable to the Company.
8.10 FAIRNESS OPINION. The Company shall have received in a form
acceptable to the Company, its legal counsel and the Company's independent
accountants, a fairness opinion issued by Houlihan Lokey Howard & Zukin.
ARTICLE IX
TAX MATTERS
9.01 REPRESENTATIONS AND OBLIGATIONS REGARDING TAXES. The Company
represents and warrants to Parent as follows:
(a) Except as set forth in SECTION 9.01 OF THE DISCLOSURE SCHEDULE,
the Company and each of its Subsidiaries has timely filed (or has had
timely filed on its behalf) with the appropriate Tax Authorities all Tax
Returns required to be filed by the Company and each of its Subsidiaries,
and such Tax Returns are true, correct, and complete in all material
respects.
(b) The Company and each of its Subsidiaries has paid, or where
payment is not yet due, has established an adequate accrual in accordance
with GAAP for the payment of, all Taxes for all periods ending through
the date hereof.
(c) There are no Liens for Taxes upon any property or assets of the
Company or any of its Subsidiaries, except for liens for Taxes not yet
due and for which adequate reserves have been established in accordance
with GAAP.
(d) No federal, state, local or foreign Audits are presently pending
with regard to any Taxes or Tax Returns of the Company and its
Subsidiaries and to the knowledge of the Company, no such Audit is
threatened.
(e) Except as set forth in SECTION 9.01(e) OF THE DISCLOSURE
SCHEDULE, the Tax Returns of the Company and each of its Subsidiaries
have not been examined by the applicable Tax Authority (or the applicable
statutes of limitation for the assessment of Taxes for such periods have
expired), and for any year that a Tax Return was examined, no material
adjustments were asserted as a result of such examination which have not
been resolved and fully paid, and no issue has been raised by any Tax
Authority in any Audit of the Company or any of its Subsidiaries that, if
raised with respect to any other period not so audited, could be expected
to result in a proposed deficiency for any such period not so audited.
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(f) There are no outstanding requests, agreements, consents or
waivers to extend the statutory period of limitations applicable to the
assessment of any Taxes or deficiencies against the Company or any of its
Subsidiaries, and no power of attorney granted by the Company or any of
its Subsidiaries with respect to any Taxes is currently in force.
(g) Neither the Company nor any of its Subsidiaries is a party to any
agreement providing for the allocation, indemnification, or sharing of
Taxes.
(h) Neither the Company nor any of its Subsidiaries has been a member
of any "affiliated group" (as defined in section 1504(a) of the Code) and
is not subject to Treas. Reg. 1.1502-6 for any period.
(i) Neither the Company nor any of its Subsidiaries is or has been a
U.S. real property holding company (as defined in Section 897(c)(2) of
the Code) during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
ARTICLE X
SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS
10.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS Notwithstanding any right of Parent (whether or not exercised)
to investigate the Business or any right of any party (whether or not
exercised) to investigate the accuracy of the representations and warranties
of the other party contained in this Agreement, the Company and Parent have
the right to rely fully upon the representations, warranties, covenants and
agreements of the other contained in this Agreement. The representations and
warranties of the Company, Parent and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants and agreements
set forth in this Agreement that by their terms survive the Effective Time
shall survive the Effective Time.
ARTICLE XI
TERMINATION
11.01 TERMINATION. This Agreement may be terminated, and the
transactions contemplated hereby may be abandoned, at any time prior to the
Effective Time, whether prior to or after the Company Stockholder Approval
and the Parent Stockholder Approval:
(a) by mutual written agreement of Parent and the Company hereto duly
authorized by action taken by or on behalf of their respective Boards of
Directors;
(b) by either the Company or Parent upon notification to the
non-terminating party by the terminating party:
(i) at any time after July 31, 2000 if the Merger shall not have
been consummated on or prior to such date and such failure to
consummate the Merger is not caused by a material breach of this
Agreement by the terminating party;
(ii) if the Company Stockholder Approval or the Parent
Stockholder Approval shall not be obtained by reason of the failure
to obtain the requisite vote upon a vote held at a meeting of such
stockholders, or any adjournment thereof, called therefor;
(iii) if any Governmental or Regulatory Authority, the taking of
action by which is a condition to the obligations of either the
Company or Parent to consummate the transactions contemplated hereby,
shall have determined not to take such action and all appeals of such
determination shall have been taken and have been unsuccessful;
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(iv) if the terminating party is not in material breach of its
obligations under this Agreement and there has been a material breach
of any representation, warranty, covenant or agreement on the part of
the non-terminating party set forth in this Agreement such that the
conditions in SECTIONS 7.01, 7.02, 8.01 or 8.02 will not be
satisfied; provided, however, that if such breach is curable by the
non-terminating party and such cure is reasonably likely to be
completed prior to the date specified in SECTION 11.01(b)(i), then,
for so long as the non-terminating party continues to use its
reasonable efforts to effect and cure, the terminating party may not
terminate pursuant to this SECTION 11.01(b)(iv);
(v) if any court of competent jurisdiction or other competent
Governmental or Regulatory Authority shall have issued an Order
making illegal or otherwise permanently restricting, preventing or
otherwise prohibiting the Merger and such Order shall have become
final and nonappealable;
(c) by Parent or the Company if the Company or its stockholders
receive a Superior Offer in connection with which the Board of Directors
of the Company exercises the rights specified in SECTION 6.02(c) to
withhold, withdraw, amend or modify its recommendation of the Merger; or
(d) by Parent if the Company breaches SECTION 4.03 of this Agreement
and Parent is in substantial compliance with its obligations under this
Agreement.
11.02 EFFECT OF TERMINATION.
(a) If this Agreement is validly terminated by either the Company or
Parent pursuant to SECTION 11.01, this Agreement will forthwith become
null and void and there will be no liability or obligation on the part of
either the Company or Parent (or any of their respective Representatives
or affiliates), except (i) that nothing, other than SECTION 11.02(d),
contained herein shall relieve any party hereto from liability for
willful breach of its representations, warranties, covenants or
agreements contained in this Agreement, (ii) as provided in paragraph (b)
below and (iii) SECTION 13.04 of this Agreement shall survive and
continue in full force and effect.
(b) In the event that Parent (and at the time of termination Parent
was in substantial compliance with its obligations under this Agreement)
or Company terminates this Agreement pursuant to SECTIONS 11.01(c), or
Parent terminates this Agreement pursuant to SECTION 11.01(d), then the
Company shall, within one (1) Business Day after receipt of a request
from Parent, pay to Parent in cash (x) a termination fee of $1,500,000
and (y) an amount equal to all documented out-of-pocket expenses and fees
incurred by Parent in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, fees and expenses
payable to all banks, investment banking firms and other financial
institutions and persons and their respective agents and counsel for
acting as Parent's financial advisor with respect to, or arranging or
committing to provide or providing any financing for, the Merger,
Parent's legal counsel and Parent's independent accountants), provided,
that in no event shall the amount of such reimbursable fees and expenses
exceed $500,000 in the aggregate (collectively, (x) and (y), the
"Termination Fee").
(c) If (A) this Agreement is terminated by Parent pursuant to SECTION
11.01(b)(II), (B) prior to such termination a third party shall have
publicly announced and not withdrawn a proposal or offer for a Company
Acquisition (as defined below) and (C) within twelve (12) months
following the termination of this Agreement a Company Acquisition is
consummated or the Company enters into a definitive agreement providing
for a Company
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Acquisition, then the Company shall pay Parent in immediately available
funds at or prior to consummating such Company Acquisition an amount
equal to the Termination Fee.
(d) The Company acknowledges that the agreements contained in this
SECTION 11.02 are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, Parent would not
enter into this Agreement; accordingly, if the Company fails to pay in a
timely manner the amounts due pursuant to this SECTION 11.02 and, in
order to obtain such payment, Parent makes a claim that results in a
judgment against the Company for the amounts set forth in this SECTION
11.02, the Company shall pay to Parent its reasonable costs and expenses
(including reasonable attorneys' fees and expenses) in connection with
such suit, together with interest on the amounts set forth in this
SECTION 11.02 at the prime rate of Bank of America N.T. & S.A. in effect
on the date such payment was required to be made. Payment of the
Termination Fee described in this SECTION 11.02 shall be in lieu of
Losses incurred in the event of breach of this Agreement. For the
purposes of this Agreement, "Company Acquisition" shall mean any of the
following transactions (other than the transactions contemplated by this
Agreement): (i) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction
involving the Company pursuant to which the shareholders of the Company
immediately preceding such transaction hold less then 50% of the
aggregate equity interests in the surviving or resulting entity of such
transaction, (ii) a sale or other disposition by the Company of assets
representing in excess of 50% of the aggregate fair market value of the
Company's business immediately prior to such sale or (iii) the
acquisition by any person or group (including by way of a tender offer or
an exchange offer or issuance by the Company), directly or indirectly, of
beneficial ownership or a right to acquire beneficial ownership of shares
representing in excess of 50% of the voting power of the then outstanding
shares of capital stock of the Company.
ARTICLE XII
DEFINITIONS
12.01 DEFINITIONS.
(a) DEFINED TERMS. As used in this Agreement, the following defined
terms have the meanings indicated below:
"Acquisition Proposal" means any proposal for a merger or other
business combination to which the Company, Galaxy Mall or IMI is a party
or the direct or indirect acquisition of any substantial equity interest
in, or a substantial portion of the assets of the Company, Galaxy Mall or
IMI, other than the transactions contemplated by this Agreement.
"Actions or Proceedings" means any action, suit, proceeding,
arbitration or Governmental or Regulatory Authority investigation or
audit.
"Affiliate" means any Person that directly, or indirectly through one
of more intermediaries, controls or is controlled by or is under common
control with the Person specified. For purposes of this definition,
control of a Person means the power, direct or indirect, to direct or
cause the direction of the management and policies of such Person whether
by Contract or otherwise and, in any event and without limitation of the
previous sentence, any Person owning ten percent (10%) or more of the
voting securities of another Person shall be deemed to control that
Person.
"Agreement" unless the context otherwise requires, means this
Agreement and Plan of Merger, the exhibits and the schedules hereto and
the certificates delivered in accordance herewith, and the Certificate of
Merger, as the same shall be amended from time to time.
"Ancillary Agreements" has the meaning given in RECITAL E.
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"Assets and Properties" of any Person means all assets and properties
of every kind, nature, character and description (whether real, personal
or mixed, whether tangible or intangible, whether absolute, accrued,
contingent, fixed or otherwise and wherever situated), including the
goodwill related thereto, operated, owned or leased by such Person,
including without limitation cash, cash equivalents, Investment Assets,
accounts and notes receivable, chattel paper, documents, instruments,
general intangibles, real estate, equipment, inventory, goods and
Intellectual Property.
"Audit" means any audit, assessment, or other examination relating to
Taxes by any Tax Authority or any judicial or administrative proceedings
relating to Taxes.
"Benefit Plan" means any Plan established by the Company, or any
predecessor or Affiliate of any of the foregoing, existing at the Closing
Date or prior thereto, to which the Company, Galaxy Mall, or IMI
contributes or has contributed, or under which any employee, former
employee or director of the Company, Galaxy Mall, or IMI or any
beneficiary thereof is covered, is eligible for coverage or has benefit
rights.
"Books and Records" means all files, documents, instruments, papers,
books and records relating to the Business or Condition of the Person
referred to, including without limitation financial statements, tax
returns and related work papers and letters from accountants, budgets,
pricing guidelines, ledgers, journals, deeds, title policies, minute
books, stock certificates and books, stock transfer ledgers, contracts,
licenses, customer lists, computer files and programs, retrieval
programs, operating data and plans and environmental studies and plans.
"Business" has the meaning given such term in SECTION 2.02.
"Business Day" means a day other than Saturday, Sunday or any day on
which banks located in the States of California and Utah are authorized
or obligated to close.
"Business or Condition" means the business, condition (financial or
otherwise), results of operations, Assets and Properties and prospects of
the referenced party taken as a whole.
