<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON [ ], 2000
REGISTRATION NO.: 333-[ ]
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
NETGATEWAY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7373 87-0591719
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
300 Oceangate, Suite 500
Long Beach, California 90802
(562)506-4600/(562)308-0021 (Telecopy)
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's principal executive offices)
Roy W. Camblin III
Chief Executive Officer
Netgateway, Inc.
300 Oceangate, Suite 500
Long Beach, California 90802
(562)506-4600/(562)308-0021 (Telecopy)
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copy to:
C. Thomas Hopkins, Esq.
Nida & Maloney, LLP
800 Anacapa Street
Santa Barbara, California 93101
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effective date of this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box. /X/ / /
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(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If 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. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT OF SHARES OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTRATION
BE REGISTERED TO BE REGISTERED SHARE PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share 32,624,902 NA $38,742,071 (1) $10,228
Common Stock, par value $.001 per share 331,000 $1.625 $ 537,875 (2) 142
===================================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(c), based on the average of the high and
low prices of a share of common stock of Netgateway on August 30, 2000
as reported on The Nasdaq Stock Market, Inc. solely for the purpose of
calculating the registration fee.
(2) Estimated pursuant to Rule 457(g) solely for the purpose of calculating
the registration fee, based upon the exercise price of the warrant
under which such shares of common stock are issuable.
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.
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated September 7, 2000
PROSPECTUS
-----------
NETGATEWAY, INC.
32,955,902 SHARES OF COMMON STOCK
-----------
- Our common stock, par value $0.001 per share, is traded on
The Nasdaq National Market under the symbol "NGWY." The closing
price on August 30, 2000 was $1.1875 per share. All of the shares
of common stock offered in this prospectus are being sold by the
selling stockholders listed on page 45 of this prospectus.
- This prospectus covers the resale of up to 32,955,902
shares of common stock, including common stock to be issued to the
selling stockholders upon conversion of a convertible debenture,
upon the exercise of warrants and upon exercise of our right to
sell shares of our common stock to one of the selling
stockholders.
- King William, LLC, one of the selling stockholders, is an
underwriter within the meaning of the Securities Act of 1933 in
connection with this offering.
- We will not receive any of the proceeds from the sale of
shares by the selling stockholders.
AN INVESTMENT IN THE SHARES OFFERED IN THIS PROSPECTUS INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
----------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------
The date of this prospectus is [ ] __, 2000.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary............................................................................... 1
Risk Factors..................................................................................... 7
Information Regarding Forward-Looking Statements................................................. 14
Use of Proceeds.................................................................................. 15
Market Price Range and Dividend Information...................................................... 15
Capitalization................................................................................... 16
Dilution......................................................................................... 16
Selected Financial Data.......................................................................... 17
Management's Discussion And Analysis Of Financial Condition And Results Of Operations............ 18
Business......................................................................................... 23
Management....................................................................................... 35
Executive Compensation........................................................................... 38
Related Party Transactions....................................................................... 43
Security Ownership of Certain Beneficial Owners.................................................. 44
Selling Stockholders ............................................................................ 45
Plan of Distribution............................................................................. 45
Description of Capital Stock..................................................................... 46
Experts.......................................................................................... 47
Legal Matters.................................................................................... 47
Where You Can Find More Information.............................................................. 48
Index to Consolidated Financial Statements....................................................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT IS PROVIDED IN
GREATER DETAIL ELSEWHERE IN THIS PROSPECTUS. WE ENCOURAGE YOU TO CAREFULLY READ
THE ENTIRE PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. UNLESS THE CONTEXT
OTHERWISE REQUIRES, THE TERMS "NETGATEWAY," "WE," "US" AND "OUR" AS USED IN THIS
PROSPECTUS INCLUDE NETGATEWAY, INC. AND ITS SUBSIDIARIES.
NETGATEWAY
We provide eCommerce services that enable companies of all sizes to
extend their businesses to the Internet quickly and effectively with minimal
investment by developing, hosting, licensing and supporting a wide range of
built-to-order business-to business, business-to-consumer and
business-to-employee applications, including enterprise portals, e-retail,
e-procurement and e-marketplace solutions.
An integral component to our electronic offerings is the Netgateway
Internet Commerce Center-TM-, a secure, high performance e-Business
infrastructure. Our Internet Commerce Center supports a level of customization
unique to application outsourcing with solutions ranging from eCommerce sites
using an Internet storefront and e-mail order processes, to complex Web-enabled
transactions to facilitate inter- and intra-business processes, such as
corporate directories and purchasing workflows. We also permit e-Business
application licensing to accommodate those organizations that have significant
internal infrastructures and the desire to manage their own solutions.
Our mission is to advance the use of the Internet as an effective
business system by providing innovative solutions for our customers. Our
strategic vision is to be the preferred e-Business solution provider for
business-to-business, business-to-consumer and business-to-employee
transactions.
We are located at 300 Oceangate, Suite 500, Long Beach, California
90802. Our telephone number is (562) 506-4600 and our Web site address is
WWW.NETGATEWAY.COM.
The information contained on our Web site does not constitute part of
this prospectus.
SERVICES OFFERED
We offer the following services.
Our business-to-business division delivers e-Business solutions
including enterprise portals, e-retail, e-procurement and e-marketplace
solutions, as well as end-to-end consulting and support services to small to
medium sized businesses throughout the United States. We develop and deploy our
e-Business proprietary applications on our Internet Commerce Center-TM-.
Our CableCommerce division partners with cable operators to combine the
power of cable advertising and local eCommerce. Our CableCommerce division
creates and launches cable-branded electronic malls, which are promoted hundreds
of times per month by cable operators. These e-Malls feature local
establishments, allowing visitors to locate convenient services and products. We
have launched eCommerce initiatives with leading cable operators such as AT&T,
CableOne, MediaOne and Cox Communications. CableCommerce e-Malls currently reach
more than 3.3 million households in over 22 markets across the nation.
We offer design, development, hosting and site management of e-Malls
and electronic storefronts sold through cable operators and delivered to local
merchants and subscribers. We provide training of the cable system sales
personnel, offers storefront creation and maintenance services. In addition, we
offer local and regional classified advertisements, community calendars and
coupons to optimize e-Mall content.
Our subsidiary, Galaxy Enterprises, Inc., offers educational eCommerce
seminars to merchants who want to bring their business ideas online. These
seminars offer strategies to successfully build, market and grow eCommerce
sites. Galaxy Enterprises also operates GalaxyMall, a popular online shopping
site at WWW.GALAXYMALL.COM, which hosts more than 3,700 merchants and manages
WWW.MATCHSITE.COM, an innovative meta-search engine that compiles
1
<PAGE>
and ranks the results of major search engines. GalaxyMall engages in the
business of selling to its customers Internet services and products which
include electronic home pages, or storefronts, on GalaxyMall, and hosts those
storefront sites on its Internet server. GalaxyMall'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.
IMI, Inc., our subsidiary doing business under the name Impact Media,
offers state-of-the-art multi-media marketing messages using custom-cut compact
discs. IMI also creates full-motion CDs for Fortune 1000 companies. IMI designs,
manufactures and markets multimedia brochures, shaped compact disks and other
products and services 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.
OUR MARKET
The new Internet economy has transformed the way that business is
conducted. Companies are now required to market dynamically, compete globally
and communicate with a network of consumers and partners. Introducing a business
to the electronic world unleashes new opportunities in such areas as growth,
services, product innovation and operational efficiencies.
In 1999, Nielsen/NetRatings, Inc. and Mediamark Research, Inc. both
estimated that there were as many as 83 million Americans actively on-line. This
number represents 42 percent of the total U.S. adult population (over 18) that
are now regular Internet users, up 20 percent from 1998. According to The Boston
Consulting Group/Shop.Org, business-to-consumer eCommerce reached $33.1 billion
in 1999 and an estimated 7 million consumers will have made their first online
purchase this year.
The North American Internet retailing segment is on pace to surpass
$29.3 billion in 2000, a 75 percent increase over 1999 revenue, according to
Gartner Group. Gartner Group reports that in 1999, North American online retail
sales totaled $16.8 billion, up 157 percent from 1998 revenue. According to
Forrester, by 2004, 49 million U.S. households are predicted to spend $184
billion online.
According to Dataquest, business-to-consumer e-Business initiatives
played a dominant role in the market in 1999. The majority of 1999 e-Business
implementations focused on Web enablement of basic business operations, basic
business-to-consumer functionality and customer relationship management.
Dataquest predicts extra-enterprise initiatives, including participation in
business-to-business supply chains and e-marketplaces, will be a major focus of
initiatives in 2000. Like business-to-consumer eCommerce, business-to-business
initiatives are forecast to grow dramatically over the next few years. 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
2002.
More than $6 trillion in online business-to-business trade is expected
by 2005, representing 42 percent of total U.S. business-to-business non-service
spending, according to research by Jupiter Communications. Jupiter's research
reveals that, while this year's Internet business-to-business trade will only
represent three percent of the total U.S. business-to-business non-service
market, or $336 billion, the online volume will grow twenty-fold over the next
five years opening the doors for new business models such as net markets and
coalition markets. Currently, the direct channel, a model of one seller to many
buyers, dominates 92 percent of the Internet business-to-business market,
according to Jupiter Communications. However, Jupiter Communications estimates
that, in 2005, 35% of the Internet business-to-business trade volume will be
conducted via a net market, a model of many buyers and many sellers, or through
a coalition market, comprised of a consortium of buyers or sellers.
As a result of the recent growth of business-to-consumer and
business-to-business eCommerce and eCommerce's 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.
2
<PAGE>
SIGNIFICANT STRATEGIC RELATIONSHIPS
CB RICHARD ELLIS. In March 1999, we 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, we developed,
managed and serviced 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 plans to offer 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, we entered into a reseller and mall
agreement with Wireless One, Inc. Under the agreement, we designed and developed
an Internet-based shopping mall, branded with the Wireless One name, brand and
image and offer our storefront creation and maintenance services to Wireless
One's subscribers. We 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 promotes this mall
with a total of 1,000 30-second spots every month jointly developed by us and
Wireless One in all systems in which it is able to provide advertising.
FRONTIERVISION MEDIA SERVICES. In July 1999, we entered into a reseller
and mall agreement with Frontiervision Media Services, a provider of cable
television programming services. Under the agreement, we designed and developed
an Internet-based shopping mall, branded with the Frontiervision name, brand and
image and are offering our storefront creation and maintenance services to
Frontiervision's subscribers. We also provide marketing support, including
development of mall content, training of Frontiervision salespeople and
production of advertising spots to promote their services. Frontiervision
promotes this mall with a minimum of 1,000 cablecasts per broadcast month in
each broadcast market where the mall services are offered.
MEDIAONE. In July 1999, we entered into a strategic relationship with
MediaOne, a leading cable television operator. Under the agreement, we 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 throughout the United States. These shopping malls are
branded with the MediaOne name, brand and image, feature businesses local to
each market and offer additional online services, such as classified
advertisements, local community events calendars and 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 our common stock and a warrant exercisable for up to 200,000 shares of
our 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 June 30, 2000, MediaOne has launched shopping malls in 11
cable television markets representing more than 1.45 million subscriber
households.
BUYSELLBID.COM. In August 1999, we entered into a distributor mall and
reseller agreement with BuySellBid.com. Under the agreement, we design and
develop Internet-based shopping malls for BuySellBid.com, which will in turn
resell and/or sublicense these Internet-based shopping malls, custom-branded, to
other resellers. In the alternative, BuySellBid.com offers to brand any such
Internet-based mall with the BuySellBid.com name, brand and image and offers our
storefront creation and maintenance services to its own subscribers. We provide
marketing support, including development of mall content and training of
BuySellBid.com salespeople.
CABLEONE. In August 1999, Netgateway entered into a cable reseller and
mall agreement with CableOne, a large cable television operator. Under the
agreement, we designed and developed an Internet-based shopping mall, branded
with the CableOne name, brand and image and are offering our storefront creation
and maintenance services to CableOne's subscribers. We also provide marketing
support, including development of mall content, training of CableOne sales
people and production of advertising to promote their services. CableOne
promotes this mall with a minimum of 400 cablecasts per broadcast month in each
broadcast market where the mall services are offered.
3
<PAGE>
BERGEN BRUNSWIG CORPORATION. In October 1999, we entered into an
Internet services agreement with Bergen Brunswig Corporation, a Fortune 100
company and the third largest pharmaceutical distributor in the United States.
Under this agreement, we designed and developed, and manage and service, an
Internet-based shopping mall branded with the Bergen Brunswig name, brand and
image. The site contains on-line storefronts for affiliated local pharmacies. We
are also responsible for training Bergen Brunswig personnel under the agreement.
Bergen Brunswig had a two-pronged business objective for its nationwide network
of 2,000 affiliated Good Neighbor Pharmacies. First, was to incorporate
business-to-business eCommerce features that directly connect Good Neighbor
Pharmacies ("GNPs") to Bergen Brunswig and other partner information and
services. Second, was to provide direct-to-consumer service on behalf of their
customers. In eight weeks, we launched more than 600 customized sites for Bergen
Brunswig's affiliated GNPs. Less than a year into the project, the myGNP.com
site represents 1,800 GNP stores and has established a strong competitive
Internet presence for both Bergen Brunswig and its affiliated GNPs. This site
also allows consumers to find the nearest Good Neighbor Pharmacy and link to
that pharmacy's site for pertinent information, pharmacists' biographies,
Bergen-provided services and specialty services, current product promotions and
pharmacy hours.
DIVERSITY ECOMMERCE.COM, INC., FORMERLY KNOWN AS LEADING TECHNOLOGIES.
In December 1999, we entered into 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, we 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, we designed and developed an Internet-based shopping mall,
branded with Intermedia's name, brand and image, and are offering our storefront
creation and maintenance services to Intermedia's subscribers. We 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 promotes
the mall with a total of 500 30-second spots every month in the Nashville
market, jointly developed by us and Intermedia.
PHARMERICA. In January 2000, we 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, we designed and developed, and manage and host, a patient
prospecting system, known as PMSIOnLine.com, in which sales professionals and
claims adjustors input prospective patient referrals directly into a secured
browser and submit these prospective patient referrals to PharMerica's legacy
systems for analysis and possible sales follow-up.
COX COMMUNICATIONS. In April 2000, we reached an agreement with
CableRep, Inc., an affiliate of Cox Communications, to launch one or more
electronic shopping malls in the Cox Communications cable television markets
designated by Cox Communications. Pursuant to this agreement, we are designing
and developing Internet-based shopping malls, branded with Cox Communications'
name, brand and image and are offering our storefront building and maintenance
services to Cox Communications' cable television subscribers. We are also
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.
SBC INTERACTIVE. In June 2000, we entered into a professional services
agreement with SBC Interactive, a subsidiary of SBC Communications, Inc., under
which we design and develop custom Web sites for SBC's hundreds of yellow pages
merchants. We provide sales support to SBC, as well as full production and
maintenance support for all Web sites that we build under the agreement.