"Certificate of Merger" has the meaning given in SECTION 1.02.
"Certificates" has the meaning given in SECTION 1.07(C).
"Closing" has the meaning given in SECTION 1.02.
"Closing Date" has the meaning given in SECTION 1.02.
"Closing Price" has the meaning given in SECTION 1.06(D).
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
"Company" has the meaning ascribed to it in the forepart of this
Agreement.
"Company Acquisition" has the meaning given in SECTION 11.02.
"Company Common Stock" has the meaning given in SECTION 1.06(A).
"Company Financials" has the meaning given in SECTION 2.07(B).
"Company Intellectual Property" shall mean any Intellectual Property
that is owned by, or exclusively licensed to, the Company.
"Company Option" has the meaning given in SECTION 2.03(B).
"Company Plan" has the meaning given in SECTION 1.06(B).
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"Company Plan Options" has the meaning given in SECTION 1.06(B).
"Company Registered Intellectual Property" means all of the
Registered Intellectual Property owned by, or filed in the name of, the
Company.
"Company SEC Reports" has the meaning given in SECTION 2.07(A).
"Company Stockholder Approval" has the meaning given in SECTION 2.05.
"Company Stockholders" means all holders of the Company Common Stock
as of the Effective Time.
"Company Stockholders' Meeting" has the meaning given in SECTION
6.02.
"Contract" means any agreement, lease, license, evidence of
Indebtedness, mortgage, indenture, security agreement or other contract
(whether written or oral).
"Delaware Law" has the meaning given in RECITAL A.
"Disclosure Schedule" means the record delivered by Parent and the
Company herewith and dated as of the date hereof, containing all lists,
descriptions, exceptions and other information and materials as are
required to be included therein by Company or Parent pursuant to this
Agreement.
"Dissenting Shares" has the meaning given in SECTION 1.11.
"Employment Agreements" has the meaning given in RECITAL E.
"Exchange Act" has the meaning given in SECTION 2.07(A).
"Exchange Agent" has the meaning given in SECTION 1.07(A).
"Exchange Ratio" has the meaning given in SECTION 1.06(A).
"GAAP" means the United States generally accepted accounting
principles, consistently applied throughout the specified period and in
the immediately prior comparable period.
"Galaxy Mall" has the meaning given in SECTION 2.02.
"Galaxy Mall Intellectual Property" shall mean any Intellectual
Property that is owned by, or exclusively licensed to, Galaxy Mall.
"Galaxy Mall Registered Intellectual Property" means all of the
Registered Intellectual Property owned by, or filed in the name of Galaxy
Mall.
"Governmental or Regulatory Authority" means any court, tribunal,
arbitrator, authority, agency, commission, official or other
instrumentality of the United States, any foreign country or any domestic
or foreign state, county, city or other political subdivision.
"IMI" has the meaning given in SECTION 2.02.
"IMI Intellectual Property" shall mean any Intellectual Property that
is owned by, or exclusively licensed to IMI.
"IMI Registered Intellectual Property" means all of the Registered
Property owned by, or filed in the name of IMI.
"Indebtedness" of any Person means all obligations of such Person (i)
for borrowed money, (ii) evidenced by notes, bonds, debentures or similar
instruments, (iii) for the deferred purchase price of goods or services
(other than trade payables or accruals incurred in the ordinary course of
business), (iv) under capital leases and (v) in the nature of guarantees
of the obligations described in clauses (i) through (iv) above of any
other Person.
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"Intellectual Property" shall mean any or all of the following and
all rights in, arising out of or associated therewith: (i) all United
States, international and foreign patents and applications therefor and
all reissues, divisions, renewals, extensions, provisionals,
continuations and continuations-in-part thereof; (ii) all inventions
(whether patentable or not), invention disclosures, improvements, trade
secrets, proprietary information, know how, technology, technical data
and customer lists, and all documentation relating to any of the
foregoing; (iii) all copyrights, copyrights registrations and
applications therefor, and all other rights corresponding thereto
throughout the world; (iv) all industrial designs and any registrations
and applications therefor throughout the world; (v) all trade names,
logos, common law trademarks and service marks, trademark and service
mark registrations and applications therefor throughout the world; (vi)
all databases and data collections and all rights therein throughout the
world; and (vii) any similar or equivalent intellectual property rights
to any of the foregoing anywhere in the world.
"Investment Assets" means all debentures, notes and other evidences
of Indebtedness, stocks, securities (including rights to purchase and
securities convertible into or exchangeable for other securities),
interests in joint ventures and general and limited partnerships,
mortgage loans and other investment or portfolio assets owned of record
or beneficially by the Company or any Subsidiary and issued by any Person
other than the Company or any Subsidiary(other than trade receivables
generated in the ordinary course of business of the Company or any
Subsidiary).
"IRS" means the United States Internal Revenue Service.
"Knowledge" or "Known" means the actual knowledge of any officer,
director or employee of the referenced party hereto or any Subsidiary of
such party.
"Laws" means all laws, statutes, rules, regulations, ordinances and
other pronouncements having the effect of law of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision or of any Governmental or Regulatory Authority.
"Liabilities" means all Indebtedness, obligations and other
liabilities of a Person (whether absolute, accrued, contingent, fixed or
otherwise, or whether due or to become due).
"Licenses" means all licenses, permits, certificates of authority,
authorizations, approvals, registrations, franchises and similar consents
granted or issued by any Governmental or Regulatory Authority.
"Liens" means any mortgage, pledge, assessment, security interest,
lease, lien, adverse claim, levy, charge or other encumbrance of any
kind, or any conditional sale contract, title retention contract or other
contract to give any of the foregoing.
"Lock-Up Agreements" has the meaning given in RECITAL E.
"Loss" means any and all losses, fines, fees, penalties, deficiencies
and expenses (including without limitation interest, court costs, fees of
attorneys, accountants and other experts or other expenses of litigation
or other proceedings or of any claim, default or assessment).
"Material Adverse Effect" means any materially adverse change in or
effect (i) that is or will be materially adverse to the business, results
of operations or financial condition, of any party hereto, taken as a
whole, or (ii) that will prevent or materially impair any party's ability
to consummate the Merger, including without limitation, a determination
by Parent's auditors that the Company's revenues for fiscal year 1999 did
not exceed $13 million dollars and a determination by Parent, in its sole
discretion, that the threatened patent infringement action
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by AVO Media involving certain IMI Intellectual Property or the U.S.
design patent for a shaped CD product issued on January 18, 2000 to SHAPE
CD, Inc., may result in a significant patent infringement claim against
IMI, Parent or any of their affiliates, provided that a "Material Adverse
Effect" shall not include changes or effects (i) relating to economic
conditions or financial markets in general or the internet or high
technology industries generally, (ii) resulting from the voluntary
termination of employment by employees or any party and its Subsidiaries
between the date hereof and the Closing Date or (iii) resulting from
actions required to be taken by the terms of this Agreement. A decline in
the stock market price of the shares of Parent or Company in and of
itself shall not be deemed a "Material Adverse Effect."
"Merger" has the meaning given in SECTION 1.01.
"Merger Sub Common Stock" has the meaning given in SECTION 1.06(C).
"Nevada Law" has the meaning given in RECITAL A.
"Nasdaq" means the National Association of Securities Dealers, Inc.
National Market System.
"Option" with respect to any Person means any security, right,
subscription, warrant, option, "phantom" stock right or other Contract
that gives the right to (i) purchase or otherwise receive or be issued
any shares of capital stock of such Person or any security of any kind
convertible into or exchangeable or exercisable for any shares of capital
stock of such Person or (ii) receive or exercise any benefits or rights
similar to any rights enjoyed by or accruing to the holder of shares of
capital stock of such Person, including any rights to participate in the
equity or income of such Person or to participate in or direct the
election of any directors or officers of such Person or the manner in
which any shares of capital stock of such Person are voted.
"Option Agreement" has the meaning given in RECITAL E.
"Order" means any writ, judgment, decree, injunction or similar order
of any Governmental or Regulatory Authority (in each such case whether
preliminary or final).
"Parent" has the meaning ascribed to it in the forepart of this
Agreement.
"Parent Common Stock" has the meaning given in SECTION 1.06(A).
"Parent Stockholder Approval" has the meaning given in SECTION 3.05.
"Parent Stockholders' Meeting" has the meaning given in SECTION 6.03.
"Permitted Lien" means (i) any Lien for Taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings
for which adequate reserves have been established in accordance with
GAAP, (ii) any statutory Lien arising in the ordinary course of business
by operation of Law with respect to a Liability that is not yet due or
delinquent and (iii) any minor imperfection of title or similar Lien
which individually or in the aggregate with other such Liens does not
materially impair the value of the property subject to such Lien or the
use of such property in the conduct of the business of the Company or any
Subsidiary.
"Person" means any natural person, corporation, general partnership,
limited partnership, proprietorship, other business organization, trust,
union, association or Governmental or Regulatory Authority.
"Representatives" has the meaning ascribed to it in SECTION 4.02.
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"Registered Intellectual Property" means all United States,
international and foreign: (i) patents and patent applications (including
provisional applications); (ii) registered trademarks, applications to
register trademarks, intent-to-use applications, or other registrations
or applications related to trademarks; (iii) registered copyrights and
applications for copyright registration; and (iv) any other Intellectual
Property that is the subject of an application, certificate, filing,
registration or other document issued, filed with, or recorded by any
state, government or other public legal authority.
"SEC" means the United Stated Securities and Exchange Commission.
"Subsidiary" means, with respect to any party, any corporation or
other organization, whether incorporated or unincorporated, of which more
than fifty percent (50%) of either the equity interests in, or the voting
control of, such corporation or other organization is, directly or
indirectly through Subsidiaries or otherwise, beneficially owned by such
party.
"Superior Offer" has the meaning given in SECTION 6.02(C).
"Surviving Corporation" has the meaning given in SECTION 1.01.
"Tax Authority" means the IRS and any other domestic or foreign
governmental authority responsible for the administration of any Taxes.
"Taxes" means any tax, fee, levy, charge, or other amount assessed by
or payable to any Governmental or Regulatory Authority, including without
limitation any interest, penalty, or other amount related thereto.
"Tax Returns" means all federal, state, local and foreign Tax
returns, declarations, statements, reports, schedules, forms and
information returns and any amendments thereto.
"Termination Fee" has the meaning given in SECTION 11.02(B).
"Voting Agreements" has the meaning given in RECITAL E.
(b) CONSTRUCTION OF CERTAIN TERMS AND PHRASES. Unless the context
of this Agreement otherwise requires, (i) words of any gender include
each other gender; (ii) words using the singular or plural number also
include the plural or singular number, respectively; (iii) the terms
"hereof," "herein," "hereby" and derivative or similar words refer to
this entire Agreement; (iv) the terms "Article" or "Section" refer to the
specified Article or Section of this Agreement; and (v) the phrases
"ordinary course of business" and "ordinary course of business consistent
with past practice" refer to the business and practice of the Company or
Parent or a Subsidiary, as the case may be. Whenever this Agreement
refers to a number of days, such number shall refer to calendar days
unless Business Days are specified. All accounting terms used herein and
not expressly defined herein shall have the meanings given to them under
GAAP, if applicable.
ARTICLE XIII
MISCELLANEOUS
13.01 NOTICES. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only
if delivered personally or by facsimile
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transmission or mailed (first class postage prepaid) to the parties at the
following addresses or facsimile numbers:
If to the Company, addressed to:
Galaxy Enterprises, Inc
754 East Technology Avenue
Orem, Utah 84907
Attn: John J. Poelman
Fax: (801) 228-9762
With a copy to:
Parsons Behle & Latimer, P.C.
One Utah Center
201 South Main Street, Suite 1800
P.O. Box 45898
Salt Lake City, UT 84145-0898
Attn: Brent Christensen, Esq.
Fax: (801) 536-6111
If to Parent and Merger Sub, addressed to:
Netgateway, Inc.
300 Oceangate, 5(th) Floor
Long Beach, CA 90802
Attn: Craig Gatarz, Esq.