COMPLETE BUSINESS SOLUTIONS, INC.; COMPLETE BUSINESS SOLUTIONS, INDIA.
In March 2000, we 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, we 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. We receive 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. We share recurring fees for hosting,
transactions and advertising with CBSI. In April 2000, we 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.
4
<PAGE>
THE OFFERING
In August 2000, we entered into a private equity credit agreement with
King William, LLC ("King William"). Under the terms of the agreement, we have
the right to issue and sell to King William up to 19,248,167 shares of our
common stock, representing $10 million aggregate principal amount of our common
stock. King William may resell these shares of common stock under this
prospectus. In addition, for each 10,000 shares of common stock that we issue
and sell to King William, we will issue a warrant to King William to purchase
1,500 shares of our common stock. The shares issuable upon exercise of these
warrants may also be sold under this prospectus.
In July 2000, we entered into a securities purchase agreement with King
William. Under the terms of the agreement, we issued to King William an 8%
convertible debenture in the principal amount of $4.5 million. The debenture is
convertible into the number of shares of our common stock equal to the lower of
$1.79 or 80% of the average market price of the common stock during the 20
trading days prior to conversion. The purchase price for the debenture is
payable in two tranches, the first $2.5 million of which was paid at the closing
in July 2000. The remainder may be drawn down by us three business days after
the effective date of the registration statement of which this prospectus is a
part. In addition, we issued to King William a warrant to purchase 231,000
shares of common stock. In connection with the issuance of the debenture, we
also issued to Roth Capital Partners, Inc. a warrant to purchase 90,000 shares
of common stock and to Carbon Mesa Partners, LLC a warrant to purchase 10,000
shares of common stock. The shares of common stock issuable upon conversion of
the debenture and exercise of these warrants may be sold under this prospectus.
This prospectus covers the resale of up to 32,955,902 shares of
common stock by the selling stockholders named in this prospectus that are
issuable under the terms of the private equity credit agreement, upon
conversion of the debenture and the exercise of the warrants described above.
We are required under the terms of our financing agreements with King William
to register 200% of the aggregate number of shares into which each of the
securities would be convertible. In addition, the number of shares being
registered for resale under this prospectus is based on the following
assumptions:
- The issuance of 331,000 shares of our common stock upon exercise
of warrants exercisable at $1.625 per share;
- The issuance of up to 10,489,510 shares of our common stock
upon conversion of the $4.5 million convertible debenture at $.858 per
share, which per share price is based on the closing price of our common
stock on August 30, 2000 and certain adjustments required by our financing
agreements with King William;
- The issuance of up to 19,248,167 shares of our common stock,
representing $10 million aggregate principal amount of our common stock at
$1.03906 per share which per share price is based on the closing price of
our common stock on August 30, 2000 and certain adjustments required by our
financing agreements with King William;
- The issuance of up to 2,887,225 shares of common stock upon
conversion of warrants to purchase $1.5 million aggregate principal amount of
our common stock at $1.03906 per share which per share price is based on the
closing price of our common stock on August 30, 2000 and certain adjustments
required by our financing agreements with King William.
<TABLE>
<S> <C>
Common stock offered..................................... 32,955,902 shares
Common stock outstanding after this offering............. 54,632,992 shares
Use of proceeds.......................................... We will not receive any proceeds from the
shares sold by the selling stockholders,
but a portion of those shares will be
obtained upon the exercise of outstanding
warrants. Any money we receive upon the
exercise of warrants will be used for
working capital purposes.
Nasdaq National Market Symbol............................ NGWY
</TABLE>
The number of shares of common stock outstanding after this offering does not
include up to 5,737,551 shares of common stock that could be issued upon the
exercise of certain warrants and options outstanding as of June 30, 2000.
5
<PAGE>
SUMMARY OF CONSOLIDATED FINANCIAL DATA
NETGATEWAY CONSOLIDATED FINANCIAL DATA
The following selected restated consolidated financial data should
be read in conjunction with the consolidated financial statements and related
notes thereto and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section 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, Spartan Multimedia, Ltd.
completed on January 15, 1999 and Galaxy Enterprises, Inc. completed on June
26, 2000. The acquisition of Galaxy Enterprises was accounted for as a
pooling-of-interests. Accordingly, all periods prior to the acquisition have
been restated. The consolidated statement of operations data for each of the
years in the three-year period ended June 30, 2000 and the consolidated
balance sheet data at June 30, 2000, 1999 and 1998 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. Prior to the combination, Galaxy Enterprises' fiscal years ended
on December 31. In recording the pooling-of-interests, Galaxy Enterprises'
financial statements for the years ended December 31, 2000 and 1999 have been
restated to conform to Netgateway's fiscal years ended June 30, 2000 and
1999. The restatement of Galaxy Enterprises' results include a duplication of
operations for the period from July 1, 1998 to December 31, 1998. As a
result, Netgateway has eliminated the related income of $1,733,441 from
accumulated deficit for fiscal 1999, which includes $3.7 million in revenue.
Galaxy Enterprises' financial statements for the year ended December 31, 1998
have been combined with Netgateway's financial statements for the period from
March 4, 1998 (inception) through June 30, 1998. The unaudited consolidated
statement of operations data for the years ended June 30, 1997 and 1996 and
the consolidated balance sheet data at June 30, 1997 and 1996 are derived
from the unaudited consolidated financial statements of Galaxy Enterprises,
Inc. as of December 31, 1997 and 1996 and each of the years in the two-year
period ended December 31, 1997. 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>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998 1997 1996
--------- --------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue $ 27,425 10,569 7,268 358 16
(Loss) income from operations (39,500) (15,821) (8,502) (2,011) 6
Net (loss) income (44,108) (15,140) (8,521) (2,049) 5
Net (loss) income per common share
Basic and diluted (2.38) (1.21) (0.97) .61 .01
Weighted average common shares outstanding
Basic and diluted 18,511 12,536 8,788 3,366 857
CONSOLIDATED BALANCE SHEET DATA:
Cash 2,607 968 279 113 10
Working capital (deficit) equity (14,845) (9,292) (8,733) (851) 8
Total assets 12,309 5,353 2,041 1,282 210
Short-term debt 102 1,535 2,152 - -
Long-term debt - - 383 15 -
Stockholders' (deficit) equity (10,776) (8,106) (7,692) (1,929) 120
</TABLE>
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CONSIDER THE RISKS DESCRIBED BELOW AND OTHER RISKS BEFORE YOU DECIDE TO
BUY OUR COMMON STOCK. THESE RISKS SHOULD BE CONSIDERED ALONG WITH THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY BE
SERIOUSLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK MAY
DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
OUR AUDITORS HAVE QUALIFIED THEIR REPORT ON OUR FINANCIAL STATEMENTS WITH
RESPECT TO OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The report of KPMG LLP, our independent accountants, with respect to our
financial statements and the related notes, indicate that at the date of their
report, we had generated losses from operations and a net stockholders'
deficit. Accordingly, KPMG LLP qualified their report as of that date to
indicate that these matters raise substantial doubt about our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from this uncertainty.
WE HAVE HAD A DEFICIT IN STOCKHOLDERS' EQUITY, WE HAVE A HISTORY OF LOSSES AND
WE EXPECT FUTURE LOSSES.
We have incurred substantial losses and anticipate incurring substantial
losses for the foreseeable future. For the year ended June 30, 1999, we had a
working capital deficit of $9,291,719 and for the year ended June 30, 2000,
we had a working capital deficit of $14,844,854. Stockholders' deficit was
$8,106,375 and $10,776,300 at June 30, 1999 and June 30, 2000, respectively.
We generated revenues of $10,568,685 for the year ended June 30, 1999 and
$27,424,759 for the year ended June 30, 2000. For the year ended June 30,
1999 and the year ended June 30, 2000, we incurred net losses of $15,140,478
and $44,108,429, respectively. We may never achieve profitability. For the
year ended June 30, 1999 and the year ended June 30, 2000, we recorded
negative cash flows from operations of $6,971,091 and $16,639,773,
respectively.
To succeed, we must leverage existing relationships and develop new
relationships to substantially increase our revenue by providing more
comprehensive eCommerce services. We have historically invested heavily in sales
and marketing, technology infrastructure and research and development and expect
to continue to do so. As a result, we must generate significant revenues to
achieve and maintain profitability. We expect our sales and marketing expenses,
research and development expenses and general and administrative expenses will
continue to increase in absolute dollars and may increase as a percentage of
revenues. In addition, we may incur substantial expenses in connection with
future acquisitions. As a result, we may not be able to achieve or sustain
profitability.
WE WILL REQUIRE ADDITIONAL FUNDING TO OPERATE AND GROW OUR BUSINESS
SUCCESSFULLY.
We will require additional financing in the near future to meet our working
capital needs. Additional financing may not be available on favorable terms or
at all. If we raise additional funds by selling stock, the percentage ownership
of our then current stockholders will be reduced. If we cannot raise adequate
funds to satisfy our capital requirements, we may have to limit our operations
significantly. Our future capital requirements depend upon many factors,
including, but not limited to:
- the rate at which we expand our sales and marketing operations and our
product and service offerings;
- the extent to which we develop and upgrade our technology and data
network infrastructure; and
- the occurrence, timing, size and success of acquisitions.
WE HAVE A LIMITED OPERATING HISTORY AND MAY NOT BE ABLE TO IMPLEMENT OUR GROWTH
STRATEGY.
Given our limited operating history, there is little operating and
financial data about us, making evaluation of our business operations and
prospects more difficult. We are subject to the risks, expenses and
uncertainties frequently encountered by young companies operating exclusively in
the new and rapidly evolving markets for Internet products and services.
Successfully achieving our 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;
7
<PAGE>
- 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 our business depends on factors outside our
control, including:
- adoption by the market of the Internet, and more specifically, our
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 our basic outsourcing business model.
OUR BUSINESS MODEL IS UNPROVEN AND CHANGING.
Our business model consists of providing businesses and merchants with
eCommerce enabling solutions. We have limited experience as a company and,
additionally, the Internet, on which our business model relies, is still
unproven as a business medium. Accordingly, our business model may not be
successful, and may need to be changed. Our ability to generate sufficient
revenues to achieve profitability will depend, in large part, on our ability to
successfully market our eCommerce products and services to businesses and
merchants that may not be convinced of the need for an online presence or may be
reluctant to rely upon third parties to develop and manage their eCommerce
offerings and marketing efforts.
IF WE ARE UNABLE TO UPGRADE OUR INFRASTRUCTURE, WE MAY BE UNABLE TO PROCESS AN
INCREASED VOLUME OF TRANSACTIONS.
We may be unable to effectively upgrade and expand our hardware and
software infrastructure or to integrate smoothly any newly developed or
purchased software with our existing systems. A key element of our business
strategy is providing a cost-effective means for our clients to generate a high
volume of eCommerce transactions through the use of our hardware and software
infrastructure. If the volume of transactions through our infrastructure
substantially increases, we will have to expand and further upgrade our
technology, transaction processing systems and hardware and software
infrastructure to accommodate these increases or our systems may suffer from:
- unanticipated system disruptions;
- slower response times;
- degradation in customer service;
- impaired quality and speed of transaction processing; and
- delays in reporting accurate financial information.
WE FACE SIGNIFICANT COMPETITION.
Our target market rapidly evolves and is subject to continuous
technological change. Our competitors may better address new developments or
react more favorably to changes, which could materially affect us. The market
for eCommerce services, while new, is already highly competitive and
characterized by an increasing number of entrants.
We compete on 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. Existing or future competitors may
develop or offer eCommerce services providing significant technological,
creative, performance, price or other advantages over the services that we
offer.
Our competitors can be divided into several groups:
- large systems integrators;
- Internet service providers and portals;
- telecommunications companies;
- large information technology consulting services providers;
- computer hardware and service vendors;
- on-line malls; and
- strategic consulting firms.
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 and adversely affect us.
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 our primary
competitors currently include, without limitation,
8
<PAGE>
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.
Many of our competitors and potential competitors have substantial
competitive advantages, including:
- larger customer or user bases;
- the ability to offer a wider array of eCommerce products and solutions;
- greater name recognition and larger marketing budgets and resources;
- substantially greater financial, technical and other resources;
- the ability to offer additional content and other personalization
features; and
- larger production and technical staff.
These advantages may enable our competitors to adapt more quickly to new
technologies and customer needs, devote greater resources to the promotion or
sale of their products and services, initiate or withstand substantial price
competition, take advantage of acquisition or other opportunities more readily
or develop and expand their product and service offerings more quickly.
Additionally, in pursuing acquisition opportunities, we may compete with
other companies with similar growth strategies. Some of these companies may be
larger and have greater financial and other resources than we have. 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 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 us.
IF WE DO NOT INCREASE BRAND AWARENESS OUR SALES MAY SUFFER.
Due in part to the emerging nature of the markets for eCommerce enabling
products and services and online marketplaces, together with the substantial
resources available to many of our competitors, our opportunity to achieve and
maintain a significant market share may be limited. Developing and maintaining
awareness of the Netgateway, StoresOnline.com and GalaxyMall brand names is
critical in achieving widespread acceptance of our eCommerce enabling products
and services and our online marketplaces. The importance of brand recognition
will increase as competition in our markets increases. Successfully promoting
and positioning our brands will depend largely on the effectiveness of our
marketing and sales efforts and our ability to develop reliable and useful
products and services at competitive prices. If our planned marketing and sales
efforts fail, we may need to increase our financial commitment to those which
could divert financial and management resources from other aspects of our
business, or cause our operating expenses to increase disproportionately to our
revenues. This could cause our business and operating results to suffer.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY AFFECT OUR STOCK PRICE AND ABILITY TO
RAISE CAPITAL.
As a result of our limited operating history and the emerging nature of the
markets in which we 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 fall, impairing our ability to raise capital. You should not rely on our
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
which may cause our quarterly results to fluctuate include, among others:
- our ability to retain and attract clients;
- intense competition;
- Internet and online services usage levels and the rate of market
acceptance of these services for transacting commerce;
- our ability to timely and effectively upgrade and develop our systems
and infrastructure;
- our ability to attract, train and retain skilled management, strategic,
technical and creative professionals;
9
<PAGE>
- technical, legal and regulatory difficulties with respect to Internet
use;
- the amount and timing of costs relating to our expansion; and
- general economic conditions and economic conditions specific to
Internet technology usage and eCommerce.
INCREASED COMPETITION MAY EXERT DOWNWARD PRICING PRESSURE ON ECOMMERCE SERVICES.
The increase in competitors selling eCommerce services may increase pricing
pressure for the sale of our services and products, which could reduce our
revenues. In addition, our sales will suffer if our competitors offer superior
services that better target users.
OUR FUTURE SUCCESS DEPENDS ON CONTINUED GROWTH IN eCOMMERCE.
The eCommerce industry must achieve widespread acceptance by a broad base
of customers for us to attain success. If the Internet fails to be a viable
commercial marketplace, we will be adversely affected.
THE MARKET FOR OUR PRODUCTS IS NEW AND ITS GROWTH IS UNCERTAIN.
The markets for our products and services have only recently developed, 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. Our business may suffer if the market develops more slowly
than expected or becomes saturated with competitors, or if our products and
services do not sustain market acceptance.
WE MUST ATTRACT AND EXPAND OUR USER AND ADVERTISER BASE.
We must develop and maintain a brand identity for our products. The failure
to establish and maintain our brands could hurt 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 depends 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 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.
WE MUST SUCCESSFULLY MANAGE OUR GROWTH AND THE INTEGRATION OF RECENTLY ACQUIRED
COMPANIES.
Our recent growth and the recent merger with Galaxy Enterprises has
strained 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 StoresOnline.com and GalaxyMall.com is an increasingly important and
complex task. We rely on both internal and licensed third-party advertising
inventory management and analysis systems. To the extent that any extended
failure of our advertising management system results in incorrect advertising
insertions, we may be exposed to "make good" obligations which, by displacing
advertising inventory, could defer advertising revenues. Failure of our
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 our relationships with advertisers.
As part of our business strategy, we have completed several recent
acquisitions, including Galaxy Enterprises, Inc. and Spartan Multimedia, Ltd.
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 our ongoing business and distraction of
management;
- the difficulty of incorporating acquired technology or content and
rights into our products and media properties;
- the negative impact on reported earnings if any of the 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;
- unanticipated expenses related to technology integration;
- the maintenance of uniform standards, controls, procedures and
policies;
10
<PAGE>
- the impairment of relationships with employees and customers as a
result of integration of new management personnel; and
- the potential unknown liabilities associated with acquired businesses.
We may not successfully address these risks or any other problems
encountered in connection with such acquisitions.
OUR OPERATIONS COULD BE HURT BY A NATURAL DISASTER OR OTHER CATASTROPHIC EVENT.
Our operations are susceptible to outages due to fire, floods, power loss,
telecommunications failures, break-ins and similar events. In addition,
substantially all of our network infrastructure is located in southern
California, an area susceptible to earthquakes. We do not have multiple site
capacity if any catastrophic event occurs and, although we do 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 our computer systems. We do
not carry sufficient business interruption insurance at this time to compensate
for losses that may occur as a result of any of these events.
OUR 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.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, WHICH ARE
COSTLY TO DEFEND AND COULD LIMIT OUR 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 our direct competitors;
- online direct marketing;
- fantasy sports;
- common Web graphics formats;
- mapping technologies; and
- custom cut CDs.
WE MAY INCUR SUBSTANTIAL EXPENSES IN DEFENDING AGAINST THIRD-PARTY INFRINGEMENT
CLAIMS REGARDLESS OF THEIR MERIT.
We anticipate that additional third-party patents will be issued in the
future. From time to time, parties may assert patent infringement claims against
us in the form of letters, lawsuits and other forms of communications. Third
parties may also assert claims against us 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.
11
<PAGE>
WE DEPEND ON KEY PERSONNEL THAT WE MAY NOT BE ABLE TO RETAIN.
If we do not succeed in attracting new personnel, or retaining and
motivating existing personnel, we will be adversely affected. We recently
announced a plan to move our headquarters from Southern California to the
existing facilities of our recently acquired subsidiary, Galaxy Enterprises,
in Orem, Utah. This consolidation may adversely affect our ability to retain
certain key personnel. For example, our chief financial officer resigned
effective as September 1, 2000. In addition, our general counsel and
corporate secretary will be resigning effective as of September 29, 2000. We
depend on the continued services of our key personnel, including our
founders, chief executive officer, president and chief operating officer,
chief financial officer, chief information officer and executive vice
president-sales and marketing. We also substantially depend upon the
continued services of the key personnel of our subsidiaries, including Galaxy
Enterprises and IMI, Inc.
Each of these individuals has acquired specialized knowledge and skills
with respect to our operations. As a result of the recent resignations of
certain key personnel or the additional resignation of any of these
individuals, 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. At times, we have experienced difficulties in
hiring personnel with the necessary training or experience, particularly in
technical areas.
OUR 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 our business could expose us
to substantial liability, including significant expenses necessary to comply
with such laws and regulations. Few laws or regulations currently directly apply
to the Internet. The relation between us and new or existing laws and
regulations 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 our 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 internet service providers and online service providers and to impose
access fees.
A number of proposals have been made at the federal, state and local level
that would impose additional taxes on the sale of goods and services over the
Internet and certain states have taken measures to tax Internet-related
activities. Foreign countries also may tax Internet transactions. The taxation
of Internet-related activities could have the effect of imposing additional
costs on companies that conduct business over the Internet. This, in turn, could
lead to increased prices for products and services, which could decrease demand
for our solutions.
THE ADOPTION OF GOVERNMENT PROPOSALS TO REGULATE THE INTERNET COULD
SUBSTANTIALLY IMPAIR THE GROWTH OF THE INTERNET AND ADVERSELY AFFECT OUR
BUSINESS.
Several recently passed federal laws could have an adverse 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 us. The legislation may impose
significant additional costs on us or subject us to additional liability.
We post policies concerning the use and disclosure of user data. Our
failure to comply with our posted privacy policies could adversely affect us.
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 us 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 us.
eCOMMERCE ACTIVITIES MAY EXPOSE US TO UNCERTAIN LEGAL RISKS AND POTENTIAL
LIABILITIES.
As part of our business, we may 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
12
<PAGE>
liability, investigating and defending the claims is expensive.
INTERNET SECURITY POSES RISKS TO OUR BUSINESS.
The compromise of our security or misappropriation of proprietary
information could have a material adverse effect on us. Processing eCommerce
transactions 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. Anyone 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.
Security and privacy concerns 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. The failure of our security measures to
prevent security breaches may have a material adverse effect on us.
SOME PROVISIONS OF OUR 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 our certificate of incorporation and bylaws could
make it more difficult for a third party to acquire us, even if doing so might
be beneficial to our stockholders by providing them with the opportunity to sell
their shares at a premium to the then market price. Our 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 making it more difficult, delaying, discouraging, preventing or
rendering more costly an acquisition or a change in control of our company.
In addition, our board of directors is divided into two classes. The term
of the first class expires at the annual meeting following fiscal year 2000 and
the term of the second class expires following fiscal year 2001. At each annual
meeting following fiscal year 2000 and thereafter, the terms of one-half of the
directors will expire, and new directors will be elected to serve two years. 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. This extends the time required to effect a change in control of
the board of directors and may discourage hostile takeover bids. 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, our certificate of 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. Such terms may
include voting rights, including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. No shares of preferred stock are currently
outstanding and we have no present plans for the issuance of any preferred
stock. However, the issuance of any preferred stock could materially adversely
affect the rights of holders of our common stock, and therefore could reduce its
value. In addition, specific rights granted to future holders of preferred stock
could be used to restrict our ability to merge with, or sell assets to, a third
party. The ability of the board of directors to issue preferred stock could make
it more difficult, delay, discourage, prevent or make it more costly to acquire
or effect a change in control, thereby preserving the current stockholders'
control.
OUR 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 our common stock has been, and may continue to be,
subject to wide fluctuations. From November 18, 1999, when our stock first began
trading on The Nasdaq National Market, through August 15, 2000, the closing sale
prices ranged from $0.937 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 us or our 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 our
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
our stock, regardless of our operating performance.
MANAGEMENT BENEFICIALLY OWNS APPROXIMATELY 17% OF OUR COMMON STOCK AND THEIR
INTERESTS COULD CONFLICT WITH YOURS.
Our directors and executive officers beneficially own approximately 17%
of our outstanding common stock. As a result, the directors and executive
officers 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.
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT
OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of
a large number of shares of its common stock in the market or the perception
that these sales could occur. These sales also might make it more difficult for
us to sell equity securities in the future at a time and at a price that we deem
appropriate. As of August 15, 2000, we had outstanding 21,677,090 shares of
common stock. As of August 15, 2000, 12,961,138 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 of these shares will become
freely tradeable in the market is as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----------
<S> <C>
8,648,652 Within six months from the date
of this prospectus
67,300 Between six and twelve months
from the date of this prospectus
</TABLE>
As of August 15, 2000 we have reserved an aggregate of 1,687,757 shares of
common stock issuable upon the exercise of outstanding warrants and convertible
or exchangeable securities. We also 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.
13
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus, 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 we use words like "believe," "expect," "anticipate" or similar
words or terms, we are making forward-looking statements.
You should note that an investment in our common stock involves risks
and uncertainties that could affect our future business success or financial
results. Our 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
prospectus.
We believe that it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. You should be aware that
the occurrence of the events described in the risk factors and elsewhere in this
prospectus could materially and adversely affect our business, financial
condition and operating results. We undertake 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.
14
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders. Upon conversion of the debenture, we will benefit from the
termination of indebtedness in the principal amount of $4.5 million and the
accrual of interest at the rate of 8% per year. In addition, we will receive
proceeds from the sale of shares to be issued under the equity line of credit.
If we draw down the maximum commitment amount under the equity line of credit,
we will receive $10 million in proceeds. We will also receive proceeds upon the
exercise of warrants. However, the warrants have an exercise option that allows
the holder to exercise the warrants without paying the exercise price in cash.
Instead, the holder would receive common stock with a dollar value that is equal
to the market price of the common stock minus the exercise price of the warrants
multiplied by the number of warrants exercised. Any net proceeds that we receive
will be used for general corporate purposes, including working capital for our
business. Pending any such uses, we intend to invest any net proceeds in
short-term, interest-bearing, investment grade securities.
MARKET PRICE AND DIVIDEND INFORMATION
Our 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, our 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 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
Fourth Quarter.................................... 9.17 1.59
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
We have never paid any cash dividends on our common stock and we
anticipate that we will continue to retain any earnings for the foreseeable
future for use in the common operation of our business.
15
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 2000:
- our actual short-term debt and capitalization;
- our debt issuance as adjusted short-term debt, long-term
debt, and capitalization giving effect to $4.5 million in
proceeds from the issuance of our 8% convertible debenture in
the principal amount of $4.5 million, of which $2.5 million
was paid upon closing and the remainder of which may be drawn
down by us upon effectiveness of this registration statement.
The debenture is net of the issuance of warrants to purchase
331,000 shares of our common stock at $1.625 per share and a
beneficial conversion feature. The warrants and beneficial
conversion feature have relative fair values of $370,000 and
$1,137,000, respectively; and
- our debt conversion as adjusted short-term debt and
capitalization giving effect to the conversion of the $4.5
million convertible debenture at the beneficial conversion
price per share of $0.95 per share. This beneficial
conversion price per share is equal to 80% of the share price
on August 30, 2000 of $1.19. The number of shares issuable
under the convertible debenture are limited to approximately
four million, prior to obtaining stockholder approval. In the
event the holders of the 8% convertible debenture are unable
to such debt to common stock because of the limitation
on the number of shares that may be issued, we may be
required to redeem the debt, based on the conversion rate
in effect at the date of conversion.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and our financial
statements and related notes and other financial information included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
At June 30, 2000
Debt Issuance Debt Conversion
Actual As Adjusted As Adjusted
----------- ------------------ ---------------
(In thousands)
<S> <C> <C> <C>
Short-term debt ................................. $ 102 $ 102 $ 102
Long-term debt................................... - 2,993 -
Stockholders' equity:
Preferred stock -$0.001 par value............. - - -
authorized -5,000,000 shares; issued
and outstanding 0 shares
Common stock - $0.001 par value, 22 22 27
authorized - 250,000,000; 21,648,732 issued
and outstanding
Additional paid-in capital 58,012 59,519 64,014
Deferred compensation (725) (725) (725)
Accumulated other comprehensive loss ......... (4) (4) (4)
Accumulated deficit........................... (68,081) (68,081) (69,588)
-------- -------- --------
Total stockholders' equity (deficit)............. $(10,776) $ (9,269) $ (6,276)
-------- -------- --------
Total capitalization ............................ $(10,878) $(12,364) $ (6,378)
======== ======== ========
</TABLE>
DILUTION
Our net tangible book value deficit as of June 30, 2000 was
$12,448,875, or $(0.58) per share of common stock. Net tangible book value
deficit per share represents the amount of net tangible assets, less total
liabilities, divided by the number of shares of common stock outstanding.
After giving effect to the conversion of 8% convertible debenture with an
aggregate principal amount of $4.5 million into 4,736,842 shares of common
stock and the exercise of warrants issued in connection with the debenture
for 331,000 shares of common stock based on the market price of the common
stock as of August 30, 2000, our net tangible book value deficit as of June
30, 2000 would have been $7,948,875, or $(0.30) per share. This represents an
immediate increase in such net tangible book value of $4,500,000 to existing
stockholders and an immediate dilution of $0.28 per share to purchasers in
this offering.
The following illustrates per share dilution:
<TABLE>
<S> <C>
Actual tangible book value deficit $(0.58)
Conversion of convertible debt and exercise of warrants issued with debenture 0.28
Dilution of net tangible book value deficit to debenture holders $(0.30)
</TABLE>
The following table sets forth, as of June 30, 2000:
- the number of shares of common stock issued; and
- the total consideration received on the convertible debentures
with a principal amount of $4.5 million and their subsequent
conversion:
<TABLE>
Shares of Common Stock Total Consideration
---------------------------- --------------------- Average
Number Percentage Amount Percentage Price Per Share
--------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 21,648,732 81% $ 51,706,457 92% $2.39
New investors 5,067,842 19% $ 4,500,000 8% $0.89
---------- ---- ----------- ------ -----
26,716,574 100% $ 56,206,457 100% $2.10
========== ==== =========== ====== =====
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected restated consolidated financial data should
be read in conjunction with the consolidated financial statements and related
notes thereto and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section 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, Spartan Multimedia, Ltd.
completed on January 15, 1999 and Galaxy Enterprises, Inc. completed on June
26, 2000. The acquisition of Galaxy Enterprises, Inc. was accounted for as a
pooling-of-interests. Accordingly, all periods prior to the acquisition have
been restated. The consolidated statement of operations data for each of the
years in the three-year period ended June 30, 2000, and the consolidated
balance sheet data at June 30, 2000, 1999 and 1998 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. Prior to the combination, Galaxy Enterprises' fiscal years ended on
December 31. In recording the pooling-of interests, Galaxy Enterprises'
financial statements for the years ended December 31, 2000 and 1999 have been
restated to conform to Netgateway's fiscal years ended June 30, 2000 and
1999. The restatement of Galaxy Enterprises' results include a duplication of
operations for the period from July 1, 1998 to December 31, 1998. As a
result, Netgateway has eliminated the related income of $1,733,441 from
accumulated deficit for fiscal 1999, which includes $3.7 million in revenue.