Fax: (562) 308-0021
With a copy to:
Nida & Maloney, LLP
800 Anacapa Street
Santa Barbara, CA 93101
Attn: C. Thomas Hopkins, Esq.
Fax: (805) 568-1955
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile
number as provided in this Section, be deemed given upon receipt, and (iii)
if delivered by mail in the manner described above to the address as
provided in this Section, be deemed given upon receipt (in each case
regardless of whether such notice, request or other communication is
received by any other Person to whom a copy of such notice, request or other
communication is to be delivered pursuant to this Section). Any party from
time to time may change its address, facsimile number or other information
for the purpose of notices to that party by giving notice specifying such
change to the other party hereto.
13.02 ENTIRE AGREEMENT. This Agreement supersedes all prior
discussions and agreements between the parties with respect to the subject
matter hereof, including without limitation that certain letter agreement
between the parties dated December 12, 1999 and contains the sole and entire
agreement between the parties hereto with respect to the subject matter
hereof.
13.03 PUBLIC ANNOUNCEMENTS. At all times at or before the Closing, the
Company and Parent will not issue or make any reports, statements or
releases to the public or generally to the employees, customers, suppliers
or other Persons to whom the Company, Galaxy Mall and IMI sell goods or
provide services or with whom the Company, Galaxy Mall and IMI otherwise
have
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significant business relationships, with respect to this Agreement or the
transactions contemplated hereby without the consent of the other, which
consent shall not be unreasonably withheld. If either party is unable to
obtain the approval of its public report, statement or release from the
other party and such report, statement or release is, in the opinion of
legal counsel to such party, required by Law in order to discharge such
party's disclosure obligations, then such party may make or issue the
legally required report, statement or release and promptly furnish the other
party with a copy thereof. Notwithstanding the foregoing, Parent and Company
will attempt to consult with each other, and to the extent practicable,
agree, before issuing any press release or otherwise making any public
statement with respect to the Parent or this Agreement and will not issue
any such press release or make any such public statement prior to such
consultation, except as may be required by Law or any listing agreement with
a national securities exchange or Nasdaq. The parties have agreed to the
text of the joint press release announcing the signing of this Agreement.
Parent may without obtaining Company's approval, issue one or more press
releases following the Closing announcing the consummation of the
transactions contemplated by this Agreement.
13.04 CONFIDENTIALITY. Each party hereto will hold, and will use its
best efforts to cause its Affiliates, and their respective Representatives
to hold, in strict confidence from any Person (other than any such Affiliate
or Representative), unless (i) compelled to disclose by judicial or
administrative process (including without limitation in connection with
obtaining the necessary approvals of this Agreement and the transactions
contemplated hereby of Governmental or Regulatory Authorities) or by other
requirements of Law or (ii) disclosed in an Action or Proceeding brought by
a party hereto in pursuit of its rights or in the exercise of its remedies
hereunder, all documents and information concerning the other party or any
of its Affiliates furnished to it by the other party or such other party's
Representatives in connection with this Agreement or the transactions
contemplated hereby, except to the extent that such documents or information
can be shown to have been (a) previously known by the party receiving such
documents or information, (b) in the public domain (either prior to or after
the furnishing of such documents or information hereunder) through no fault
of such receiving party or (c) later acquired by the receiving party from
another source if the receiving party is not aware that such source is under
an obligation to another party hereto to keep such documents and information
confidential; provided that following the Closing the foregoing restrictions
will not apply to Parent's use of documents and information concerning the
Company furnished by Company hereunder. In the event the transactions
contemplated hereby are not consummated, upon the request of the other
party, each party hereto will, and will cause its Affiliates and their
respective Representatives to, promptly redeliver or cause to be redelivered
all copies of documents and information furnished by the other party in
connection with this Agreement or the transactions contemplated hereby and
destroy or cause to be destroyed all notes, memoranda, summaries, analyses,
compilations and other writings related thereto or based thereon prepared by
the party furnished such documents and information or its Representatives.
13.05 EXPENSES. Except as otherwise expressly provided in this
Agreement, whether or not the transactions contemplated hereby are
consummated, each party will pay its own costs and expenses incurred in
connection with the negotiation, execution and closing of this Agreement and
the transactions contemplated hereby.
13.06 WAIVER. Any term or condition of this Agreement may be waived at
any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly
executed by or on behalf of the party waiving such term or condition. No
waiver by any party of any term or condition of this Agreement, in any one
or more instances, shall be deemed to be or construed as a waiver of the
same or any other term or condition of this
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Agreement on any future occasion. All remedies, either under this Agreement
or by Law or otherwise afforded, will be cumulative and not alternative.
13.07 AMENDMENT. This Agreement may be amended, supplemented or
modified only by a written instrument duly executed by or on behalf of each
party hereto.
13.08 NO THIRD PARTY BENEFICIARY. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and it is not the intention of
the parties to confer third-party beneficiary rights upon any other Person,
except as set forth in Section 5.07.
13.09 NO ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any
right, interest or obligation hereunder may be assigned by any party hereto
without the prior written consent of the other party hereto and any attempt
to do so will be void, except for assignments and transfers by operation of
Law. Subject to the preceding sentence, this Agreement is binding upon,
inures to the benefit of and is enforceable by the parties hereto and their
respective successors and assigns.
13.10 HEADINGS. The headings used in this Agreement have been inserted
for convenience of reference only and do not define or limit the provisions
hereof.
13.11 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. Subject to any
other provision of this Agreement, each party hereby irrevocably submits to
the non-exclusive jurisdiction of the federal and state courts located in
Los Angeles, California in any such action, suit or proceeding arising out
of or relating to this Agreement or any of the transactions contemplated
hereby, provided, however, that such consent to jurisdiction is solely for
the purpose referred to in this Section and shall not be deemed to be a
general submission to the jurisdiction of said courts or in the State of
California other than for such purpose. Each party hereby irrevocably
waives, to the fullest extent permitted by Law, any objection that it may
now or hereafter have to the laying of the venue of any such action, suit or
proceeding brought in such a court and any claim that any such action, suit
or proceeding brought in such a court has been brought in an inconvenient
forum. Nothing herein shall affect the right of any party to serve process
in any other manner permitted by Law or to commence legal proceedings or
otherwise proceed against the other in any other jurisdiction.
13.12 INVALID PROVISIONS. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under any present or future Law, and
if the rights or obligations of any party hereto under this Agreement will
not be materially and adversely affected thereby, (a) such provision will be
fully severable, (b) this Agreement will be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part
hereof, and (c) the remaining provisions of this Agreement will remain in
full force and effect and will not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom.
13.13 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the Laws of the State of California applicable to a
Contract executed and performed in such State, without giving effect to the
conflicts of Laws principles thereof, except to the extent that the Laws of
the States of Delaware and Nevada shall apply where mandatorily applicable.
13.14 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 signature pages shall be forwarded to the Parent or
its counsel and the Parent or its counsel will provide all of the parties
hereto with a copy of the entire Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officer of each party hereto as of the date first above
written.
PARENT: NETGATEWAY, INC.,
a Delaware corporation
By:_________________________________
Name:
Title:
MERGER SUB: GALAXY ACQUISITION CORP.,
a Delaware corporation
By:_________________________________
Name:
Title:
COMPANY: GALAXY ENTERPRISES, Inc.,
a Nevada corporation
By:_________________________________
John J. Poelman
President and Chief Executive Officer
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APPENDIX B
RIGHTS OF DISSENTING STOCKHOLDERS
NRS 92A.300 DEFINITIONS. As used in NRS 92A.300 to 92A.500, inclusive,
unless the context otherwise requires, the words and terms defined in NRS
92A.305 to 92A.335, inclusive, have the meanings ascribed to them in those
sections. (Added to NRS by 1995, 2086)
NRS 92A.305 "BENEFICIAL STOCKHOLDER" DEFINED. "Beneficial stockholder"
means a person who is a beneficial owner of shares held in a voting trust or by
a nominee as the stockholder of record. (Added to NRS by 1995, 2087)
NRS 92A.310 "CORPORATE ACTION" DEFINED. "Corporate action" means the action
of a domestic corporation. (Added to NRS by 1995, 2087)
NRS 92A.315 "DISSENTER" DEFINED. "Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.400 to
92A.480, inclusive. (Added to NRS by 1995, 2087; A 1999, 1631)
NRS 92A.320 "FAIR VALUE" DEFINED. "Fair value," with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which he objects, excluding any
appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable. (Added to NRS by 1995, 2087)
NRS 92A.325 "STOCKHOLDER" DEFINED. "Stockholder" means a stockholder of
record or a beneficial stockholder of a domestic corporation. (Added to NRS by
1995, 2087)
NRS 92A.330 "STOCKHOLDER OF RECORD" DEFINED. "Stockholder of record" means
the person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee's certificate on file with the domestic corporation. (Added
to NRS by 1995, 2087)
NRS 92A.335 "SUBJECT CORPORATION" DEFINED. "Subject corporation" means the
domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective or
the surviving or acquiring entity of that issuer after the corporate action
becomes effective. (Added to NRS by 1995, 2087)
NRS 92A.340 COMPUTATION OF INTEREST. Interest payable pursuant to NRS
92A.300 to 92A.500, inclusive, must be computed from the effective date of the
action until the date of payment, at the average rate currently paid by the
entity on its principal bank loans or, if it has no bank loans, at a rate that
is fair and equitable under all of the circumstances. (Added to NRS by 1995,
2087)
NRS 92A.350 RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP. A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity. (Added to NRS by 1995, 2088)
NRS 92A.360 RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED-LIABILITY
COMPANY. The articles of organization or operating agreement of a domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity. (Added to NRS by
1995, 2088)
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NRS 92A.370 RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION.
1. Except as otherwise provided in subsection 2, and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his resignation
and is thereby entitled to those rights, if any, which would have existed if
there had been no merger and the membership had been terminated or the member
had been expelled.
2. Unless otherwise provided in its articles of incorporation or bylaws, no
member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of NRS
to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1. (Added to NRS by
1995, 2088)
NRS 92A.380 RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS
AND TO OBTAIN PAYMENT FOR SHARES.
1. Except as otherwise provided in NRS 92A.370 and 92A.390, a stockholder
is entitled to dissent from, and obtain payment of the fair value of his shares
in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation
is a party:
(1) If approval by the stockholders is required for the merger by NRS
92A.120 to 92A.160, inclusive, or the articles of incorporation and he is
entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged with
its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic corporation
is a party as the corporation whose subject owner's interests will be
acquired, if he is entitled to vote on the plan.
(c) Any corporate action taken pursuant to a vote of the stockholders to
the event that the articles of incorporation, bylaws or a resolution of the
board of directors provides that voting or nonvoting stockholders are
entitled to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to him
or the domestic corporation. (Added to NRS by 1995, 2087)
NRS 92A.390 LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN CLASSES
OR SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF MERGER.
1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the record
date fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting at which the plan of merger or exchange is to be acted on,
were either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the shares
provide otherwise; or
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(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu of
fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the plan of
merger or exchange, were either listed on a national securities
exchange, included in the national market system by the National
Association of Securities Dealers, Inc., or held of record by a least
2,000 holders of owner's interests of record; or
(2) A combination of cash and owner's interests of the kind described
in sub-subparagraphs (I) and (II) of subparagraph (1) of paragraph (b).
2. There is no right of dissent for any holders of stock of the surviving
domestic corporation if the plan of merger does not require action of the
stockholders of the surviving domestic corporation under NRS 92A.130. (Added to
NRS by 1995, 2088)
NRS 92A.400 LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY
TO SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL STOCKHOLDER.
1. A stockholder of record may assert dissenter's rights as to fewer than
all of the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the subject corporation
in writing of the name and address of each person on whose behalf he asserts
dissenter's rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares held
on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the beneficial
stockholder or over which he has power to direct the vote. (Added to NRS by
1995, 2089)
NRS 92A.410 NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken by written
consent of the stockholders or without a vote of the stockholders, the domestic
corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430. (Added to NRS by 1995, 2089; A 1997, 730)
NRS 92A.420 PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES.