Galaxy Enterprises' financial statements for the year ended December 31, 1998
have been combined with Netgateway's financial statements for the period
March 4, 1998 (inception) through June 30, 1998. The unaudited consolidated
statement of operations data for the years ended June 30, 1997 and 1996 and
the consolidated balance sheet data at June 30, 1997 and 1996 are derived
from the unaudited consolidated financial statements of Galaxy Enterprises,
Inc. as of December 31, 1997 and 1996 and each of the years in the two-year
period ended December 31, 1997. 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 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>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue $ 27,425 10,569 7,268 358 16
(Loss) income from operations (39,500) (15,821) (8,502) (2,011) 6
Net (loss) income (44,108) (15,140) (8,521) (2,049) 5
Net (loss) income per common share
Basic and diluted (2.38) (1.21) (0.97) .61 .01
Weighted average common shares outstanding
Basic and diluted 18,511 12,536 8,788 3,366 857
CONSOLIDATED BALANCE SHEET DATA:
Cash 2,607 968 279 113 10
Working capital (deficit) equity (14,845) (9,292) (8,733) (851) 8
Total assets 12,309 5,353 2,041 1,282 210
Short-term debt 102 1,535 2,152 - -
Long-term debt - - 383 15 -
Stockholders' (deficit) equity (10,776) (8,106) (7,692) (1,929) 120
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN
FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THIS FORWARD-LOOKING
INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
GENERAL
Effective October 1, 1999, we changed our method of accounting for
revenue from the completed contract method to the percentage-of-completion
method. We believe that the percentage-of-completion method more accurately
reflects the current earnings process under our 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.
On June 26, 2000, we completed the merger of Galaxy Enterprises, Inc.
into a wholly owned subsidiary of Netgateway, Inc. The merger was accounted for
as a pooling-of-interests. Accordingly, our historical consolidated financial
statements and the discussion and analysis of financial condition and results of
operations for the prior periods have been restated to include the operations of
Galaxy Enterprises, Inc. as if it had been combined with our company at the
beginning of the first period presented.
FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY
In view of the rapidly evolving nature of our business and its limited
operating history, we believe that period-to-period comparisons of our operating
results, including our gross profit and operating expenses as a percentage of
net sales, are not necessarily meaningful and should not be relied upon as an
indication of future performance.
We cannot predict the degree to which we will experience seasonality in
our business because of our limited operating history and the fact that we
cannot identify which companies, if any, we will acquire in the foreseeable
future.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
REVENUE
Total revenues for the year ended June 30, 2000 increased to
$27,424,759 from $10,568,685 in the comparable period of the prior fiscal
year.
Service revenues include revenues from the design and development of
Internet Web sites and related consulting projects, revenues from the
Company's Internet training workshops (including attendance at the workshop,
rights to activate web sites and hosting), sales of banner advertising,
mentoring and transaction processing. Service revenues for the year ended
June 30, 2000 increased to $22,149,649 from $10,280,440 for the comparable
period of the prior year. Approximately $5.5 million of the increase can be
primarily attributed to the increase in the number of Internet training
workshops. The number of workshops increased to 250 workshops from 133 in
prior year. The average number of attendees at each workshop were comparable
for each year. In addition, approximately $2.3 million of increased revenues
can be attributed to increased revenues from banner advertising and $5.2
million relating to the design and development of Internet Web sites and
their hosting on our Internet Commerce Center.
Product sales, relating to the sale of our multimedia products, for
the year ended June 30, 2000 increased to $5,275,110 from $288,245 in the
comparable period of the prior fiscal year. Product sales relate to the sale
of our multimedia products. The multimedia product segment was acquired on
May 31, 1999 when Galaxy Enterprises, Inc. purchased IMI, Inc. and
accordingly, was only included in the results of fiscal 1999 for one month.
GROSS PROFIT
Gross profit is calculated as net sales less the cost of sales,
which consists of the cost to program customer storefronts, project
development, customer support expenses and tangible products sold. Gross
profit for the fiscal year ended June 30, 2000 increased to $13,491,828 from
$6,498,990 in the comparable prior period. The increase in gross profit
primarily reflects our increased sales volume of services provided through
our Internet training workshops and the addition of several new customers to
the Internet Commerce Center. Gross margin percentages decreased over the
same periods due to the lower gross profit margin associated with the
multimedia product sales. The decrease was partially offset by the licensing
of our technology to one customer during the year, which has no significant
costs to sell the license.
18
<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 fiscal year ended June 30,
2000 increased to $6,462,999 from $1,496,563 in the comparable prior period.
Product development expenses have increased as we continue to upgrade the
Internet Commerce Center, our core technology platform. No other significant
development costs for other projects have been incurred.
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 fiscal
year ended June 30, 2000 increased to $18,901,847 from $8,730,366 in the
comparable prior period. The increases in selling and marketing expenses are
primarily attributable to increased payroll-related and other infrastructure
costs as we expanded and incurred additional costs related to the growth of
our 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 fiscal year ended June 30, 2000 increased to $25,250,624 from
$11,595,071, in the comparable prior period. The increase in general and
administrative expenses is attributable primarily to non-cash compensation
expense from common stock issued to certain 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 we
expanded and incurred additional costs related to the growth of our business and
one-time merger related expenses of $889,757 in the fiscal year ended June 30,
2000.
INTEREST (INCOME) EXPENSE, NET
Interest expense consists primarily of amortization of debt issuance
costs and debt discount and interest in connection with our $1,000,000 of
secured convertible debentures due December 31, 1999 and $6,633,500 of our
series A 12% senior notes. The senior notes were issued in connection with our
May through October 1999 bridge financing private placements. Interest (income)
expense, net for the fiscal year ended June 30, 2000 increased to $4,575,141
from $933,097 in the comparable prior period. The increase in interest expense
for the fiscal year is attributable primarily to the amortization of promissory
note discounts incurred in conjunction with the bridge financing. 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.
INCOME TAXES
We have not generated any taxable income to date and, therefore, we
have not paid any federal income taxes. The use of our net operating loss carry
forwards, which begin to expire in 2006, may be subject to certain limitations
under Section 382 of the Internal Revenue Code of 1986, as amended.
YEARS ENDED JUNE 30, 1999 AND 1998
REVENUE
Total revenues for the year ended June 30, 1999 increased to
$10,568,685 from $7,268,425 in the comparable period of the prior fiscal year.
Service revenues include revenues from the design and development of
Internet Web sites and related consulting projects, revenues from the
Company's Internet training workshops (including attendance at the workshop,
rights to activate web sites and hosting), sales of banner advertising,
mentoring and transaction processing. Service revenues for the year ended
June 30, 1999 increased to $10,280,440 from $7,268,425 for the comparable
period of the prior year. Approximately $1.3 million of the increase can be
primarily attributed to the increase in revenue from the Company's Internet
training workshops. The number of workshops increased to 133 workshops from
120 in prior year. The average number of attendees at each workshop were
comparable for each year. In addition, approximately $700,000 of the
increased revenues can be attributed to increased revenues from banner
advertising and approximately $400,000 can be attributed to increased
revenues from the mentor program.
Product sales, relating to the sale of our multimedia products, for
the year ended June 30, 1999 increased to $288,245. There were no product
sales in the comparable period of the prior fiscal year. Product sales
relate to the sale of our multimedia products. The multimedia product segment
was acquired on May 31, 1999 when Galaxy Enterprises, Inc. purchased IMI,
Inc. and accordingly, was only included in the results of fiscal 1999 for one
month.
19
<PAGE>
GROSS PROFIT
Gross profit is calculated as net sales less the cost of sales,
which consists of the cost to program customer storefronts, customer support
expenses and tangible products sold. Gross profit for the fiscal year ended
June 30, 1999 increased to $6,498,990 from $4,735,887 in the comparable prior
period. The increase in gross profit primarily reflects the increased number
and attendance at our Internet training workshops. The decrease in gross
profit margin primarily reflects a slight decrease in gross profit margins
related to products sold through our Internet training workshops, and the
initial revenues from the design and development of Internet Web sites and
their hosting on our Internet Commerce Center, which did not generate a gross
profit.
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 fiscal year ended June 30,
1999 increased to $1,496,563 from $25,047 in the comparable prior period.
Product development expenses have increased as we developed the Internet
Commerce Center, our core technology platform.
LICENSE FEE
License fee represents a one time, non-cash charge in fiscal year
1998 to amortize and write off a license that was acquired and subsequently
written off as we abandoned further development of the technology.
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 fiscal
year ended June 30, 1999 increased to $8,730,366 from $6,495,547 in the
comparable prior period. The increases in selling and marketing expenses are
primarily attributable to increased payroll-related and other infrastructure
costs as we expanded and incurred additional costs related to the growth of
our 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 fiscal year ended June 30, 1999 increased to $11,595,071 from $2,658,449
in the comparable prior period. The increases in general and administrative
expenses are attributable to increased payroll-related and other infrastructure
costs as we expanded and incurred additional costs related to the growth of our
business.
INTEREST (INCOME) EXPENSE, NET
Interest (income) expense, net for the fiscal year ended June 30,
1999 increased to $933,097 from $23,277 in the comparable prior period. The
increase in interest expense for the fiscal year is primarily related to an
increase in notes payable.
INCOME TAXES
We have not generated any taxable income to date and, therefore, we
have not paid any federal income taxes since our inception. The use of our net
operating loss carry forwards, which begin to expire in 2006, may be subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had $2,607,491 in cash on hand, an increase of
$1,639,819 from June 30, 1999.
Net cash used in operating activities was $16,639,773 for the fiscal
year ended June 30, 2000. Net cash used in operations was primarily attributable
to $44,108,429 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 $3,321,699 in accounts receivable resulting from
the growth in revenues during the fiscal year ended June 30, 2000. Non-cash
charges include $3,660,498 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 and debt issuance costs. Increases in liabilities included
$8,496,419 in deferred revenue resulting from the growth in billings during the
fiscal year ended June 30, 2000, $3,460,210 in accounts payable and accrued
expenses resulting primarily from the accrual of wages and benefits and balances
owed on expenditures.
Net cash used in investing activities was $2,916,055 for the fiscal
year ended June 30, 2000 and consisted primarily of purchases of property and
equipment for the upgrade of our technological infrastructure.
20
<PAGE>
Net cash provided by financing activities of $21,196,316 for the fiscal
year ended June 30, 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 principally in connection with our secondary offering, which was completed
in November and December 1999. These proceeds were partially offset by
$6,433,500 used to repay the bridge financing loans in their entirety.
At June 30, 1999, we had $967,672 in cash on hand, an increase of
$688,357 from June 30, 1998.
Net cash used in operating activities was $6,971,091 for the fiscal
year ended June 30, 1999. Net cash used in operations was primarily
attributable to $15,140,478 in net losses, non-cash gain on extinguishments
of debt, and increases in assets, partially offset by non-cash charges as
well as increases in deferred revenue and accounts payable and accrued
expenses. The non-cash gain related to extinguishments of debt was
$1,653,232. Accounts receivable decreased $14,699. Increases in assets
included $44,133 in inventory and $325,887 in prepaid offering costs.
Non-cash charges include $1,262,200 for common stock issued for services,
$800,000 write off of note receivable, $535,535 of interest expense on
warrants issued as debt issue costs and $400,000 of stock compensation paid
by stockholders. Increases in liabilities included $1,617,563 in deferred
revenue resulting from the growth in billings during the fiscal year ended
June 30, 1999 and $1,787,550 in accounts payable and accrued expenses
resulting primarily from the accrual of wages and benefits and balances owed
on expenditures.
Net cash used in investing activities was $1,482,250 for the fiscal
year ended June 30, 1999 and consisted of a loan in exchange for a note
receivable, purchases of property and equipment and the purchase of equity
securities.
Net cash provided by financing activities of $7,411,855 for the fiscal
year ended June 30, 1999 resulted primarily from $2,506,000 in proceeds from the
issuance of notes payable and convertible debt and $5,782,760 in proceeds from
the issuance of common stock. These proceeds were partially offset by $990,630
used to repay notes to a related party.
At June 30, 1998, we had $279,315 in cash on hand, an increase of
$166,171 from June 30, 1997.
Net cash used in operating activities was $392,795 for the fiscal year
ended June 30, 1998. Net cash used in operations was primarily attributable to
$8,520,822 in net losses partially offset by non-cash charges as well as
increases in deferred revenue. Non-cash charges include $3,822,000 for the
amortization and write-off of license fees and $371,680 for common stock issued
for services. Increases in liabilities included $3,729,290 in deferred revenue
resulting from the growth in billings during the fiscal year ended June 30, 1998
and $109,620 in accounts payable and accrued expenses.
Net cash used in investing activities was $236,213 for the fiscal year
ended June 30, 1998 and consisted of a loan in exchange for a note receivable
and purchases of property and equipment.
Net cash provided by financing activities of $795,179 for the fiscal
year ended June 30, 1998 resulted primarily from $232,429 in proceeds from the
issuance of a note payables and $649,000 in proceeds from the issuance of common
stock. These proceeds were partially offset by $100,000 used to repay notes to a
related party.
As of June 30, 2000, we believe that our existing capital resources
are adequate to meet our cash requirements for at least the next three
months. In July 2000, we entered into a securities purchase agreement with
King William, LLC ("King William"). Under the terms of the agreement, we
issued an 8% convertible debenture in the principal amount of $4.5 million.
In August 2000, we entered into a private equity credit agreement with King
William. Under the terms of the agreement, we have the right to issue and
sell to King William up to $10 million of our common stock at the market
price at the time of sale, subject to certain conditions and adjustments. The
number of shares issuable under the securities purchase agreement and private
equity credit agreement are limited to approximately four million shares prior
to obtaining stockholder approval. In the event the holders of the 8%
convertible debenture are unable to convert such debt into common stock
because of the limitation on the number of shares that may be issued, we may
be required to redeem the debt based on the conversion rate in effect at the
date of conversion. We expect that these financings, together with an
anticipated growth in billings from our business and associated profits from
these increased revenues, will provide sufficient liquidity to fund our
business operations for the next twelve months.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
21
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 will require recognition of all derivatives as either assets or liabilities
on the balance sheet at fair value. Netgateway will adopt SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, in the first quarter of its fiscal
year ending June 30, 2001. Management has not completed an evaluation of the
effects this standard will have on Netgateway's consolidated financial
statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying
APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies
specifically to new awards, exchanges of awards in a business combination,
modification to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
Application of FIN 44 did not have an effect on Netgateway's financial
reporting.
RECENT EVENTS
In August 2000, we entered into a private equity credit agreement with
King William. Under the terms of the agreement, we have the right to issue and
sell to King William up to $10 million of our common stock at the market price
at the time of sale, subject to certain conditions and adjustments. King William
may resell these shares of common stock pursuant to the terms of the securities
purchase agreement and applicable securities laws. In addition, for each 10,000
shares of common stock that we issue and sell to King William, we will issue a
warrant to King William to purchase 1,500 shares of our common stock. The shares
issuable upon exercise of these warrants may be sold pursuant to the terms of
the securities purchase agreement and applicable securities laws.
In July 2000, we entered into a securities purchase agreement with King
William. Under the terms of the agreement, we issued an 8% convertible debenture
in the principal amount of $4.5 million. The purchase price of the debenture is
payable to us in two tranches. The first tranche, in the amount of $2.5 million,
net of closing costs of approximately $300,000, was paid at the closing in July
2000. The second tranche, in the amount of $2.0 million, may be drawn down by us
three business days after the registration statement registering the shares
issuable upon conversion has been declared effective. The debenture is
convertible into shares of our common stock at the lower of $1.79 per share or a
conversion rate of 80% of the market price at the time of conversion, subject to
certain conditions and adjustments. In addition, we issued to King William
warrants to purchase 231,000 shares of common stock. We also issued to Roth
Capital Partners, Inc. warrants to purchase 90,000 shares of common stock and to
Carbon Mesa Partners, LLC warrants to purchase 10,000 shares of common stock.
The shares of common stock issuable upon conversion of the debenture and
exercise of these warrants may also be sold pursuant to the terms of the
securities purchase agreement and applicable securities laws.
In June 2000, we completed the merger of Galaxy Enterprises into one
of our wholly owned subsidiaries of ours. In the merger, we issued 3,929,988
shares of our common stock in exchange for all of the outstanding common
stock of Galaxy Enterprises.
In April 2000, we 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, we will design and develop
Internet-based shopping malls, to be branded with Cox Communications' name,
brand and image, and will offer our storefront building and maintenance services
to Cox Communications' cable television subscribers. We 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 store building services.
In March 2000, we 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, we will provide CBSI with
access to the Internet Commerce Center development environment. We 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. We receive 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. We and
CBSI share recurring fees for hosting, transactions and advertising. In April
2000, we 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.
In January 2000, we entered into an agreement with PharMerica, a
subsidiary of Bergen Brunswig Corporation, 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, we 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 January 2000, we also 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, we
will design and develop an Internet-based shopping mall, to be branded with
Intermedia's name, brand and image. We will also offer our 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 storebuilding services.
22
<PAGE>
BUSINESS
GENERAL
We provide eCommerce services that enable companies of all sizes to
extend their businesses to the Internet quickly and effectively with minimal
investment by developing, hosting, licensing and supporting a wide range of
built-to-order business-to-business, business-to-consumer and
business-to-employee applications, including enterprise portals, e-retail,
e-procurement and e-marketplace solutions.
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.
In June 2000, we acquired all of the outstanding capital stock of
Galaxy Enterprises, Inc., a Nevada corporation, in exchange for approximately
3,900,000 shares of our common stock. 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.
In December 1996, Galaxy Enterprises acquired all of the issued and
outstanding common stock of GalaxyMall, 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. On December 16, 1996, Galaxy Enterprises changed its name from
Cipher Voice, Inc. to Galaxy Enterprises, Inc.
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 these assets relate to the design, manufacture
and marketing of Impact Media's products and services.
INDUSTRY BACKGROUND
The new Internet economy has transformed the way that business is
conducted. Companies are now required to market dynamically, compete globally
and communicate with a network of consumers and partners. Introducing a business
to the electronic world unleashes new opportunities in such areas as growth,
services, product innovation and operational efficiencies.
In 1999, Nielsen/NetRatings, Inc. and Mediamark Research, Inc. both
estimated that there were as many as 83 million Americans actively on-line. This
number represents 42 percent of the total U.S. adult population (over 18) that
are now regular Internet users, up 20 percent from 1998. According to The Boston
Consulting Group/Shop.Org, business-to-consumer eCommerce reached $33.1 billion
in 1999 and an estimated 7 million consumers will have made their first online
purchase this year.
The North American Internet retailing segment is on pace to surpass
$29.3 billion in 2000, a 75 percent increase over 1999 revenue, according to
Gartner Group. Gartner Group reports that in 1999, North American online retail
sales totaled $16.8 billion, up 157 percent from 1998 revenue. According to
Forrester, by 2004, 49 million U.S. households are predicted to spend $184
billion online.
According to Dataquest, business-to-consumer e-Business initiatives
played a dominant role in the market in 1999. The majority of 1999 e-Business
implementations focused on Web enablement of basic business operations, basic
business-to-consumer functionality and customer relationship management.
Dataquest predicts extra-enterprise initiatives, including participation in
23
<PAGE>
business-to-business supply chains and e-marketplaces, will be a major focus of
initiatives in 2000. Like business-to-consumer eCommerce, business-to-business
initiatives are forecast to grow dramatically over the next few years. 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
2002.
More than $6 trillion in online business-to-business trade is expected
by 2005, representing 42 percent of total U.S. business-to-business non-service
spending, according to research by Jupiter Communications. Jupiter's research
reveals that, while this year's Internet business-to-business trade will only
represent three percent of the total U.S. business-to-business non-service
market, or $336 billion, the online volume will grow twenty-fold over the next
five years opening the doors for new business models such as net markets and
coalition markets. Currently, the direct channel, a model of one seller to many
buyers, dominates 92 percent of the Internet business-to-business market,
according to Jupiter Communications. However, Jupiter Communications estimates
that, in 2005, 35% of the Internet business-to-business trade volume will be
conducted via a net market, a model of many buyers and many sellers, or through
a coalition market, comprised of a consortium of buyers or sellers.
As a result of the recent growth of business-to-consumer and
business-to-business eCommerce and eCommerce's 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
within their existing systems. Finally, a successful solution requires that the
Internet application, particularly the user interface, be engaging and easy to
use.
We believe that few of the existing 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, we believe that organizations are increasingly searching for
professional services firms offering turn-key business-to-business and
business-to-consumer eCommerce solutions, including integrated strategy,
technology and creative design, connectivity, transaction processing, data
warehousing, transaction reporting, help desk and consulting and training.
Furthermore, we believe that organizations will increasingly look to Internet
solutions providers that can leverage industry and client practices, increase
predictability of success for Internet solutions and decrease risks associated
with implementation by providing low-cost, scalable solutions with minimal
lead-time.
OUR BUSINESS
We are an e-Business solution provider offering application
outsourcing, software solutions, custom development and comprehensive services
for a full spectrum of electronic business transactions and processes.
An integral component to our electronic offerings is the Netgateway
Internet Commerce Center-TM-, a secure, high performance e-Business
infrastructure. Our Internet Commerce Center supports a level of customization
unique to application outsourcing with solutions ranging from eCommerce sites
using an Internet storefront and e-mail order processes, to complex Web-enabled
transactions to facilitate inter- and intra-business processes, such as
corporate directories and purchasing workflows. We also permit e-Business
application licensing to accommodate those organizations that have significant
internal infrastructures and the desire to manage their own solutions.
Our mission is to advance the use of the Internet as an effective
business system by providing innovative solutions for our customers. Our
strategic vision is to be the preferred e-Business solution provider for
business-to-business, business-to-consumer and business-to-employee
transactions.
BUSINESS STRATEGY
Key elements of our business strategy are described below.
- IMPLEMENT COST EFFECTIVE SERVICES WITH BROAD APPEAL. We
designed our operations and business model to focus on the
e-Business services of highest value to our clients. These
services would require significant capital and resource
investments, including technical expertise, if clients
provided the services themselves. By offering these services
to
24
<PAGE>
a number of clients simultaneously and by creating and
using reusable software modules, we can 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 e-Business
transactions. This permits us to offer these services to our
clients on a highly cost effective basis.
- LEVERAGE RELATIONSHIPS WITH SYSTEMS INTEGRATIONS TO MAXIMIZE
GROWTH. We have embraced a channel strategy with systems
integrators to expand our market reach. We have found that
this particular strategy matches well with systems integrators
that have existing client relationships where adding an
e-Business solution for that client strengthens the
relationship.
- PROVIDE EASY ACCESS TO SCALABLE ECOMMERCE FUNCTIONALITY. We
designed our Internet Commerce Center and its hardware and
software infrastructure to permit scalable
business-to-business and business-to-commerce eCommerce
solutions. We can offer incremental services to our clients
through the activation of additional software capabilities
that quickly provide additional services and added
functionality in response to client growth or commercial
requirements.
- INCORPORATE CLIENT AND INDUSTRY PRACTICES AND MAINTAIN CLIENTS
PRIOR INVESTMENT. We structured our Internet Commerce Center
infrastructure and developed e-Business applications to permit
the easy interconnection of a customer's existing legacy
environment with our environment. As a result, we can offer
e-Business solutions that incorporate the sales and other
practices of our customers and their industries, as well as
maintain the customers' prior investment in creating and
maintaining a Web presence.
- SEEK STRATEGIC ACQUISITIONS AND INVESTMENTS. We intend to seek
strategic acquisitions of, and investments in, businesses and
technologies that we believe will enhance the functionality of
our solutions and services, operations and competitive
position.
SERVICES OFFERED
We have the following four operating subsidiaries or divisions, each of
which serves as a channel to market, sell and deliver our e-Business solutions.
BUSINESS-TO-BUSINESS
Our business-to-business division delivers e-Business solutions
including enterprise portals, e-retail, e-procurement and e-marketplace
solutions, as well as end-to-end consulting and support services to small to
medium sized businesses throughout the United States. We develop and deploy our
e-Business applications on our Internet Commerce Center.
We maintain a library of application components dynamically updated
within one shared repository. Pre-assembled or custom e-Business application
components are easily tailored to meet industry or market specific protocols.
Our component strategy goes beyond simply reusing code - rather, our Internet
Commerce Center application components incorporate complex design, interface,
documentation and testing that are often underestimated in e-Business
implementations. The sophisticated, component-based framework of the Internet
Commerce Center allows for the configuration of virtually unlimited e-Business
scenarios without the need to reengineer components or compromise performance.
We host and maintain our Internet Commerce Center and its e-Business
applications minimizing clients' technology investment while leveraging their
competitive advantage. We also permit e-Business application licensing to
accommodate those larger organizations that have significant internal
infrastructures and the desire to self-manage their solutions.
CABLECOMMERCE
Our CableCommerce division partners with cable operators to combine the
power of cable advertising and local eCommerce. Our CableCommerce division
creates and launches cable-branded electronic malls, which are promoted hundreds
of times per month by cable operators. These e-Malls feature local
establishments, allowing visitors to locate convenient services and products. We
have launched eCommerce initiatives with leading cable operators such as AT&T,
CableOne, MediaOne and Cox Communications. CableCommerce e-Malls currently reach
more than 3.3 million households in over 22 markets across the nation.
We offer design, development, hosting and site management of e-Malls
and electronic storefronts sold through cable operators and delivered to local
merchants and subscribers. We provide training of the cable system sales
personnel, offers storefront creation and maintenance services. In addition, we
offer local and regional classified advertisements, community calendars and
coupons to optimize e-Mall content.
25
<PAGE>
We believe that a professionally designed Web site is critical to the
success of business customers desiring to transact eCommerce. We offer Web site
development, design and maintenance service 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. Our 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. We intend to further develop and enhance this technology
and to aggressively market these services through our cable company partners.
We believe that the use of e-Malls is critical to create an effective
eCommerce marketplace. Through the creation and use of private labeled Internet
malls, users of our services can take advantage of both the pre-existing
relationships and marketing efforts of the reseller sponsoring the private
labeled mall, thereby increasing traffic to, and exposure of, their site. In
addition, we have developed and feature an eCommerce search engine that searches
within each Internet mall, as well as across all Internet malls served by the
Internet Commerce Center. We believe the use of e-Malls and the availability of
our robust eCommerce search engine adds substantial value to individual stores
and resellers alike. For our customers not otherwise affiliated with any e-Mall,
we provide access to our own e-Mall as a value-added service.
GALAXY ENTERPRISES
Our subsidiary, Galaxy Enterprises, offers educational eCommerce
seminars to merchants who want to bring their business ideas online. These
seminars offer strategies to successfully build, market and grow eCommerce
sites. Galaxy Enterprises also operates GalaxyMall, a popular online shopping
site at WWW.GALAXYMALL.COM, which hosts more than 3,700 merchants and manages
WWW.MATCHSITE.COM, an innovative meta-search engine that compiles and ranks the
results of major search engines.
GalaxyMall engages in the business of selling to its customers Internet
services and products which include electronic home pages, or storefronts, on
GalaxyMall, 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.
Galaxy Enterprise's MatchSite.com 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.
GalaxyMall 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 and services include the following:
- COMMERCIAL WEB SITES/WEB HOSTING
GalaxyMall programs commercial web sites with the most current
types of Internet programming, such as HTML, JavaScript and Perl.
Each site programmed by GalaxyMall 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. GalaxyMall 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-GalaxyMall IP address.
- AUTO-RESPONDERS
GalaxyMall 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
GalaxyMall provides software for a merchant's web site that 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.
26
<PAGE>
- INTERNET CLASSIFIED ADVERTISEMENTS
GalaxyMall sells 200-word ads on its classified ad network. Each
classified ad runs on the network for 90 days. This classified ad
network is comprised of thousands of listings.
- MERCHANT ACCOUNTS
GalaxyMall sells merchant accounts combined with software that
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 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 GalaxyMall banner network, as well as
benefit from ongoing discounts for future impression and banner
purchases.
- BANNER/IMPRESSIONS
GalaxyMall designs and programs banners for its customers. These
banners are then advertised on GalaxyMall's network of over 20,000
Internet sites. The number of banner impressions is determined by
the number of times the banner advertisement is uploaded, or
displayed, on one of the banner network's Internet sites.
GalaxyMall's customer purchases a number of impressions based upon
its specific marketing and advertising needs. The GalaxyMall
banner network currently markets in excess of one million banner
impressions daily to businesses doing commerce on the Internet.
- EXECUTIVE MENTOR PROGRAM
GalaxyMall's mentoring program is a ten week program in which a
select number of GalaxyMall'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
IMI, our subsidiary doing business under the name Impact Media, offers
state-of-the-art multi-media marketing messages using custom-cut compact discs.
IMI also creates full-motion CDs for Fortune 1000 companies.
IMI designs, manufactures and markets multimedia brochures, shaped
compact disks and other products and services 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
deliver a multimedia presentation of their corporate image or product or tell
their story and market their products in an inexpensive, broadband-like format.
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 CDs have also been introduced to the trading card industry to
turn traditional trading cards into a multimedia presentation or 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.
27
<PAGE>
SUPPORT SERVICES
Our CableCommerce and business-to-business clients are provided with
toll free, telephone technical assistance 24 hours per day and seven days per
week by a support services staff of approximately 24 individuals. We also
provide customers with access to information and customer support services by
means of the Internet.
TRANSACTION PROCESSING
We offer solutions that capture and transact customer orders according
to the business rules and specific "back office" needs of the particular client.