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, a stockholder who wishes to assert
dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
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(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 and
NRS 92A.400 is not entitled to payment for his shares under this chapter. (Added
to NRS by 1995, 2089; 1999, 1631)
NRS 92A.430 DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDERS ENTITLED TO ASSERT
RIGHTS; CONTENTS.
1. If a proposed corporate action creating dissenters' rights is authorized
at a stockholders' meeting, the subject corporation shall deliver a written
dissenter's notice to all stockholders who satisfied the requirements to assert
those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to what
extent the transfer of the shares will be restricted after the demand for
payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's
rights certify whether or not he acquired beneficial ownership of the shares
before that date;
(d) Set a date by which the subject corporation must receive the demand
for payment, which may not be less than 30 nor more than 60 days after the
date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
(Added to NRS by 1995, 2089)
NRS 92A.440 DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF
RIGHTS OF STOCKHOLDER.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of
the notice.
2. The stockholder who demands payment and deposits his certificates, if
any, before the proposed corporate action is taken retains all other rights of a
stockholder until those rights are canceled or modified by the taking of the
proposed corporate action.
3. The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter. (Added to NRS by 1995,
2090; A 1997, 730)
NRS 92A.450 UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER
DEMAND FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
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2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action. (Added to NRS by 1995, 2090)
NRS 92A.460 PAYMENT FOR SHARES: GENERAL REQUIREMENTS.
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced by
the district court:
(a) Of the county where the corporation's registered office is located;
or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement
of income for that year, a statement of changes in the stockholders' equity
for that year and the latest available interim financial statements, if any;
(b) A statement of the subject corporation's estimate of the fair value
of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive. (Added to NRS by 1995,
2090)
NRS 92A.470 PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF
DISSENTER'S NOTICE.
1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares, plus
accrued interest, and shall offer to pay this amount to each dissenter who
agrees to accept it in full satisfaction of his demand. The subject corporation
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a statement of
the dissenters' right to demand payment pursuant to NRS 92A.480. (Added to NRS
by 1995, 2091)
NRS 92A.480 DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT
CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of
his shares and interest due, if he believes that the amount paid pursuant to NRS
92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his
shares or that the interest due is incorrectly calculated.
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2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within
30 days after the subject corporation made or offered payment for his shares.
(Added to NRS by 1995, 2091)
NRS 92A.490 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT
CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.
1. If a demand for payment remains unsettled, the subject corporation shall
commence a proceeding within 60 days after receiving the demand and petition the
court to determine the fair value of the shares and accrued interest. If the
subject corporation does not commence the proceeding within the 60-day period,
it shall pay each dissenter whose demand remains unsettled the amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced under
subsection 2 is plenary and exclusive. The court may appoint one or more persons
as appraisers to receive evidence and recommend a decision on the question of
fair value. The appraisers have the powers described in the order appointing
them, or any amendment thereto. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold payment
pursuant to NRS 92A.470. (Added to NRS by 1995, 2091)
NRS 92A.500 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS
AND FEES.
1. The court in a proceeding to determine fair value shall determine all of
the costs of the proceeding, including the reasonable compensation and expenses
of any appraisers appointed by the court. The court shall assess the costs
against the subject corporation, except that the court may assess costs against
all or some of the dissenters, in amounts the court finds equitable, to the
extent the court finds the dissenters acted arbitrarily, vexatiously or not in
good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if
the court finds the subject corporation did not substantially comply with
the requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith
with respect to the rights provided by NRS 92A.300 to 92A.500, inclusive.
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3. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may assess
the costs against the subject corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115. (Added to NRS by 1995, 2092)
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APPENDIX C
March 2, 2000
Board of Directors
Netgateway, Inc.
300 Oceangate, 5th Floor
Long Beach, CA 90802
Gentlemen:
You have requested that we render our opinion as to the fairness, from a
financial point of view, to the shareholders of Netgateway, Inc., (the
"Company"), of the exchange ratio of 0.63217 shares of Common Stock, par value
$.01 per share (the "Shares"), of the Company (the "Exchange Ratio") to be
exchanged for each outstanding share of Common Stock, par value $.007 per share
(the "Galaxy Common Stock"), of Galaxy Enterprises, Inc. ("Galaxy") pursuant to
the Agreement and Plan of Merger dated as of March 10, 2000 between the Company
and Galaxy (the "Agreement").
Roth Capital Partners, Inc. ("Roth Capital" or the "Firm"), as part of its
investment banking business, is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. We are familiar with the Company, having provided
certain investment banking services to it, including having acted as placement
agent in the private placement of subordinated bridge notes in 1999; having
acted as lead managing underwriter in the public offerings of Shares in 1999;
and having participated in certain of the negotiations leading to the Agreement.
In connection with the review and analysis performed to render our opinion,
among other things, we have:
i. Reviewed certain interim reports of the Company and Galaxy to their
respective stockholders and Quarterly Reports on Form 10-Q of the
Company and Galaxy;
ii. Reviewed certain internal financial analyses and forecasts for the
Company and Galaxy prepared by their respective management;
iii. Held discussions with members of the senior management of the Company
and Galaxy regarding the strategic rationale for, and potential
benefits of, the transaction contemplated by the Agreement and the past
and current business operations, financial condition and future
prospects of their respective companies and of the combined operations
of the Company and Galaxy;
iv. Reviewed a draft copy of the Agreement and Plan of Merger in the form
provided to us by the Company;
v. Reviewed certain publicly available documents relating to the Company
and Galaxy;
vi. Reviewed internal budgets and projections, marketing materials and
press releases provided to us by the Company;
vii. Reviewed publicly available data and information for companies which we
have determined to be comparable to the Company and Galaxy;
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viii. Reviewed available research reports for companies which we have
determined to be comparable to the Company and Galaxy;
ix. Reviewed the financial terms of other recent business combinations; and
x. Conducted such other financial analysis as we have determined to be
appropriate for purposes of this opinion.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In that regard, we have
assumed with the Company's consent that the financial forecasts provided by the
respective managements of the Company and Galaxy, including the synergies
expected to be derived from the business combination, have been reasonably
prepared on a basis reflecting the best currently available judgments and
estimates of the management of the Company and Galaxy. In addition, we have not
made an independent evaluation or appraisal of the assets and liabilities of the
Company or Galaxy or any of their subsidiaries and we have not been furnished
with any such evaluation or appraisal. We have assumed that the transaction
contemplated by the Agreement will be accounted for as a pooling of interests
under generally accepted accounting principles. Our advisory services and the
opinion expressed herein are provided for the information and assistance of the
Board of Directors of the Company in connection with its consideration of the
transaction contemplated by the Agreement and such opinion does not constitute a
recommendation as to how any holder of Shares should vote on the proposed
transaction.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion as of the date hereof that the Exchange
Ratio pursuant to the Agreement is fair, from a financial point of view, to
holders of the Company's common stock.
This Opinion is furnished solely for your benefit and may not be relied upon
by any other person without our express, prior written consent. This Opinion is
delivered to each recipient subject to the conditions, scope of engagement,
limitations and understandings set forth in this Opinion and our engagement
letter, and subject to the understanding that the obligations of Roth Capital
hereunder are solely corporate obligations, and no officer, director, employee,
agent, shareholder or controlling person of Roth Capital shall be subjected to
any personal liability whatsoever to any person, nor will any such claim be
asserted by or on behalf of you or your affiliates.
We have tried to apply objective measures of value in rendering our Opinion.
You understand, however, that such a valuation necessarily is based on some
subjective interpretations of value. We understand that we are not obligated to
revise our opinion due to events and fluctuating economic conditions occurring
subsequent to the date of this Opinion.
We hereby consent to the use of this opinion in the Proxy
Statement/Prospectus.
Very Truly Yours,
Roth Capital Partners, Inc.
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[LOGO]
APPENDIX D
March 10, 2000
Board of Directors
Galaxy Enterprises, Inc.
754 East Technology Avenue
Orem, Utah 84097
Dear Gentlemen:
We understand that Galaxy Enterprises, Inc. (the "Company") (OTC: GLXY) is being
merged with and into Netgateway, Inc. ("Netgateway") (NASDAQ: NGWY) in a
stock-for-stock transaction (the Transaction), whereby each share of the
Company's common stock will be exchanged for 0.632 shares of Netgateway's common
stock (the Consideration). Such transaction and all related transactions are
referred to collectively herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries, as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed Galaxy's annual reports on Form 10-KSB for the two fiscal years
ended December 31, 1998 and quarterly report on Form 10-Q for the period
ended September 30, 1999;
2. reviewed Netgateway's Form S-1, dated November 18, 1999;
3. reviewed the draft Agreement and Plan of Merger by and between
Netgateway, Inc., Galaxy Acquisition Corp. and Galaxy Enterprises, Inc.,
dated as of March 8, 2000;
4. reviewed the draft Form S-4, dated February , 2000;
5. met with certain members of the senior management of Galaxy and Netgateway
to discuss the Transaction, the operations, financial condition, future
prospects and projected operations and performance of Galaxy and Netgateway;
6. visited the headquarters and operating facilities of both Galaxy and
Netgateway in Orem, Utah and Long Beach, California, respectively;
7. reviewed Galaxy Business Plan, dated February 16, 1999;
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8. reviewed financial projections for Galaxy prepared by CSK Securities
Research and approved by Galaxy's management for the years ending
December 31, 2001;
9. reviewed Netgateway's pro-forma projections provided by management for the
two years ending December 31, 2002;
10. analyzed historical stock performance and trading volume of both Galaxy's
and Netgateway's common stock;
11. reviewed various industry and research reports for the Internet--eBusiness
industry;
12. reviewed transcripts of chat rooms of Galaxy and Netgateway during the
run-up period before the merger announcement date;
13. reviewed certain other publicly available and proprietary financial data for
certain companies that we have deemed comparable to Galaxy and Netgateway;
and
14. conducted such other studies, analyses and inquiries we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
The Company, like other companies and any business entities analyzed by Houlihan
Lokey or which are otherwise involved in any manner in connection with this
Opinion, could be materially affected by complications that may occur, or may be
anticipated to occur, in computer-related applications as a result of the year
change from 1999 to 2000 (the "Y2K Issue"). In accordance with long-standing
practice and procedure, Houlihan Lokey's services are not designed to detect the
likelihood and extent of the effect of the Y2K Issue, directly or indirectly, on
the financial condition and/or operations of a business. Further, Houlihan Lokey
has no responsibility with regard to the Company's efforts to make its systems,
or any other systems (including its vendors and service providers), Year 2000
compliant on a timely basis. Accordingly, Houlihan Lokey shall not be
responsible for any effect of the Y2K Issue on the matters set forth in this
Opinion.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
consideration to be received by the public stockholders of the Company in
connection with the Transaction is fair to them from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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. Netgateway's Certificate of Incorporation includes the
following language:
Netgateway's certificate of incorporation and/or bylaws 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 in place directors and officers liability insurance in an amount of
not less than $15 million.
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.
ITEM 21. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ -----------
<C> <S>
1.1 Form of Underwriting Agreement(1)
2.1 Agreement and Plan of Merger dated March 10, 2000 by and
among Netgateway, Inc., Galaxy Acquisition Corp. and Galaxy
Enterprises, Inc.(6)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(3)
3.3 Certificate of Ownership and Merger(4)
3.4 Articles of Merger(4)
4.1 Form of Representatives' Warrant(1)
4.2 Form of Common Stock Certificate(4)
5.1+ Opinion of Nida & Maloney, LLP
8.1+ Tax Opinion of Wisan Smith Racker & Prescott, LLP
10.1 Form of Employment Agreement, dated as of January 1, 1999,
between Netgateway, Inc. and Keith D. Freadhoff(1)
10.2 Form of Employment Agreement, dated as of January 1, 1999,
between Netgateway, Inc. and Donald M. Corliss, Jr.(1)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ -----------
<C> <S>
10.3 Form of Employment Agreement, dated as of January 1, 1999,
between Netgateway, Inc. and David Bassett-Parkins(1)
10.4 Form of Employment Agreement, dated as of January 1, 1999,
between Netgateway, Inc. and Hanh Ngo(1)
10.5 Form of Employment Agreement, dated as of April 5, 1999,
between Netgateway, Inc. and Craig Gatarz(1)
10.6 1998 Stock Compensation Program(1)
10.7 1998 Stock Option Plan for Senior Executives(1)
10.8 Office Lease, dated as of June 26, 1998, between Netgateway,
Inc. and Pacific Tower Associates(1)
10.9 Form of Internet Data Center Services Agreement, between
Netgateway, Inc. and Exodus Communications, Inc.(1)
10.10 Form of Secured Convertible Debenture due December 31,
1999(1)
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(1)
10.12 Software Assignment and Grant Back Limited License
Agreement, dated as of November 16, 1999, between Netgateway
and Shopping Planet(1)
10.13 Stock Purchase Agreement, dated as of November 1, 1998,
among StoresOnline.com, Ltd., Netgateway, Inc. and the
Selling Stockholders(1)
10.14 Amendment to Stock Purchase Agreement, among
StoresOnline.com, Ltd., Netgateway, Inc. and the Selling
Stockholders(1)
10.15 Form of Financial Consulting Agreement(1)
10.16 Letter Agreement, dated June 3, 1998, between Netgateway and
Nida & Maloney, including Terms of Retention and Legal Fee
Services Option(2)
10.17 Consulting and Advisory Agreement, dated October 20, 1998,
between Burchmont Equities Group, Inc. and Netgateway(2)
10.18 Consulting and Advisory Agreement, dated November 1, 1998,
between North Coast Securities Corp. and Netgateway(2)
10.19 Consulting Agreement, dated December 24, 1998, between
Netgateway and Glashow Associates(2)
10.20 Consulting Agreement, dated July 1, 1999, between Netgateway
and Glashow Associates LLC(2)
10.21 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(2)
10.22 Form of Series A 12% Senior Note due 2000(3)
10.23 Agreement, dated February 25, 1999, between Netgateway, Inc.
and Xoom.com(3)
10.24[R] Agreement, dated February 25, 1999, between Netgateway, Inc.
and Xoom.com(4)
10.25 Electronic Commerce Services Agreement, dated as of
March 24, 1999, between Netgateway, Inc. and CB Richard
Ellis(3)
10.26[R] Electronic Commerce Services Agreement, dated as of
March 24, 1999, between Netgateway, Inc. and CB Richard
Ellis(4)
10.27 Reseller and Mall Agreement, dated as of May 20, 1999, among
Netgateway, Inc., StoresOnline.com, Inc. and WirelessOne,
Inc.(3)
10.28[R] Reseller and Mall Agreement, dated as of May 20, 1999, among
Netgateway, Inc., StoresOnline.com, Inc. and WirelessOne,
Inc.(4)
10.29 Electronic Commerce Services Agreement, dated as of
June 1999, between Netgateway, Inc. and Reliant Innovations,
Inc.(3)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ -----------
<C> <S>
10.30[R] Electronic Commerce Services Agreement, dated as of June
1999, between Netgateway, Inc. and Reliant Innovations,
Inc.(4)
10.31 Cable Reseller and Mall Agreement, dated as of July 26,
1999, among StoresOnline.com, Inc., Netgateway, Inc. and
MediaOne of Colorado, Inc.(3)
10.32[R] Cable Reseller and Mall Agreement, dated as of July 26,
1999, among StoresOnline.com, Inc., Netgateway, Inc. and
MediaOne of Colorado, Inc.(4)
10.33 Stock Purchase Agreement, dated as of July 16, 1999, between
Netgateway, Inc. and MediaOne of Colorado, Inc.(3)
10.34[R] Stock Purchase Agreement, dated as of July 16, 1999, between
Netgateway, Inc. and MediaOne of Colorado, Inc.(4)
10.35 Distributor Mall/Storefront Agreement, dated as of
August 25, 1999, between Netgateway, Inc. and
BuySellBid.com, Inc.(3)
10.36[R] Distributor Mall/Storefront Agreement, dated as of August
25, 1999, between Netgateway, Inc. and BuySellBid.com,
Inc.(4)
10.37 Joint Marketing and Promotion Agreement, dated August 25,
1999, between Netgateway, Inc. and BuySellBid.com, Inc.(3)
10.38[R] Joint Marketing and Promotion Agreement, dated August 25,
1999, between Netgateway, Inc. and BuySellBid.com, Inc.(4)
10.39 Cable Reseller and Mall Agreement, dated as of August 30,
1999 among Netgateway, Inc., StoresOnline and B2BStores.com,
Inc.(3)
10.40[R] Cable Reseller and Mall Agreement, dated as of August 30,
1999 among Netgateway, Inc., StoresOnline and B2BStores.com,
Inc.(4)
10.41 Electronic Commerce Services Agreement, dated as of July 28,
1999, between Netgateway, Inc. and B2BStores.com, Inc.(3)
10.42[R] Electronic Commerce Services Agreement, dated as of July 28,
1999, between Netgateway, Inc. and B2BStores.com, Inc.(4)
10.43 Form of Employment Agreement between Netgateway, Inc. and
Roy W. Camblin III(3)
10.44 Reseller and Mall Agreement dated as of July 27, 1999, among
Frontiervision, Netgateway, Inc. and StoresOnline.com,
Inc.(3)
10.45[R] Reseller and Mall Agreement dated as of July 27, 1999, among
Frontiervision, Netgateway, Inc. and StoresOnline.com,
Inc.(4)
10.46 1999 Stock Option Plan for Non-Executives.(3)
10.47 Employment Agreement, dated as of November 18, 1998, between
Netgateway and Luis Marcelo Povalo(3)
10.48 Consulting Agreement, dated as of October 14, 1998, between
Netgateway, Inc. and Richard A. Beras(3)
10.49 Letter, dated December 9, 1998, from Netgateway, Inc. to
Jerry Czuchan(3)
10.50 Promissory Note, dated March 15, 1999, in the principal
amount of $50,000 payable to Joseph Py(3)
10.51 Promissory Note, dated March 15, 1999, in the principal
amount of $30,000 payable to Robert E. Ciri(3)
10.52 Common Stock Purchase Warrant, dated November 20, 1998,
issued to Sean Beebe(3)
10.53 Common Stock Purchase Warrant, dated November 20, 1998,
issued to Donald Danks(3)
10.54 Common Stock Purchase Warrant, dated November 20, 1998,
issued to Keith D. Freadhoff(3)
10.55 Common Stock Purchase Warrant, dated November 20, 1998,
issued to Michael V. Vanderhoof(3)
10.56 Master Trust--Oceangate Trust, dated as of December 10,
1998, among Keith Freadhoff, as the Trustee and the
Beneficiaries(3)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ -----------
<C> <S>
10.57 Form of Individual Trust--Oceangate Trust, between Keith D.
Freadhoff as Trustor, and Keith Freadhoff, as Trustee, for
the benefit of the Beneficiary(3)
10.58 Courseware Reproduction License Agreement, dated as of
October 29, 1997, between Prosoft I-Net Solutions, Inc. and
S.T.E.P.S., as amended by Amendment No. 1 to the Courseware
Reproduction License Agreement, and as amended by Amendment
No. 2 to the Courseware Reproduction License Agreement(3)
10.59 Assignment of License, dated as of April 1, 1998, between
S.T.E.P.S. and Netgateway, Inc.(3)
10.60 Courseware Reproduction License Agreement, dated as of
January 20, 1997, between Prosoft I-Net Solutions, Inc. and
Training Resources International, Inc., as amended by
Amendment No. 1 to the Courseware Reproduction License
Agreement(3)
10.61 Sublicense Agreement, dated as of March 27, 1998 between
Netgateway and Training Resources International, Inc.(3)
10.62 Settlement and Release Agreement, entered into April 19,
1999 among Prosoft Training.com (formerly Prosoft I-Net
Solutions, Inc., Training Resources International, Inc.,
S.T.E.P.S., Netgateway, Inc., Michael Khaled, Scott Beebe
and Donald Danks(3)
10.63 Form of Employment Agreement, dated as of June 1, 1999
between Netgateway, Inc. and John Wendel(3)
10.64 Internet Services Agreement, dated as of October 25, 1999
between Netgateway, Inc. and Bergen Brudswig Drug Company(4)
10.65 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and John J. Poelman.(6)
10.66 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and Sue Ann Cochran(6)
10.67 Form of Affiliate Lock-Up Agreement(6)
10.68 Form of Employment Agreement(6)
10.69 Stock Option Agreement dated as of March 10, 2000, by and
among Netgateway, Inc. and John J. Poelman.(6)
10.70[R] Electronic Commerce Services Agreement, dated as of
December 1, 1999, between Netgateway and Leading
Technologies, Inc. d/b/a Mall of Minority America.com,
Inc.(7)
10.71[R] Cable Reseller and Mall Agreement, dated as of December 9,
1999, among Netgateway, StoresOnline.com, Inc. and
Intermedia Partners Southeast(7)
10.72 Pledge Agreement, dated as of January 7, 2000, between
John J. Poelman and the Company(7)
10.72 Promissory Note in the principal amount of $300,000, dated
January 7, 2000 issued to the Company(7)
10.73 Pledge Agreement, dated as of February 4, 2000, between
John J. Poelman and the Company(7)
10.74 Promissory Note in the principal amount of $150,000, dated
February 4, 2000 issued to the Company(7)
10.75 Employment Agreement, dated as of December 15, 1999, between
Jill Padwa and the Company(7)
10.76 Letter of Intent, dated December 12, 1999 between Galaxy
Enterprises, Inc., a Nevada corporation and the Netgateway,
Inc.(7)
10.77* Employment Agreement by and between John J. Poelman and
Galaxy Enterprises, Inc. dated March 10, 2000
10.78* Employment Agreement by and between Frank C. Heyman and
Galaxy Enterprises, Inc. dated March 10, 2000
10.79* Employment Agreement by and between David Wise and Galaxy
Enterprises, Inc. dated March 10, 2000
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ -----------
<C> <S>
10.80* Employment Agreement by and between Brandon Lewis and Galaxy
Enterprises, Inc. dated March 10, 2000
10.81* Employment Agreement by and between Robert Green and IMI,
Inc. dated March 10, 2000
10.82* Employment Agreement by and between Benjamin Roberts and
IMI, Inc. dated March 10, 2000
10.83* Affiliate Lock-up Agreement by and between Netgateway and
Darral Clarke dated March 10, 2000
10.84* Affiliate Lock-up Agreement by and between Netgateway and
Brandon B. Lewis dated March 10, 2000
10.85* Affiliate Lock-up Agreement by and between Netgateway and
David Wise dated March 10, 2000
10.86* Affiliate Lock-up Agreement by and between Netgateway and
Frank C. Heyman dated March 10, 2000
10.87* Affiliate Lock-up Agreement by and between Netgateway and
John J. Poelman dated March 10, 2000
10.88* Affiliate Lock-up Agreement by and between Netgateway and
Benjamin Roberts dated March 10, 2000
10.89* Affiliate Lock-up Agreement by and between Netgateway and
Robert Green dated March 10, 2000
10.90* Electronic Commerce Services Agreement dated March 1, 2000
between Netgateway, Inc. and Galaxy Enterprises, Inc.
10.91* Statement of Work for Galaxy Mall and Store Conversion dated
March 1, 2000 between Netgateway, Inc. and Galaxy Mall
10.92[R] Systems Integrator Agreement dated as of March 6, 2000
between Netgateway and Complete Business Solutions, Inc.(8)
10.93[R] Systems Integrator Agreement dated as of April 4, 2000
between Netgateway and Complete Business Solutions (India)
Ltd.(8)
10.94[R] Reseller and Mall Agreement dated as of April 18, 2000 among
CableRep, Inc., Netgateway and StoresOnline.com, Inc.(8)
18.1 Letter dated February 9, 2000 from KPMG LLP(7)
21.1* Subsidiaries of Netgateway
23.1+ Consent of KPMG LLP
23.2+ Consent of Wisan, Smith, Racker & Prescott, LLP
23.3* Consent of Roth Capital Partners, Inc.