Our eCommerce system solution allows us to receive and process orders and
payments, provide order confirmation and reporting and organize order
fulfillment. We can also provide support for eCommerce transactions using
checks, credit cards, electronic funds transfers, purchase orders and other
forms of payment. We currently provide 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. We intend to pursue our own secured transaction clearing
solutions as well as a strategic alliance or acquisition of a secured
transaction-processing center.
CONNECTIVITY SOLUTIONS
For businesses to effectively engage in eCommerce, they must be
connected to the Internet. We assist our business clients in structuring and
obtaining high-speed Internet connectivity solutions to improve their
business-to-business communications by means of the Internet. We provide these
connectivity solutions to our business customers in conjunction with third party
Internet access providers. Our connectivity solutions also include the ability
to host clients' Web sites and provide clients with security measures necessary
for secure transmissions over the Internet. We support our hosted Web sites by a
connectivity enhancing, high-performance, high-bandwidth server system.
We anticipate that, as our business continues to grow, we will compile
large amounts of transactional and other data with respect to our clients and
their businesses, markets, customers and eCommerce transactions. We have the
capability to automatically generate reports relating to order confirmation,
inventory tracking, fulfillment, transaction details, customer data, market
research and other sophisticated management reports based on the transactions
facilitated through our hardware and software infrastructure. We are continuing
to further develop these capabilities.
ADVERTISING
We have an agreement with Engage Technologies, Inc. to manage national
banner advertising in our Internet-based shopping malls. We share advertising
revenues with the respective mall owner on whose Web site the advertisement
resides.
CLIENTS AND STRATEGIC RELATIONSHIPS
Our strategy is to build relationships with key customers that are
embracing business-to-business, business-to employee and business-to-consumer
eCommerce initiatives. We are currently processing electronic transactions for
over 2,300 clients. Our clients are geographically dispersed across the United
States and represent a mix of businesses and industries. Each of our clients
generally enters into a standard e-Business and/or eCommerce services agreement
or subscription agreement, as appropriate. These agreements vary significantly
based upon the terms and conditions of the particular client transaction, the
features of the proposed e-Business and/or eCommerce site, the levels of service
necessary for the client and other factors. The agreements may include
provisions for the payment to us of development fees, hosting fees, interchange
fees, transaction fees and other fees related to the services provided by us
under a particular agreement.
The following are descriptions of client contracts into which we have
entered:
CB RICHARD ELLIS. In March 1999, we 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, we developed,
managed and serviced 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 plans to offer 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, we entered into a reseller and mall
agreement with Wireless One, Inc. Under the agreement, we designed and developed
an Internet-based shopping mall, branded with the Wireless One name, brand and
image and offer our storefront creation and maintenance services to Wireless
One's subscribers. We also provide marketing support, including
28
<PAGE>
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 promotes this mall with a total of 1,000 30-second spots every
month jointly developed by us and Wireless One in all systems in which it is
able to provide advertising.
FRONTIERVISION MEDIA SERVICES. In July 1999, we entered into a reseller
and mall agreement with Frontiervision Media Services, a provider of cable
television programming services. Under the agreement, we designed and developed
an Internet-based shopping mall, branded with the Frontiervision name, brand and
image and are offering our storefront creation and maintenance services to
Frontiervision's subscribers. We also provide marketing support, including
development of mall content, training of Frontiervision salespeople and
production of advertising spots to promote their services. Frontiervision
promotes this mall with a minimum of 1,000 cablecasts per broadcast month in
each broadcast market where the mall services are offered.
MEDIAONE. In July 1999, we entered into a strategic relationship with
MediaOne, a leading cable television operator. Under the agreement, we 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 throughout the United States. These shopping malls are
branded with the MediaOne name, brand and image, feature businesses local to
each market and offer additional online services, such as classified
advertisements, local community events calendars and 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 our common stock and a warrant exercisable for up to 200,000 shares of
our 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 June 30, 2000, MediaOne has launched shopping malls in 11
cable television markets representing more than 1.45 million subscriber
households.
BUYSELLBID.COM. In August 1999, we entered into a distributor mall and
reseller agreement with BuySellBid.com. Under the agreement, we design and
develop Internet-based shopping malls for BuySellBid.com, which will in turn
resell and/or sublicense these Internet-based shopping malls, custom-branded, to
other resellers. In the alternative, BuySellBid.com offers to brand any such
Internet-based mall with the BuySellBid.com name, brand and image and offers our
storefront creation and maintenance services to its own subscribers. We provide
marketing support, including development of mall content and training of
BuySellBid.com salespeople.
CABLEONE. In August 1999, Netgateway entered into a cable reseller and
mall agreement with CableOne, a large cable television operator. Under the
agreement, we designed and developed an Internet-based shopping mall, branded
with the CableOne name, brand and image and are offering our storefront creation
and maintenance services to CableOne's subscribers. We also provide marketing
support, including development of mall content, training of CableOne sales
people and production of advertising to promote their services. CableOne
promotes this mall with a minimum of 400 cablecasts per broadcast month in each
broadcast market where the mall services are offered.
BERGEN BRUNSWIG CORPORATION. In October 1999, we entered into an
Internet services agreement with Bergen Brunswig Corporation, a Fortune 100
company and the third largest pharmaceutical distributor in the United States.
Under this agreement, we designed and developed, and manage and service, an
Internet-based shopping mall branded with the Bergen Brunswig name, brand and
image. The site contains on-line storefronts for affiliated local pharmacies. We
are also responsible for training Bergen Brunswig personnel under the agreement.
Bergen Brunswig had a two-pronged business objective for its nationwide network
of 2,000 affiliated Good Neighbor Pharmacies. First, was to incorporate
business-to-business eCommerce features that directly connect Good Neighbor
Pharmacies ("GNPs") to Bergen Brunswig and other partner information and
services. Second, was to provide direct-to-consumer service on behalf of their
customers. In eight weeks, we launched more than 600 customized sites for Bergen
Brunswig's affiliated GNPs. Less than a year into the project, the myGNP.com
site represents 1,800 GNP stores and has established a strong competitive
Internet presence for both Bergen Brunswig and its affiliated GNPs. This site
also allows consumers to find the nearest Good Neighbor Pharmacy and link to
that pharmacy's site for pertinent information, pharmacists' biographies,
Bergen-provided services and specialty services, current product promotions and
pharmacy hours.
DIVERSITY ECOMMERCE.COM, INC., FORMERLY KNOWN AS LEADING TECHNOLOGIES.
In December 1999, we entered into 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, we 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, we designed and developed an Internet-based shopping mall,
branded with Intermedia's name, brand and image, and are offering our storefront
creation and maintenance services to Intermedia's subscribers. We 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 promotes
the mall with a total of 500 30-second spots every month in the Nashville
market, jointly developed by us and Intermedia.
PHARMERICA. In January 2000, we 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, we designed and developed, and manage and host, a patient
prospecting system,
29
<PAGE>
known as PMSIOnLine.com, in which sales professionals and claims adjustors
input prospective patient referrals directly into a secured browser and
submit these prospective patient referrals to PharMerica's legacy systems for
analysis and possible sales follow-up.
COX COMMUNICATIONS. In April 2000, we reached an agreement with
CableRep, Inc., an affiliate of Cox Communications, to launch one or more
electronic shopping malls in the Cox Communications cable television markets
designated by Cox Communications. Pursuant to this agreement, we are designing
and developing Internet-based shopping malls, branded with Cox Communications'
name, brand and image and are offering our storefront building and maintenance
services to Cox Communications' cable television subscribers. We are also
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.
SBC INTERACTIVE. In June 2000, we entered into a professional services
agreement with SBC Interactive, a subsidiary of SBC Communications, Inc., under
which we design and develop custom Web sites for SBC's hundreds of yellow pages
merchants. We provide sales support to SBC, as well as full production and
maintenance support for all Web sites that we build under the agreement.
We have also embraced a channel strategy with systems integrators to
expand our market reach. We have found that this particular strategy works well
with systems integrators that have existing clients for whom adding an
e-Business / eCommerce solution will strengthen the relationship. These
partnerships expand our market reach in the United States, Europe, Asia and
South America. Our system integrator partners gain the benefit of developing
rapid and comprehensive e-Business solutions using a robust, fully scalable
e-Business technology platform.
The following is a description of the systems integrator agreements
into which we have recently entered:
COMPLETE BUSINESS SOLUTIONS, INC.; COMPLETE BUSINESS SOLUTIONS, INDIA.
In March 2000, we 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, we 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. We receive 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. We share recurring fees for hosting,
transactions and advertising with CBSI. In April 2000, we 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.
SALES AND MARKETING
We sell and market our business-to-business services by means of a
combination of direct and indirect sales. Presently, we have a sales force of 12
full-time employees focusing on our business-to-business products and services.
We anticipate increasing this sales force substantially over the next year,
including creating a group within this sales force focused solely on partnering
with system integrators to deliver solutions to a broader range of clients. We
also have a marketing and sales support group of seven full time employees. Our
marketing team is focused on creating demand in the marketplace for our
business-to-business products and services. Our marketing team is also
responsible for product management, new market development, sales support and
lead generation programs.
Our CableCommerce division sells and markets its services by partnering
with the cable operator's sales force through partnership agreements with cable
operators. CableCommerce maintains a sales force of approximately seven
full-time employees. We have developed, and are continuing to develop, our
relationships with our cable company partners to sell entry-level Internet
Commerce Center services, such as simple Internet storefronts and services to
the cable company's customers. We will "private label" the Internet storefront
service and establish private branded Internet-based shopping malls to provide
our cable partners with the means to drive traffic to these storefronts. The
storefronts and mall will have the customized "look and feel" of the particular
cable company.
In July 1999, we established a call center in American Fork, Utah. As
part of our merger with Galaxy Enterprises, we have consolidated our American
Fork call center resources with our Galaxy Enterprises operations. As a result
of that consolidation, we have shut down our American Fork facility.
Most of the products of our GalaxyMall business are Internet related
and, consequently, do not use traditional distribution channels. GalaxyMall's
principal products involve delivering to its customers the ability to conduct
business over the Internet. GalaxyMall attracts its customers through Internet
marketing workshops. These workshops are presented several times a week during
most weeks of the year. GalaxyMall rents hotel conference rooms in various
cities throughout the United States in which it hosts its
30
<PAGE>
preview sessions and Internet training workshops. GalaxyMall uses a 90-minute
information seminar which previews the Internet, the "Registered Merchant"
section and the option to establish a storefront on the GalaxyMall and the
Internet marketing workshop. Preview attendees are invited to attend a one
day workshop at which GalaxyMall 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 a "storefront" presence on the GalaxyMall to market their products
and services.
GalaxyMall advertises its preview sessions in direct mail solicitations
targeted to potential customers meeting certain demographic criteria established
by GalaxyMall. The direct mail pieces are mailed to persons and small businesses
located in cities scheduled to be visited by GalaxyMall'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.
GalaxyMall also uses a telemarketing effort to market GalaxyMall
products and services and also conducts its preview sessions and workshops for
audiences assembled by third parties at selected locations.
IMI primarily sells its products through two channels, consisting of
eight outside distributors and an inside sales force of seven employees
primarily engaged in outbound telemarketing. IMI has no long-term agreements
with its customers.
RESEARCH AND DEVELOPMENT
Since June 1998, we have conducted extensive research and development
with respect to our technology. During the year ended June 30, 1999, and during
the year ended June 30, 2000, we invested, on a consolidated basis,
approximately $1,496,563 and $6,462,999 respectively, in the research and
development of our technology. Our research and development efforts have:
- emphasized the development of advanced technology and new
services;
- focused on 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;
- improved functionality, flexibility, ease of use;
- and enhanced the quality of documentation, training materials and
technical support tools.
During the last two fiscal years, our Galaxy Enterprises subsidiary has
also engaged in extensive research and development activities, developing
various products and services, including 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 GalaxyMall.
- 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.
31
<PAGE>
- Development of "Quick-Links" for incorporation into multimedia
presentations to allow easy access to customer Web sites.
We intend to conduct additional research and development to, among
other things, further our strategy of developing cost effective services with
broad appeal, provide easy access to scalable e-Business services and offer
additional functionality of our Internet Commerce Center services and solutions.
COMPETITION
The e-Business market is becoming increasingly competitive as small to
large organizations recognize the need for a sophisticated Web-based solution.
Our competitors include application service providers, software vendors, systems
integrators and information technology consulting service providers.
Although most of these 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 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 us. Competitors that have established relationships
with large companies, but have limited expertise in providing Internet
solutions, may nonetheless be able to successfully use their client
relationships to enter our target market or prevent our penetration into their
client accounts.
Additionally, in pursuing acquisition opportunities, we may compete
with other companies with similar growth strategies. Some of these competitors
may be larger and have greater financial and other resources than we do.
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 our business. We have
limited proprietary technology that would preclude or inhibit competitors from
entering the e-Business services market. With regard to the business of our
subsidiary Galaxy Enterprises, we anticipate that new entrants will try to
develop competing Internet malls or new forums for conducting eCommerce that
could be deemed competitors. We believe, however, that we presently have a
competitive advantage due to our marketing strategies for GalaxyMall and our
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 our knowledge, there were no other businesses engaged in the Internet
marketing workshop industry at that time. Due to the experience of Galaxy
Enterprises with such marketing workshops, we believe we enjoy a strong
competitive position in this industry. Prior to our acquisition, Galaxy
Enterprises used its position as a leader in the Internet marketing workshop
industry to establish its GalaxyMall as one of the largest malls on the
Internet. According to the December 1998 edition of Internet World, GalaxyMall
is considered "one of the large general malls."
We are aware of several companies previously active in the Internet
marketing workshop industry that no longer are connected with the industry. We
are aware of only three companies currently in the Internet marketing workshop
industry, and to our knowledge, none of these competitors have been engaged in
the industry as long as Galaxy Enterprises.
Anticipated and expected technology advances associated with the
Internet, 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. We anticipate that we can
compete successfully, building on our three-year head start in our segments of
the industry, by relying on our 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 we deem necessary.
The markets of our subsidiary IMI 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 Web
site 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.
INTELLECTUAL PROPERTY
Our success depends upon our proprietary technology and other
intellectual property and on our ability to protect our proprietary technology
and other intellectual property rights. In addition, we must conduct our
operations without infringing on the proprietary rights of third parties. We
also intend to rely upon unpatented trade secrets and the know-how and expertise
of our employees. To protect our proprietary technology and other intellectual
property, we rely primarily on a combination of the protections provided by
applicable copyright, trademark and trade secret laws as well as on
confidentiality procedures and licensing
32
<PAGE>
arrangements. We have 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
- 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 we believe that we have taken appropriate steps to protect our
intellectual property rights, including requiring that employees and third
parties who are granted access to our intellectual property enter into
confidentiality agreements, these measures may not be sufficient to protect our
rights against third parties. Others may independently develop or otherwise
acquire unpatented technologies or products similar or superior to ours.