23.4* Consent of Houlihan Lokey Howard & Zukin
23.5 Consent of Wright Ford Young & Company(3)
23.6 Consent of Allan Hogenson, Chartered Accountant(5)
23.7 Consent of Ted A. Madsen, Certified Public Accountant(5)
23.8+ Consent of Nida & Maloney, LLP (included in Exhibit 5.1)
23.9+ Consent of Wisan Smith Racker & Prescott, LLP (included in
Exhibit 8.1)
99.1+ Form of Proxy to be used for the Netgateway special meeting
99.2+ Form of Proxy to be used for the Galaxy Enterprises special
meeting
99.3+ Opinion of Roth Capital Partners, Inc. (incorporated by
reference to Appendix C to the joint proxy
statement/prospectus constituting Part I of this
Registration Statement)
99.4+ Opinion of Houlihan Lokey Howard & Zukin (incorporated by
reference to Appendix D to the joint proxy
statement/prospectus constituting Part I of this
Registration Statement)
</TABLE>
- ------------------------
* Previously filed
+ Filed herewith
II-5
<PAGE>
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (File No. 333-79751) filed on June 1, 1999.
(2) Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-79751) filed on July 21,
1999.
(3) Incorporated by reference from Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (File No. 333-79751) filed on
October 14, 1999.
(4) Incorporated by reference from Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-79751) filed on
November 12, 1999.
(5) Incorporated by reference from Amendment No. 4 to the Registrant's
Registration Statement on Form S-1 (File No. 333-79751) filed on
November 18, 1999.
(6) Incorporated by reference from Netgateway's Report on Form 8-K filed on
March 21, 2000.
(7) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed on February 15, 2000 for the quarter ended December 31,
1999.
(8) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q filed on May 15, 2000 for the period ended March 31, 2000.
(b) Please note that certain confidential technical and commercial
information has been redacted from some of the exhibits attached to this
Form S-1 in order to preserve the confidentiality of such information. All of
the confidential information which has been redacted is on file with the
Securities and Exchange Commission and may be obtained in accordance with the
Freedom of Information Act. Exhibits to this Form S-1 which have had
confidential information redacted are indicated as follows on the exhibit list
above: "[R]." Within the exhibits to this Form S-1, redacted material is
indicated by the following sign where such redacted text would have appeared in
the relevant exhibit: "[REDACTED]"
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to 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) and 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 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) to include any material information 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) that, 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
II-6
<PAGE>
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof;
(3) to 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;
(4) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), such reoffering prospectus
will contain the information called for by the applicable registration
form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other
items of the applicable form;
(5) that every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a
part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes 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;
(6) to respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request; and
(7) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 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 Act and will be governed by the final adjudication of
such issue.
II-7
<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-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Long Beach, California on May 24, 2000.
<TABLE>
<S> <C> <C>
NETGATEWAY, INC.
By: /s/ ROY W. CAMBLIN III
-----------------------------------------
Roy W. Camblin III
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
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>
/s/ KEITH D. FREADHOFF
------------------------------------------- Chairman of the Board of May 24, 2000
Keith D. Freadhoff Directors
/s/ ROY W. CAMBLIN III
------------------------------------------- Chief Executive Officer May 24, 2000
Roy W. Camblin III
/s/ DONALD M. CORLISS, JR.
------------------------------------------- President, Chief Operating May 24, 2000
Donald M. Corliss, Jr. Officer and Director
/s/ JON C. FROJEN
------------------------------------------- Chief Financial Officer May 24, 2000
Jon C. Frojen
/s/ JILL GLASHOW PADWA
------------------------------------------- Executive Vice President-Sales May 24, 2000
Jill Glashow Padwa and Marketing
/s/ SIMON SPENCER
------------------------------------------- Chief Information Officer May 24, 2000
Simon Spencer
/s/ CRAIG S. GATARZ
------------------------------------------- General Counsel and Corporate May 24, 2000
Craig S. Gatarz Secretary
/s/ JOSEPH ROEBUCK
------------------------------------------- Director May 24, 2000
Joseph Roebuck
/s/ DAVID BASSETT-PARKINS
------------------------------------------- Director May 24, 2000
David Bassett-Parkins
/s/ R. SCOTT BEEBE
------------------------------------------- Director May 24, 2000
R. Scott Beebe
/s/ WILLIAM BROCK
------------------------------------------- Director May 24, 2000
William Brock
/s/ JOHN DILLON
------------------------------------------- Director May 24, 2000
John Dillon
</TABLE>
II-8
<PAGE>
Exhibit 5.1
May 23, 2000
Netgateway, Inc.
300 Oceangate, 5th Floor
Long Beach, CA 90802
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-4
(the "Registration Statement") to be filed by you with the Securities and
Exchange Commission (the "Commission") on or about May 23, 2000 in connection
with the registration under the Securities Act of 1933, as amended, of an
aggregate of 5,000,000 shares of your Common Stock (the "Stock").
In rendering this opinion, we have examined the following:
1. your registration statement on Form S-4 filed with the Commission
on November 18, 1999 (File No. 333-79751);
2. your Quarterly Report on Form 10-Q for the quarters ended
December 31, 1999 and March 30, 2000;
3. your Current Report on Form 8-K filed with the Commission on
March 21, 2000;
4. the Registration Statement, together with the exhibits filed as
part thereof;
5. the joint proxy statement/prospectus prepared in connection with
the Registration Statement (the "Prospectus");
6. your Certificate of Incorporation filed with the Delaware
Secretary of State on May 12, 1999 and your Bylaws, each of which are listed
as exhibits to the Registration Statement; and
7. the minutes of meetings and actions by written consent of the
Board of Directors that are contained in your minute books.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity and completeness of all documents
submitted to us as originals, the conformity to originals and completeness of
all documents submitted to us as copies, the legal capacity of all natural
persons executing the same, the lack of any undisclosed termination,
modification, waiver or amendment to any document reviewed by us and
<PAGE>
Netgateway, Inc.
May 23, 2000
Page 2
the due authorization, execution and delivery of all documents where due
authorization, execution and delivery are prerequisites to the effectiveness
thereof.
As to matters of fact relevant to this opinion, we have relied solely
upon our examination of the documents referred to above and have assumed the
current accuracy and completeness of the information obtained from public
officials and records referred to above. We have made no independent
investigation or other attempt to verify the accuracy of any of such
information or to determine the existence or non-existence of any other
factual matters; however, we are not aware of any facts that would cause us
to believe that the opinion expressed herein is not accurate.
We are admitted to practice law in the State of California, and we
express no opinion herein with respect to the application or effect of the
laws of any jurisdiction other than the existing laws of the United States of
America and the State of California and (without reference to case law or
secondary sources) the existing Delaware General Corporation Law.
In connection with our opinion expressed below, we have assumed that, at
or prior to the time of the delivery of any shares of Stock, the Registration
Statement will have been declared effective under the Securities Act of 1933,
as amended, that the registration will apply to such shares of Stock and will
not have been modified or rescinded and that there will not have occurred any
change in law affecting the validity or enforceability of such shares of
Stock.
Based upon the foregoing, it is our opinion that up to 5,000,000 shares
of Stock to be issued and sold by you, when issued and sold in accordance in
the manner referred to in the Registration Statement, will be validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us, if any, in the
Registration Statement, the Prospectus constituting a part thereof and any
amendments thereto.
This opinion speaks only as of its date and we assume no obligation to
update this opinion should circumstances change after the date hereof. This
opinion is intended solely for your use as an exhibit to the Registration
Statement for the purpose of the above sale of the Stock and is not to be
relied upon for any other purpose.
Very truly yours,
NIDA & MALONEY, LLP
By: /s/ C. Thomas Hopkins
-----------------------
C. Thomas Hopkins
<PAGE>
EXHIBIT 8.1
[LETTERHEAD]
May 23, 2000
GALAXY ENTERPRISES, INC.
754 E. TECHNOLOGY AVENUE
OREM, UTAH 84097
ACQUISITION OF GALAXY ENTERPRISES INC.,
BY NETGATEWAY, INC.
Gentlemen:
You have requested our opinion as to certain federal income tax consequences
associated with the merger (the "Merger") of Galaxy Enterprises, Inc. (the
"Company") with Galaxy Acquisition Corp. ("Merger Sub"), a wholly-owned
subsidiary of Netgateway, Inc. ("Parent"). The Merger will occur at the
Effective Time, as defined in and pursuant to the Agreement and Plan of
Merger (the "Merger Agreement"), dated as of March 10, 2000, and by and among
the Company, Merger Sub, and Parent. The Merger Agreement is incorporated
herein by reference. All capitalized terms not defined herein have the same
meanings as in the Merger Agreement.
Our opinion is limited to the federal income tax consequences of the Merger
to the Company and the current shareholders of the Company. Any other tax
aspects, including foreign and state and local taxation, are not considered
in this opinion. You should obtain separate advice in respect of such
aspects. We express no opinion on the tax consequences of the Merger to
Merger Sub or Parent
This opinion is based upon the facts of the transactions as discussed herein.
If any of the material facts stated herein are not complete or accurate, or
if any of the material facts change, our opinions may be modified in whole or
in part. In providing this opinion, we have reviewed copies of certain
documents related to the proposed Merger. This opinion assumes, and we have
not independently verified, the authenticity of each of these
<PAGE>
GALAXY ENTERPRISES, INC. 2 May 23, 2000
agreements, and the due capacity, authorization and power of each party to
enter into the foregoing agreements.
In providing this opinion we have reviewed the Internal Revenue Code of 1986,
as amended, the Treasury Regulations promulgated thereunder, and such cases,
rulings and other authorities, all as in effect on the date hereof, as we
deemed necessary or appropriate. Any changes in any of the foregoing could
have an effect on the validity of our opinions. We do not assume any
obligation to update our advice in light of any subsequent changes in or
modifications to the law or regulations, or any judicial or administrative
interpretations. The analysis and conclusions expressed herein are not
binding on the Internal Revenue Service ("IRS"), any other taxing agency, or
any court or administrative body. There can be no assurance that the IRS
will not take a position contrary to one or more of the opinions expressed
herein.
FACTS
THE MERGER
The Merger Agreement provides for a reorganization pursuant to which the
Company will merge with Merger Sub, with the Company being the surviving
company. As a result of the Merger, each share of the Company's Common Stock
issued and outstanding at the Effective Time of the Merger will be converted
into the right to receive that number of shares of Parent Common Stock equal
to the Exchange Ratio (as defined in Section 1.06(a) of the Merger Agreement)
multiplied by the subject share. In lieu of issuing fractional shares,
Parent will pay each Company shareholder cash in an amount equal to the
fractional share times the Closing Price (as defined in Section 1.06(d) of
the Merger Agreement) of one share of Parent Common Stock
At the Effective Time all Company Plan Options and Company Warrants (as
defined in Section 1.06(b)(i) and (ii) of the Merger Agreement) shall be
assumed by Parent. Each assumed Company Plan Option or Company Warrant shall
have the same terms and conditions as under the applicable Company Plan
Option Or Company Warrant except that (a) each Company Option or Warrant will
be exercisable for shares of Parent Common Stock, and the number of shares of
Parent Common Stock issuable upon exercise of any given option or warrant
will be determined by multiplying the Exchange Ratio in the Merger by the
number of shares of Company Common Stock underlying such option or warrant;
and (b) the per share exercise price of any such option or warrant will be
determined by dividing the exercise price of the option or warrant
immediately prior to the Effective Time by the Exchange Ratio in the Merger.
<PAGE>
GALAXY ENTERPRISES, INC. 3 May 23, 2000
THE COMPANIES
GALAXY ENTERPRISES, INC. Galaxy is a Nevada corporation which commenced
operations in 1994 under the name Cipher Voice, Inc. It adopted its present
name on December 16, 1996, and is engaged, directly and through subsidiaries,
in the business of providing various Internet products and services to assist
its customers in establishing their businesses on the Internet.
NETGATEWAY, INC. Netgateway is a Delaware corporation which is engaged in
the business of providing eCommerce services that allow clients to extend
their business to the Internet.
GALAXY ACQUISITION CORP. Galaxy Acquisition Corp. is a Delaware corporation
organized as a wholly-owned subsidiary of Parent and formed for the purpose
of merging with and into the Company.
REASONS FOR THE MERGER
The acquisition of the Company by Parent provides the Company with access to
greater financial resources, and will enable it to avail itself of
opportunities to expand its services. The Company is a complementary
business to Parent and will gain access to additional channels of
distribution for its products and services. Other business purposes, as set
out in the joint proxy statement/prospectus dated May 24, 2000, also exist.
OPERATIONS AFTER THE MERGER
After completion of the Merger, the Company will continue its operations as a
wholly owned subsidiary of Parent. The stockholders of the Company will
become stockholders of Parent and their rights as stockholders will be
governed by Parent's certificate of incorporation, bylaws and the laws of the
State of Delaware.
COMPLETION AND EFFECTIVENESS OF THE MERGER
The Merger will become effective upon the filing of certificates of Merger
with the States of Delaware and Nevada.
EXPENSES
As specified in section 13.05 of the Merger Agreement and except as otherwise
expressly provided in the Merger Agreement, all costs and expenses incurred
in connection with the Merger will be borne by the party incurring the
expense.
<PAGE>
GALAXY ENTERPRISES, INC. 4 May 23, 2000
OPINIONS
In providing this opinion, we have reviewed copies of the Merger Agreement
and related documents, and have relied upon your description of the
transaction set out above, and the representations you have provided us.
This opinion assumes, and we have not independently verified, the accuracy of
the description and representations, the authenticity and completeness of
each of these agreements, and the due capacity, authorization and power of
each party to enter into the foregoing agreements. Where we have made any
assumptions, we have set these out in this opinion. If the descriptions or
assumptions are inaccurate in any material respect, or the documents prove
not to be authentic, the opinions set out herein may not be relied upon.
This opinion assumes (i) the completeness, authority, validity, and accuracy
of such documents and authorities as well as (ii) the accuracy of any and all
assumptions and statements of fact made in this opinion. In certain
instances we have determined that there is no authority directly on point,
and in such instances we have reached our opinion reasoning from such other
authority as we believe to be relevant to the issues addressed.
Based on and subject to the descriptions and assumptions set out herein and
the analysis of the relevant statutory provisions and other legal authority
in effect on the date hereof, as set out below, we are of the opinion that
for federal income tax purposes it is more likely than not that:
1. The Merger will constitute a corporate reorganization within the
meaning of sections 368(a)(1)(A) and 368(a)(2)(E).1
2. The Company's shareholders will not recognize gain on the exchange of
their Company Common Stock for Parent Common Stock, except as provided
in item 3 below. Section 356(a).
3. The payment of cash in lieu of issuing a fractional share of Parent
Common Stock will be treated as if the fractional share interest had
been issued as part of the Merger and then redeemed by Parent. The
cash payment will be treated as having been received in exchange for
the constructively redeemed share. Rev. Rul. 66-365, 1966-2 CB 116;
Rev. Proc. 77-41, 1977-2 CB 574.
4. No gain or loss will be recognized by the Company on the receipt of
Merger Sub's assets in exchange for the Company's stock. Section 1032.
- --------------------------
1 Unless otherwise noted, all section references are to the Internal
Revenue code of 1986, as amended, and the Treasury Regulations
promulgated thereunder.
<PAGE>
GALAXY ENTERPRISES, INC. 5 May 23, 2000
5. The tax basis of the Parent Common Stock received by the Company's
shareholders is the same as the tax basis of the Company Common Stock
surrendered (except for fractional shares for which cash is received).
Section 358.
6. The holding period of the Parent Common Stock received by the
Company's shareholders will include the holding period of the Company
stock surrendered, provided that the Company stock is held as a
capital asset at the Effective Time. Section 1223(1).
Furthermore, the opinions are specifically conditioned upon the accuracy of
certain assumptions, and the representations you provided us, including the
following:
1. The Merger will be consummated pursuant to the Agreement and Plan of
Merger.
2. Following the Merger, the Company will hold at least 90 percent of the
fair market value of its net assets and at least 70 percent of the
fair market value of its gross assets and at least 90 percent of the
fair market value of Merger Sub's net assets and at least 70 percent
of the fair market value of Merger Sub's gross assets held immediately
prior to the Merger.
3. The fair market value of the Parent Common Stock to be received by
each Company shareholder will be approximately equal to the fair
market value of the Company common stock surrendered in the exchange.
4. Prior to the Merger, Parent will be in control of Merger Sub within
the meaning of section 368(c).
5. The Company has no plan or intention to issue additional shares of its
stock that would result in Parent losing control of the Company within
the meaning of section 368(c).
6. Parent has no plan or intention to reacquire any of its stock issued
in the transaction.
7. Following the Merger, the Company will continue its historic business
or use a significant portion of its historic business assets in a
business.
8. Parent, Merger Sub, the Company, and the shareholders of the Company
will pay their respective expenses, if any, incurred in connection
with the proposed transaction.
<PAGE>
GALAXY ENTERPRISES, INC. 6 May 23, 2000
LAW AND ANALYSIS
REQUIREMENTS OF A CORPORATE REORGANIZATION
If a merger is to qualify as a reorganization, there are a number of
applicable general and specific requirements that must be met, both
statutorily and judicially mandated.
THE PLAN OF REORGANIZATION
Sections 356(a)(1) and 361(a) provide the tax consequences to the
participants on the exchange of property made "in pursuance of the plan of
reorganization." However, neither the Code nor the Treasury Regulations
define the term "plan of reorganization."
Treas. Reg. Sections 1.368-3(a) and (c) provide specific requirements with
respect to records to be kept and information regarding the reorganization to
be filed with the tax returns of the parties to a reorganization. A copy of
the plan of reorganization is to be filed as a required attachment to the tax
returns of the parties to the reorganization for the taxable year in which
the Merger is effective. In addition, Treas. Reg. Section 1.368-3(b)
requires the shareholders to include with their tax return for the year in
which the reorganization occurs a statement of the relevant facts, including
a statement of the cost or other basis of the shares exchanged and a
statement of the shares received.
The term "party to a reorganization" includes (i) a corporation resulting
from a reorganization and (ii) both corporations, in the case of a
reorganization resulting from the acquisition by one corporation of stock or
properties of another. Additionally, in the case of a reorganization
qualifying under section 368(a)(1)(A) by reason of section 368(a)(2)(E) (a
reverse triangular merger), the term also includes the corporation that is in
control of the merged corporation.
In the instant case, the Merger will be consummated pursuant to the Merger
Agreement that will be approved by the shareholders. The Company, Merger Sub
and Parent will each be a party to the reorganization.
COMPLIANCE WITH LAW
Treas. Reg. Section 1.368-2(b)(1) requires that in order to qualify as a
reorganization under section 368(a)(1)(A), the transaction must be a merger
or consolidation pursuant to the corporation laws of the United States or a
state or territory, or the District of Columbia.
According to the Agreement, the Merger will be consummated pursuant to the
laws of Delaware and Nevada.
<PAGE>
GALAXY ENTERPRISES, INC. 7 May 23, 2000
CONTINUITY REQUIREMENTS
In order to qualify as a reorganization under the Code, a transaction must
satisfy both a continuity of business enterprise requirement and a continuity
of interest requirement. "Requisite to a reorganization under the Internal
Revenue Code are a continuity of the business enterprise through the issuing
corporation [Parent] under the modified corporate form described in paragraph
(d) of this section and . . . a continuity of interest as described in
paragraph (e) of this section." Treas. Reg. Section 1.368-1(b).
CONTINUITY OF BUSINESS ENTERPRISE
Treas. Reg. Section 1.368-1(d)(1) requires that the acquiring company either
(i) continue the target's historic business or (ii) use a significant portion
of the target's historic assets in a business. If the target has more than
one line of business, this requirement is satisfied if the acquiring company
continues a significant line of business.
The continuity of business enterprise requirement should be satisfied
because, following the Merger, the Company will continue its operations, and
will continue to use a significant portion of its historic business assets.
CONTINUITY OF INTEREST
The continuity of interest requirement is meant to distinguish taxable sales
from tax-free reorganizations.
Continuity of interest requires that in substance a substantial part
of the value of the proprietary interests in the target corporation be
preserved in the reorganization. A proprietary interest in the target
corporation is preserved if, in a potential reorganization, it is
exchanged for a proprietary interest in the issuing corporation
[Parent] . . . . However, a proprietary interest in the target
corporation is not preserved if, in connection with the potential
reorganization, . . . stock of the issuing corporation furnished in
exchange for a proprietary interest in the target corporation in the
potential reorganization is redeemed. Treas. Reg. Section 1.368-(e)(1)
(i).
The continuity of interest test requires an analysis of (i) the nature of the
interest received by the acquired corporation or its shareholders, (ii) the
degree of continuity necessary to satisfy the requirement, and (iii) the
duration of the continuity of interest.
<PAGE>
GALAXY ENTERPRISES, INC. 8 May 23, 2000
1. NATURE OF THE INTEREST RECEIVED
If an exchange is to qualify as a reorganization, the acquired corporation's
shareholders must receive an equity interest in the acquiring corporation to
replace their equity interest in the acquired corporation.
With respect to the Merger, the holders of the Company Common Stock will
receive Parent Common Stock. The Parent Common Stock represents an equity
interest in Parent.
2. DEGREE OF CONTINUITY OF INTEREST
The regulations require that a "substantial part of the value of the
proprietary interests" in the target be preserved in the reorganization, but
do not specify what is meant by "substantial." The regulations provide a
safe harbor, however, by indicating that continuity of interest is satisfied
if the value of the acquiring company's stock is at least equal to 50% of the
value of the target company's stock. Treas. Reg. 1.368-1(e)(6), Ex. 1.
In this transaction, best described as a reverse triangular merger or a
reverse subsidiary merger, 100% of the Company Common Stock will be exchanged
for Parent Common Stock. The holders of each share of Company Common Stock
will receive Parent Common Stock in accordance with the Exchange Ratio as
described in the Agreement. Thus, in the Merger, Parent will issue stock
worth nearly 100% of the total consideration issued. The exceptions include
fractional shares and dissenting shares for which cash will be issued. It is
anticipated that such exceptions will be minimal. Therefore, a substantial
part of the value of the proprietary interests in the Company will be
preserved in the Merger.
3. DURATION OF CONTINUITY OF INTEREST
In a significant modification of prior law, the IRS has amended the
continuity of interest regulations to provide that the disposition of the
Parent Common Stock received in the reorganization is disregarded if made to
persons not related to Parent, even if made pursuant to a pre-existing
commitment. Treas. Reg. Section 1.368-1(e), Ex. (1). A sale of the Company
Common Stock prior to the reorganization is also disregarded if the purchaser
is not related to Parent. Treas. Reg. Section 1.368-1(e), Ex. (2).
Rev. Rul. 66-23, 1966-1 CB 67, established that the continuity of interest
requirement would be satisfied, where the shareholders receive stock without
any preconceived plan or arrangement to dispose of the stock and with
"unrestricted rights of ownership for a period of time sufficient to warrant
the conclusion that such ownership is definite and substantial." In the
ruling, the IRS said that it would ordinarily treat 5 years of unrestricted
ownership as a sufficient period. TD 8760 (January 23, 1998), which modified
the continuity of interest rules, declared Rev. Rul. 66-23 obsolete because
it
<PAGE>
GALAXY ENTERPRISES, INC. 9 May 23, 2000
dealt with sales to unrelated persons. The principle of Rev. Rul. 66-23
should still be applicable where the sale is to the issuing company.