We license from third parties certain software and Internet tools that
we include in our services and products. If any of these licenses were to be
terminated, we could be required to seek licenses for similar software and
Internet tools from other third parties or develop these tools internally. We
may not be able to obtain such licenses or develop such tools in a timely
fashion, on acceptable terms, or at all.
Companies participating in the software and Internet technology
industries are frequently involved in disputes relating to intellectual
property. We may in the future be required to defend our intellectual property
rights against infringement, duplication, discovery and misappropriation by
third parties or to defend against third-party claims of infringement. Likewise,
disputes may arise in the future with respect to ownership of technology
developed by employees who were previously employed by other companies. Any such
litigation or disputes could result in substantial costs to, and a diversion of
effort by, us. An adverse determination could subject us to significant
liabilities to third parties, require us to seek licenses from, or pay royalties
to, third parties, or require us to develop appropriate alternative technology.
Some or all of these licenses may not be available to us on acceptable terms or
at all. In addition, we may be unable to develop alternate technology at an
acceptable price, or at all. Any of these events could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
The business of our subsidiary, Galaxy Enterprises, depends
significantly on intellectual property developed by Galaxy Enterprises and
intellectual property licensed from third parties. While Galaxy Enterprises
generally has not sought copyright and patent protection for its intellectual
property, it does endeavor to treat such property as trade secrets where
appropriate and has procedures in place to maintain their status as such. We
have been informed that certain of IMI's shaped CD products may infringe patents
of third parties. Prior to our acquisition of IMI, IMI's supplier of these CDs
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 these products do not infringe these or other
patents.
EMPLOYEES
As of August 15, 2000, we had approximately 260 full-time employees,
including 13 executive personnel, approximately 97 in sales and marketing,
approximately 100 in the development of our e-Business solutions, approximately
24 in customer support and approximately 26 in general administration and
finance.
GOVERNMENTAL REGULATION
We are not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to, or 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 our products
or services, our cost of doing business or otherwise have an adverse effect on
our business, prospects, financial condition or results of operations. Moreover,
the applicability to the Internet of existing laws governing issues
33
<PAGE>
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.
FACILITIES
In July 2000, we announced plans to consolidate our existing operations
in Southern California with those acquired through our merger with Galaxy
Enterprises. We intend to move our headquarters from Long Beach, California to
the existing facility occupied by Galaxy Enterprises in Orem, Utah. We expect
this consolidation to improve delivery capabilities and operational
efficiencies. We expect to complete the consolidation by November 1, 2000.
Restructuring changes are estimated to be approximately $275,000, which includes
$175,000 for severance packages, relocation expenses of $84,000 and equipment
moving costs of $15,000.
Galaxy Enterprises' principal office is located at 754 E. Technology
Avenue, Orem, Utah 84097. The property consists of approximately 12,700 square
feet leased from an unaffiliated third party for a period of five years with an
annual rental of $241,764. Our IMI business is located at 890 North Industrial
Park Drive, Orem, Utah 84057 in approximately 8,000 square feet leased from an
unaffiliated third party for a period of three years with annual rental of
$72,000. We maintain tenant fire and casualty insurance on our properties
located in these buildings in an amount that we deem adequate. We also rent 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. We are under no long-term obligations
to such hotels.
Certain of our sales and marketing and other personnel will remain at
300 Oceangate, 5th Floor, Long Beach, California 90802. These premises, which
occupy 16,360 square feet currently, are subject to a lease between us and an
unaffiliated third party. The lease expires on July 9, 2001 and monthly payments
under this lease are currently approximately $25,900. We intend to sublease
excess space resulting from our consolidation in Utah to an unaffiliated third
party, as allowed under the terms of our lease.
We are also currently seeking to enter into a sublease agreement for
our American Fork, Utah location which was previously closed and consolidated
into our Galaxy Enterprises location in Orem, Utah during the fourth quarter of
fiscal year 2000.
To house and support the Internet Commerce Center, we maintain
equipment in Exodus' state-of-the-art data center in Irvine, California, which
provides a 24-hour per day, seven days per week accessible operating environment
with multiple redundant high-speed connections to the Internet backbone. The
hardware used 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 uninterruptible 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.
LEGAL PROCEEDINGS
We are not a party to any material litigation or legal proceeding
relating to our products and services or otherwise. Except as set forth in the
following paragraph, we are not aware of any material legal proceedings
threatened against us.
From time to time, prior to our acquisition of Galaxy Enterprises,
Galaxy Enterprises received inquiries from attorneys general offices and other
regulators about civil and criminal compliance matters with various state and
federal regulations. These inquiries sometimes rose 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
attorneys general of 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 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
GalaxyMall, Inc. under the Kentucky business opportunity statute. On December
15, 1998, an order of dismissal was entered based on GalaxyMall agreeing to
advise the Kentucky Attorney General's office of any complaints from GalaxyMall
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' business or operations.
34
<PAGE>
MANAGEMENT
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........................ 42 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
Frank C. Heyman........................... 62 Acting 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*
Scott Beebe............................... 47 Director
John Dillon............................... 50 Director
Joseph Roebuck............................ 64 Director
</TABLE>
* As a result of our consolidation to Orem, Utah, Mr. Gatarz will be
resigning his position with us effective as of September 29, 2000.
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 since
our inception in March 1998. He also served as chief executive officer 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 served as the executive director
of Career Planning Center, a community based organization serving disadvantaged
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 our chief executive officer since October 1,
1999. He has been a director since December 15, 1999. Mr. Camblin served as our
chief information officer 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 an 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. Other career
experiences included twelve years as an officer and pilot in the US Air Force,
including as 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.
35
<PAGE>
DONALD M. CORLISS, JR.
Mr. Corliss has served as our president and a director 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, where he was responsible for management of
development projects. 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, where he was responsible for the structuring and
negotiation of the business and projects. 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 his 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. Two real estate development ventures of Mr.
Corliss', 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 our executive vice president-sales and
marketing 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.
SIMON SPENCER
Mr. Spencer has served as our chief information officer since March
2000. From September 1999 through February 2000, he served as our 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
organizations.
FRANK C. HEYMAN
Mr. Heyman has served as our acting chief financial officer since
September 2000. Prior to that, he served as vice president, secretary,
treasurer and chief financial officer and a director of our subsidiary,
Galaxy Enterprises since 1997. Prior to that, since 1992, Mr. Heyman served
as vice president and chief financial officer of GC Industries, Inc., a
manufacturer of calibration systems for toxic gas monitors. Prior to 1992,
Mr. Heyman served for twelve years as chief financial officer for Scan- Tron
Corporation, a manufacturer of optical mark reading equipment used in test
scoring by the educational community. From June 1992 to May 1996 he also
served as financial vice president and chief financial officer and a director
of NYB Corporation, a manufacturer of women's sports clothing. From June 1996
to April 1997 he was employed as controller of Provider Solutions, Inc., a
business consulting firm. Mr. Heyman is a graduate of the University of Utah
with a B.S. degree in accounting.
36
<PAGE>
CRAIG S. GATARZ
Mr. Gatarz has served as general counsel since April 1999 and was
appointed our corporate secretary in February 2000. From March 1989 until March
1999, Mr. Gatarz was an attorney at the law firm of Jones, Day, Reavis & Pogue
where he specialized in corporate law, particularly corporate restructurings and
asset-based lending transactions. 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. As a
result of our consolidation to Orem, Utah, Mr. Gatarz will be resigning his
position with us effective as of September 29, 2000.
JOHN DILLON
Mr. Dillon has served as a director 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 States 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 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 Bachelor of Arts degree in English from the
University of California at Berkeley in 1973.
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 the 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 the 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 the 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.
37
<PAGE>
Messrs. Freadhoff and Camblin are Netgateway employees and are not
compensated for their services as directors.
All directors are reimbursed for reasonable expenses incurred in
connection with attending meetings of the board of directors.
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 our
named executive officers, who are the individuals who served as chief executive
officer during fiscal year 2000 and the four most highly compensated executive
officers, other than the chief executive officers, who were serving as executive
officers at the end of fiscal year 2000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------- -----------------------------
RESTRICTED
STOCK STOCK
NAME AND SALARY BONUS AWARDS OPTIONS
PRINCIPAL POSITION YEAR ($) ($) (1) ($) (#)
------------------ ---- ------ ----- ---------- --------
<S> <C> <C> <C> <C> <C>
Keith D. Freadhoff(2).......... 2000 201,339 57,500 - -
Director 1999 100,625 57,500 3,200,000(3) (3)
Roy W. Camblin III(4).......... 2000 164,315 28,750 3,375,000(5) 200,000(6)
Chief Executive Officer and 1999 - - - -
Director
Donald M. Corliss, Jr.
President, Chief Operating
Officer and Director 2000 192,697 55,000 - -
1999 96,250 50,000 3,200,000(7) (7)
David Bassett-Parkins(8)
Chief Financial Officer and 2000 175,075 50,000 - -
Chief Operating Officer 1999 87,500 50,000 3,200,000(9) (9)
Simon Spencer(10) 2000 135,736 52,500 - 150,000(11)
Chief Information Officer.... 1999 - - - -
Craig S. Gatarz 2000 136,969 37,500 - 15,000(12)
General Counsel 1999 30,000 7,500 - 161,821(13)
</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) Mr. Freadhoff served as chief executive officer prior to Mr. Camblin's
appointment as chief executive officer in October 1999.
(3) 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.
(4) Mr. Camblin commenced his employment with us in August 1999.
(5) In November 1999, Mr. Camblin received a restricted stock award of
500,000 shares of our common stock.
(6) At June 30, 2000, Mr. Camblin held options exercisable for an aggregate
of 200,000 shares of common stock. Of these options, options
exercisable for 166,667 shares of common stock were declared vested as
of June 30, 2000.
(7) 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.
(8) Mr. Bassett-Parkins no longer serves as our chief financial officer or
chief operating officer. On April 14, 2000, we 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." We
are 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.
(9) 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.
(10) Mr. Spencer commenced his employment with us in September 1999.
(11) At June 30, 2000, Mr. Spencer held options exercisable for an aggregate
of 150,000 shares of common stock. Of these options, options
exercisable for 18,750 shares of common stock were declared vested as
of June 30, 2000.
(12) For the fiscal year ended June 30, 2000, Mr. Gatarz was granted options
to purchase 15,000 of common stock. None of these options were vested
as of June 30, 2000.
(13) At June 30, 2000, Mr. Gatarz held options exercisable for an aggregate
of 176,821 shares of common stock. Of these options, options
exercisable for 99,321 shares of common stock were declared vested as
of June 30, 2000.
38
<PAGE>
EMPLOYMENT AGREEMENTS
The following table summarizes the key provisions of the employment
agreements of Netgateway's executive officers.
<TABLE>
<CAPTION>
NAME/POSITION CONTRACT CONTRACT PER ANNUM SALARY BONUS
------------- COMMENCEMENT TERMINATION ---------------- ARRANGEMENTS
DATE DATE ------------
------------ -----------
<S> <C> <C> <C> <C>
Keith D. Freadhoff............ January 1, 1999 December 31, 2001 $201,500 As determined by board of
Chairman of the Board of directors.
Directors
Roy W. Camblin III............ August 13, 1999 July 25, 2002(1) $250,000 As determined by board of
Chief Executive Officer directors
Donald M. Corliss, Jr......... January 1, 1999 December 31, 2001 $192,500 As determined by board of
President and Chief directors
Operating Officer
Jill Glashow Padwa............ December 15, 1999 December 14, 2001 $180,000 As determined by board of
Executive Vice directors
President-Sales and
Marketing
Simon Spencer................. March 1, 2000 February 28, 2002 $200,000 As determined by board of
Chief Information Officer directors
Craig S. Gatarz............... April 5, 1999 April 5, 2002 $175,000 As determined by board of
General Counsel and directors.
Corporate Secretary(3)
</TABLE>
-------
(1) By amendment dated July 25, 2000, Mr. Camblin's employment agreement was
extended until July 25, 2002.
(2) As a result of our consolidation to Orem, Utah, Mr. Gatarz will be
resigning his position with us effective as of September 29, 2000.
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, we are required to pay to such individuals in the case
of Messrs. Freadhoff and Corliss, 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, Spencer and Ms. Padwa, 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 us without cause or by the relevant individual with good reason, then we
are required to pay the relevant individual a lump sum severance payment
equal to his or her current annual salary for the remainder of the employment
period. If any of these severance payments result in the imposition of an
excise tax on the relevant individual, we are required to gross up this
individual for such excess tax and any income taxes arising as a result of
the gross up payment. 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.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options
to purchase our common stock that were granted in fiscal year 2000 to the named
executive officers. We did not grant SARs in fiscal year 2000.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM($)
----------------- ---------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR CLOSING
OPTIONS EMPLOYEES IN BASE PRICE SALE
NAME GRANTED FISCAL YEAR ($) EXPIRATION DATE PRICE($) 5% 10% 0%(1)
---- --------- ------------ ----------- --------------- -------- -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Keith D. Freadhoff........ 0 0 0 0 0 - - -
Roy W. Camblin III........ 200,000 18.09 8.18 8/13/09 8.18 2,430,311 3,869,864 1,492,000
Donald M. Corliss, Jr..... 0 0 0 0 0 - - -
David Bassett-Parkins..... 0 0 0 0 0 - - -
Simon Spencer............. 50,000 1.72 9.25 3/1/10 9.25 687,399 1,094,559 422,000
50,000 1.72 9.25 12/23/09 9.25 687,399 1,094,559 422,000
50,000 1.72 6.75 12/1/09 7 521,246 829,998 320,000
Craig S. Gatarz........... 15,000 * 3.75 4/17/10 3.75 83,562 135,059 51,300
</TABLE>
* Less than one percent.
(1) 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.
39
<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)................................. 166,667 33,333 - -
Donald M. Corliss, Jr.(4)............................. - - - -
David Bassett-Parkins(5).............................. - - - -
Simon Spencer(6)...................................... 18,750 131,250 - -
Craig S. Gatarz(7).................................... 99,321 62,500 - -
</TABLE>
----------
(1) Based on the closing sale price of our common stock on the OTC bulletin
board at fiscal year end of $1.94 per share less the exercise price
payable for the shares. The fair market value of our common stock at
June 30, 2000 was determined on the basis of the closing sale price of
our common stock on that date.
(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.
(3) At June 30, 2000, Mr. Camblin held no exercisable or unexercisable in
the money stock options.
(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 were terminated. In
lieu of these options, Mr. Corliss received a restricted stock award of
400,000 shares of common stock.
(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 were
terminated. In lieu of these options, Mr. Bassett-Parkins received a
restricted stock award of 400,000 shares of common stock.
(6) At June 30, 2000, Mr. Spencer held no exercisable or unexercisable in
the money stock options.