As long as no shares are sold to Parent or a related party pursuant to a
pre-existing plan, this requirement will be satisfied.
BUSINESS PURPOSE
To qualify as a tax-free reorganization a valid business purpose for the
reorganization must be established. The courts have long held that an
essential ingredient to a tax-free reorganization is that the transaction be
consummated to fulfill a bona fide business purpose of the parties. GREGORY
v. HELVERING, 293 US 465 (1935).
The Board of Directors, as set out in the joint proxy statement/prospectus
dated May 24, 2000, determined that sound and reasonable business purposes
exist for the Merger. The Merger will be consummated pursuant to
corporate-level business purposes as well as shareholder purposes, consistent
with the business purpose requirement.
ADDITIONAL REQUIREMENTS OF TAX-FREE REORGANIZATIONS PURSUANT TO SECTION
368(A)(2)(E) (REVERSE TRIANGULAR MERGER)
For reorganizations structured as reverse triangular mergers in accordance
with sections 368(a)(1)(A) and 368(a)(2)(E), additional requirements must be
met.
HOLD SUBSTANTIALLY ALL ASSETS
Section 368(a)(2)(E) requires that the surviving corporation must hold
"substantially all" of its properties and the properties of the merged
corporation. Treas. Reg. Section 1.368-2(j)(3)(iii) provides that the term
"substantially all" has the same meaning as it has in section 368(a)(1)(C).
The term "substantially all" is, however, not statutorily defined. The IRS
and the courts have indicated that no specific percentage of assets is
required, but the determination is based upon all of the facts and
circumstances. In Rev. Rul. 57-518, 1957-2 CB 253, the IRS stated
The specific question presented is what constitutes "substantially all
of the properties" as defined in [Code Sec. 368(a)(1)(C)]. The answer
will depend upon the facts and circumstances in each case rather than
any particular percentage. Among the elements of importance that are
to be considered in arriving at the conclusion are the nature of the
properties retained by the transferor, the purpose of the retention,
and the amount thereof.
For advance ruling purposes, the IRS has stated that the "substantially all"
requirement of section 368(a)(2)(E) is satisfied if the assets retained by
the surviving corporation represent at least 90% of the fair market value of
the net assets and at least 70% of the fair market
<PAGE>
GALAXY ENTERPRISES, INC. 10 May 23, 2000
value of the gross assets held by the corporation immediately prior to the
transfer. Included in the assets of the acquired corporation held
immediately prior to the reorganization are all redemptions and distributions
except for regular, normal distributions. Rev. Proc. 77-37, 1977-2 CB 568.
This 90/70 guideline is for IRS advance ruling purposes; it is not a rule of
substantive law and is not intended to prescribe a minimum threshold for
meeting the "substantially all" requirement.
Based on the representation you made to us, it is our opinion that the
"substantially all" requirement is satisfied.
CONSIDERATION USED
In a corporate reorganization under section 368(a)(2)(E), the former
shareholders of the surviving corporation must exchange, for an amount of
voting stock of the controlling corporation, an amount of stock in the
surviving corporation which constitutes control of such corporation.
A corporation is in control of another corporation if it owns stock having at
least 80% of the total combined voting power and at least 80% of the total
number of shares of all other classes of stock. Section 368(c).
In the Merger, shares of Parent Common Stock will be issued for each share of
Company Common Stock in accordance with the Exchange Ratio. Thus, the former
shareholders of the Company will exchange more than 80% of their stock in the
Company for Parent voting stock
TAX CONSEQUENCES TO PARTIES TO THE REORGANIZATION
GALAXY ENTERPRISES, INC. SHAREHOLDERS
Generally, no gain or loss is recognized by shareholders who exchange their
shares of stock SOLELY for shares of stock in another corporation as long as
such exchange is pursuant to a plan of reorganization and both corporations
are parties to such reorganization. Section 354(a)(1). Where the acquiring
corporation issues not just stock, but other property, section 356(a)
provides that gain will be recognized, but not in excess of the amount of
cash and the value of the other property received.
Historically, stock rights have not been accorded status as "stock or
securities" for purposes of the reorganization provisions, including Section
354(a). The Service has amended Reg. 1.354-1(e) to provide that "securities"
includes rights issued by a party to
<PAGE>
GALAXY ENTERPRISES, INC. 11 May 23, 2000
the reorganization to acquire its stock. In addition, the amended Reg.
1.354-1(e) provides that this new category of securities will have no
principal amount, so that even though they are not technically nonrecognition
property, their receipt generally will not cause a realized gain to be
recognized. Therefore, an exchange of stock for stock and warrants will more
likely than not be tax free.
In regards to the employee stock option plan, Internal Revenue Code sections
421(a), 423(a) and 424(a) provide for the tax-free transfer of stock options
by reason of corporate merger or reorganization providing no other
disqualifying disposition or transaction occurs.
For advance ruling purposes, the IRS requires a representation from taxpayers
that the fair market value of the stock exchanged by the acquired corporation
shareholders is approximately equal to the fair market value of the stock and
other consideration, if any, received by such shareholders from the acquiring
corporation. Rev. Proc. 86-42, 1986-2 CB 722. It has been represented that
the fair market value of Parent Common Stock is approximately equal to the
fair market value of Company Common Stock surrendered.
Cash issued to shareholders in lieu of a fractional share is taxable. Where
the cash is not separately bargained for consideration, but is issued solely
to save the issuing corporation the expense and inconvenience of issuing
fractional shares, the IRS treats the issuing corporation as issuing the
fractional share, and then redeeming it. The payment will be treated as in
full payment of the fractional share interest. Rev. Proc. 77-41, 1977-2 CB
574.
CORPORATE PARTIES
Section 1032 provides that "no gain or loss shall be recognized to a
corporation on the receipt of money or other property in exchange for stock
(including treasury stock) of such corporation." In the Merger, the Company
will acquire the assets of Merger Sub solely in exchange for its stock.
Accordingly, the Company will not recognize gain or loss on the receipt of
Merger Sub's assets in exchange for its stock.
SHAREHOLDER BASIS
The basis of the stock of the acquiring corporation received by shareholders
of the acquire d corporation is the same as the basis of the stock
transferred, decreased by the amount of cash received and increased by the
amount of gain recognized. Section 358(a)(1).
HOLDING PERIOD
Provided that the shareholders of an acquired corporation held their stock as
a capital asset, the holding period of the stock of the acquiring corporation
received under section 354 will include the holding period of the stock
surrendered. Section 1223(1).
<PAGE>
GALAXY ENTERPRISES, INC. 12 May 23, 2000
CONSEQUENCES OF FAILURE TO QUALIFY THE MERGER AS TAX-FREE REORGANIZATION
Should the reverse triangular merger fail to qualify as a reorganization, the
transfer of the Company stock to Parent pursuant to the Merger Agreement
would be considered a taxable exchange to the Company shareholders.
* * * * *
This opinion is furnished to you solely for your use in determining the
federal income tax consequences of the transactions described above and is
not to be used, circulated, quoted or otherwise referred to for any other
purpose without our express written permission. Our permission is not
required in connection with any examination conducted or required by a
governmental or regulatory body, including disclosure to your outside
accountants or lawyers in order to allow them to deal with such an
examination on your behalf.
Very truly yours,
WISAN, SMITH, RACKER & PRESCOTT, LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Netgateway, Inc:
We consent to the use of our report dated August 23, 1999, except for the
last two paragraphs of note 1, which is as of October 1, 1999, on the
consolidated financial statements of Netgateway, Inc. and subsidiaries as of
June 30, 1999 and 1998, and the related consolidated statements of operations,
changes in shareholders' equity (deficit) and cash flows for the year ended
June 30, 1999 and the period March 4, 1998 (inception) through June 30, 1998,
included in the registration statement and to the reference to our firm under
the heading "Experts" in the registration statement.
/s/ KPMG LLP
Los Angeles, California
May 24, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Netgateway Inc. of our report on the consolidated financial statements of Galaxy
Enterprises, Inc. and subsidiaries dated March 15, 2000, which appears in such
Registration Statement. We also consent to the references to us under the
headings "Experts" and "Selected Consolidated Financial Data" in such
Registration Statement.
Wisan, Smith, Racker & Prescott, LLP
Salt Lake City, Utah
May 23, 2000
<PAGE>
EXHIBIT 99.1
NETGATEWAY, INC.
SPECIAL MEETING OF STOCKHOLDERS, JUNE 21, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
NETGATEWAY, INC.
P R O X Y
The undersigned hereby revokes all previous proxies, acknowledges receipt of the
Notice of Special Meeting of Stockholders to be held on June 21, 2000 and the
Joint Proxy Statement/Prospectus, dated May 24, 2000, and hereby appoints
Roy W. Camblin III as the Proxy of the undersigned, with full power of
substitution, to vote on behalf of the undersigned at the Special Meeting of
Stockholders of Netgateway to be held at the Hilton Hotel--Long Beach, Two World
Trade Center, Long Beach, California, on June 21, 2000, at 10:00 a.m. local
time, and at any adjournment or postponement thereof, with the same force and
effect as the undersigned might or could do if personally present thereat. The
shares represented by this Proxy shall be voted in the following manner:
<PAGE>
1. Proposal to approve (a) the Agreement and Plan of Merger, dated as of
March 10, 2000, among Netgateway Inc., a Delaware corporation, Galaxy
Acquisition Corp., a Delaware corporation, and Galaxy Enterprises, Inc., a
Nevada corporation, and (b) the merger of Galaxy Enterprises Acquisition
Corp., a wholly-owned subsidiary of Netgateway, with and into Galaxy
Enterprises whereby, among other things, each outstanding share of Galaxy
Enterprises common stock will be converted into the right to receive
shares of Netgateway common stock.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSAL 1. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
Please sign your name exactly as it appears below. In the case of shares owned
in joint tenancy or as tenants in common, all should sign. Fiduciaries should
indicate their title and authority.
Dated: _____________________, 2000
Signature(s) _____________________
Please print the name(s) appearing
on each share certificate(s) over
which you have voting authority:
(Print name(s) on certificate(s)).
Please sign your name (Authorized
Signature(s))
<PAGE>
EXHIBIT 99.2
GALAXY ENTERPRISES, INC.
SPECIAL MEETING OF STOCKHOLDERS, JUNE 21, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
GALAXY ENTERPRISES, INC.
P R O X Y
The undersigned hereby revokes all previous proxies, acknowledges receipt of the
Notice of Special Meeting of Stockholders to be held on June 21, 2000 and the
Joint Proxy Statement/Prospectus, dated May 24, 2000, and hereby appoints
John J. Poelman as the Proxy of the undersigned, each with full power of
substitution, to vote on behalf of the undersigned at the Special Meeting of
Stockholders of Galaxy Enterprises to be held at 754 E. Technology Avenue, Orem,
Utah on June 21, 2000, at 10:00 a.m. local time, and at any adjournment or
postponement thereof, with the same force and effect as the undersigned might or
could do if personally present thereat. The shares represented by this Proxy
shall be voted in the following manner:
<PAGE>
1. Proposal to approve (a) the Agreement and Plan of Merger, dated as of
March 10, 2000, among Netgateway Inc., a Delaware corporation, Galaxy
Acquisition Corp., a Delaware corporation, and Galaxy Enterprises, Inc., a
Nevada corporation, and (b) the merger of Galaxy Enterprises Acquisition
Corp., a wholly-owned subsidiary of Netgateway, with and into Galaxy
Enterprises whereby, among other things, each outstanding share of Galaxy
Enterprises common stock will be converted into the right to receive
shares of Netgateway common stock.
FOR / / AGAINST / / ABSTAIN / /
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSAL 1. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
Please sign your name exactly as it appears below. In the case of shares owned
in joint tenancy or as tenants in common, all should sign. Fiduciaries should
indicate their title and authority.
Dated: _____________________, 2000
Signature(s) _____________________
Please print the name(s) appearing
on each share certificate(s) over
which you have voting authority:
(Print name(s) on certificate(s)).
Please sign your name (Authorized
Signature(s))