(7) At June 30, 2000, Mr. Gatarz held no exercisable or unexercisable
in-the-money stock options and held unexercisable in-the-money stock
options.
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 our senior executives. 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 two 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 will 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 any person may be granted incentive stock options
which first become exercisable in any calendar year may not exceed $100,000 on
the date of grant.
No stock option may be transferred by an optionee other than by will
or the laws of descent and distribution or, if permitted, pursuant to a
qualified domestic relations order and, during the lifetime of the optionee,
the option will be exercisable only by the optionee. In the event of
termination of employment by reason of death, disability or by us for cause,
as defined in each optionee's employment agreement, the optionee will have no
more than 365 days after such termination during which the optionee shall be
entitled to exercise the vested options, unless otherwise determined by the
board of directors. Upon termination of employment by us without cause or by
the optionee for good reason, as defined in the optionee's employment
agreement, the optionee's options remain exercisable to the extent the
options were exercisable on the date of such termination until the expiration
date of the options pursuant to the option agreement.
We may grant options under this plan within ten years from the
effective date of the plan. The effective date of this plan is December 31,
1998. Holders of incentive stock options granted under this plan cannot exercise
these options more than ten years from the date of grant. 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
us 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 terminate upon an optionee's
ceasing to be employed by us become available again for reissuance under this
plan.
As of June 30, 2000, options exercisable for an aggregate of 850,714
shares of common stock were outstanding pursuant to this plan at a weighted
average exercise price of $6.73 per share.
40
<PAGE>
1998 STOCK COMPENSATION PROGRAM
In July 1998, the board of directors adopted the 1998 Stock
Compensation Program. The program was approved by our stockholders in December
1998. 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. 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 two 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 will 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.
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.
We may grant options under this program within ten years from the
effective date of the plan. The effective date of this program is July 31, 1998.
Holders of incentive stock options granted under this program cannot exercise
these options more than ten years from the date of grant. 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 us become available again for reissuance
under this program.
This program permits us to grant, in addition to incentive stock
options and non-qualified stock options:
- rights to purchase shares of our common stock to employees;
- restricted shares of our common stock;
- stock appreciation rights; and
- performance shares of common stock.
However, we have not issued any other type of compensation under this program
other than non-qualified stock options and have agreed not to do so in the
future.
As of June 30, 2000, options exercisable for an aggregate of 698,833
shares of common stock were outstanding pursuant to this program at a weighted
average exercise price of $3.59 per share.
41
<PAGE>
1999 STOCK OPTION PLAN FOR NON-EXECUTIVES
In July 1999, the board of directors adopted the 1999 Stock Option Plan
for Non-Executives. This plan was approved by the stockholders in May 2000. This
plan is administered by the compensation committee of the board of directors,
which currently consists of two 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 will receive options, the
time period during which the options may be partially or fully vested and
exercisable, the number of shares of common stock issuable upon the exercise of
each option and the option exercise price.
The exercise price per share of common stock subject to an option 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 optionee who owns stock possessing more than 10% of the voting
power of our 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 us 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 us 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 us, 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 our 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 us become available for reissuance under
this plan.
In May 2000, our stockholders approved an amendment to this plan to
increase the number of shares available for grant under the plan from 2,000,000
to 5,000,000.
As of June 30, 2000, options exercisable for an aggregate of 1,899,630
shares of common stock were outstanding pursuant to this plan at a weighted
average exercise price of $7.34.
GALAXY ENTERPRISES STOCK OPTION PLAN
Pursuant to the terms of the merger with Galaxy Enterprises, each
outstanding option to purchase shares of Galaxy Enterprises common stock under
Galaxy Enterprises' 1997 Employee Stock Option Plan was assumed by us, whether
or not vested and exercisable. We assumed options exercisable for an aggregate
of 1,665,815 shares of common stock of Galaxy Enterprises.
In addition, we assumed certain outstanding warrants to purchase shares
of Galaxy Enterprises common stock. These include the Invest Linc Emerging
Growth Fund I Warrant dated March 18, 1999 exercisable for 250,000 shares of
common stock and the Bridgewater Corporation Warrant dated January 11, 1999
exercisable for 50,000 shares of common stock.
Each Galaxy Enterprises stock option and warrant assumed by Netgateway
is subject to the same terms and conditions that were applicable to the stock
option or warrant immediately prior to the merger, except that:
- each Galaxy Enterprises stock option 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 0.63843 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 of the merger by 0.63843.
Therefore, the total amount of options assumed in the merger are now
exercisable for approximately 1,069,890 shares of Netgateway common stock and
the total amount of warrants assumed in the merger are now exercisable for
approximately 191,529 shares of Netgateway common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From our inception on March 1, 1998 through September 30, 1998, we did
not have a compensation committee. Messrs. Beebe and Dillon currently are
members of the compensation committee. No interlocking relationships exist
between our 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
Our 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. Netgateway believes that these provisions
are necessary to attract and retain qualified directors and officers.
We have 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 pursuant to
the foregoing provisions or otherwise, we have been informed that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
42
<PAGE>
RELATED PARTY TRANSACTIONS
In July 1998 and August 1998, we loaned $600,000 and an additional
$200,000, respectively, to Admor Memory Corp., a California-based computer
memory maker, during our then pending acquisition of Admor. The 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% per
annum thereafter. In August 1998, we agreed to subordinate this obligation to
a credit facility obtained by Admor and to receive payment of this obligation
from the net income and the proceeds of equity sales of Admor. Subsequently,
Admor defaulted on this credit facility and entered receivership. We reduced
the value of this loan in our financial statements to $0 effective December
31, 1998. Keith D. Freadhoff, chairman of the board of directors and chief
executive officer, and Scott Beebe, one of our directors, beneficially own
less than 1% and 2.89%, respectively, of the outstanding capital stock of
Admor. Donald Danks, one of our stockholders, 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 our inception on March 1, 1998 until June 1998, our business plan
was to engage in the licensing and distribution of software support materials
for the governmental and educational markets. In June 1998, we changed our
business model to the development of technology to enable businesses and other
organizations to engage in eCommerce. In connection with the implementation of
our initial business plan, we entered into sublicensing agreements related to
proprietary courseware of ProSoft, an Internet training solutions provider based
in Austin, Texas. ProSoft entered into a courseware reproduction and licensing
agreement with Steps Inc., an investment and consulting firm, under which it
granted Steps the exclusive right to sell courseware to the federal government.
This licensing obligation was personally guaranteed by Mr. Beebe. ProSoft also
entered into a courseware reproduction and licensing agreement with Training
Resources International, granting an exclusive right to sell courseware in the
education market. This licensing obligation was personally guaranteed by Michael
Khaled, one of our significant stockholders. We entered into exclusive
sublicense agreements with each of Steps and Training Resources with the consent
of ProSoft. In consideration of the sublicense from Training Resources, we
agreed to assume the minimum royalty payments required under their master
license, totaling $1,600,000. In consideration of the sublicense from Steps, we
- assumed the minimum royalty payments required under their master
license, totaling $1,500,000;
- assumed Steps' $200,000 obligation to Vision Holdings, Inc., which
had advanced funds to Steps in connection with its master license;
and
- issued 1,000,000 shares of our common stock to Steps.
Of this aggregate obligation of $3,300,000, we paid approximately
$1,500,000. Due to a lack of revenue derived from these licenses, we terminated
the licenses and entered into a settlement agreement in December 1998, under
which we were released from all further obligations with respect to the
remaining amounts payable. Steps is substantially owned by Mr. Beebe and
Training Resources is owned by Mr. Khaled. Mr. Freadhoff was a founder of
ProSoft and ProSoft's chief executive officer and a director until his
resignation in November 1997. Mr. Freadhoff beneficially owns approximately
3.32% of the outstanding common stock of ProSoft. Donald M. Corliss, Jr., our
president and a director, and Mr. Beebe, each beneficially own less than 1% of
the outstanding common stock of ProSoft. Mr. Danks 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 us $132,429, $100,000 of which was converted into a capital
contribution in June 1998. The remaining balance of $32,429 is non- 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, Messrs.
Khaled and Danks and Lynn Turnbow, another stockholder, paid 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 our common stock.
In May 1999, Mr. Freadhoff loaned us $100,000. This loan was
non-interest bearing. This loan was repaid with a portion of the proceeds of our
summer 1999 private placement. In June 1999, we loaned Mr. Freadhoff $30,000
which was repaid in July 1999.
In November 1998, we issued warrants exercisable for an aggregate of
300,000 shares of common stock and 50,000 shares of common stock to each of
Messrs. Freadhoff, Beebe, Danks and Vanderhoff, and 100,000 shares of common
stock to Mr. Khaled. The warrants were issued to reimburse Messrs. Freadhoff,
Beebe, Danks, and Vanderhoff for voluntarily transferring to Mr. Khaled an equal
number shares of common stock to settle a dispute with Mr. Khaled.
These warrants are exercisable at $1.00 per share and expire in November 2000.
In December 1998, Messrs. Freadhoff, Beebe, Danks and Vanderhoff
contributed to a 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 of which Mr. Freadhoff is the
trustee in exchange for a promissory note from each of these trusts in the
principal amount of $350,000. Mr. Corliss is the beneficiary of one of the
trusts and David Bassett-Parkins, our former chief financial officer and chief
operating officer, is the beneficiary of the other. The master trust sold the
remaining shares in exchange for a promissory note from this trust in the
principal amount of $50,000 to a trust of which Mr. Freadhoff is the trustee and
the beneficiary of which is Hanh Ngo, formerly our executive vice
president-operations. 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, of which Mr. Freadhoff is the trustee and the beneficiary of
which is Mr. Camblin. 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's trust. The terms of Mr. Camblin's trust are substantially similar to
the description of the other individual trusts set forth above.
43
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of June 30, 2000:
- each person who is known by us to be the owner of record or
beneficial owner of more than 5% of the outstanding common
stock;
- each of our named executive officers;
- all of our current directors and executive officers as a
group; and
- 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, Suite 500, Long Beach,
California 90802.
<TABLE>
<CAPTION>
NUMBER OF WARRANTS OR
OPTION GRANTS UNDER
NETGATEWAY STOCK OPTIONS TOTAL BENEFICIAL PERCENT OF CLASS
NAME OF BENEFICIAL OWNER SHARES OWNED PLANS(1) OWNERSHIP(2) BENEFICIALLY OWNED
------------------------ ------------ ------------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff................. 1,520,215 0 1,520,215(3) 7.0%
Roy W. Camblin III................. 500,000 200,000 700,000 3.2%
Donald M. Corliss, Jr.............. 552,000 0 552,000 2.5%
David Bassett-Parkins.............. 840,667 0 840,667 3.9%
Simon Spencer...................... 0 18,750 18,750 *
Craig S. Gatarz.................... 0 111,821 111,821 *
John Dillon........................ 5,000 16,667 21,667 *
R. Scott Beebe..................... 704,000 20,000 724,000 3.3%
Joseph Roebuck..................... 0 15,000 15,000 *
All current directors and executive
officers as a group (10
persons)(4)..................... 3,282,215 480,479 3,762,694 17.0%
</TABLE>
----------
* Less than 1 percent.
(1) Reflects warrants or options that will be vested as of June 30, 2000 or
within 60 days thereafter.
(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 June 30, 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,
Frank C. Heyman, Jill Padwa, Craig S. Gatarz, John Dillon, Scott Beebe
and Joseph Roebuck.
44
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the name of the persons or entities that
are offering their shares of common stock in this prospectus and the number of
shares of common stock being offered by each selling stockholder.
<TABLE>
<CAPTION>
Number of Shares Shares Owned Prior to Shares Owned After the
Owned the Offering Offering
---------------------- ----------------------- ----------------------
Selling Stockholder Number Percent Number Percent Number Percent
--------------------------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
King William, LLC.......... 32,855,902(2) 60% 32,855,902 60% - *
Roth Capital Partners...... 90,000(3) * 90,000 * - *
Carbon Mesa Partners, LLC.. 10,000(3) * 10,000 * - *
</TABLE>
* Less than 1 percent
(1) Computation of percentages is based on conversion of the entire $4.5
million convertible debenture and exercise of all warrants by the selling
stockholders and the issuance of the maximum number of shares under the
private equity credit agreement.
(2) Includes (1) 10,489,510 shares of common stock issuable upon conversion
of the $4.5 million convertible debenture based on a conversion price of
$.858 per share multiplied by 200%, (2) 19,248,167 shares of common stock
issuable under the private equity credit agreement based upon a purchase
price of $1.03906 per share multiplied by 200% and (3) 2,887,225 shares of
common stock issuable upon exercise of warrants at an exercise price of
$1.03906 per share multiplied by 200% and (4) 231,000 shares of common
stock issuable upon exercise of warrant at an exercise price of $1.625
per share.
(3) All of such shares are issuable upon exercise of warrants.
PLAN OF DISTRIBUTION
We are registering the resale of our common stock on behalf of the
selling stockholders. A selling stockholder includes donees, transferees and
pledges selling shares of common stock received from a named selling stockholder
after the date of this prospectus. This prospectus may also be used by
transferees of the selling stockholders or by other persons acquiring shares,
including brokers who borrow the shares to settle short sales of our common
stock. If any of the selling stockholders transfer any of their shares, each
transferee must be bound to the same restrictions and limitations that apply to
the selling stockholders described in this prospectus. We will bear all costs,
expenses and fees in connection with the registration of the shares offered in
this prospectus. The selling stockholders will bear all brokerage commissions
and similar selling expenses associated with the sale of the shares.
The selling stockholders may offer their shares of our common stock at
various times in one or more of the following transactions:
- on The Nasdaq National Market;
- in the over-the-counter market;
- in transactions other than on The Nasdaq National Market or in the
over-the-counter market;
- in negotiated transactions or otherwise, including an underwritten
offering;
- in connection with short sales of the shares of our common stock;
- by pledge or by grant of a security interest in the shares to
secure debts and other obligations;
- in ordinary brokerage transactions and transactions in which a
broker solicits purchasers;
- in connection with the writing of non-traded and exchange-traded
call or put options, in hedge transactions and in settlement of
other transactions in standardized or over-the-counter options;
- in a block trade in which a broker-dealer, as principal, may
resell a portion of the block, as principal, in order to
facilitate the transaction;
- in a purchase by a broker-dealer, as principal, and resale by the
broker-dealer for its account; or
- in a combination of any of the above transactions.
In connection with hedging transactions, the selling stockholders may:
- enter into transactions in which broker-dealers or other financial
institutions may in turn engage in short sales of our common stock
in the course of hedging the positions they assume with the
selling stockholders;
- sell shares short themselves and redeliver such stock to close out
their short positions;
- loan or pledge the shares to a broker-dealer, who may sell the
loaned stock, or in the event of default, sell the pledged stock;
or
45
<PAGE>
- enter into options or other transactions with broker-dealers or
other financial institutions that require the delivery to such
broker-dealer or other financial institution of the shares offered
by this prospectus, which shares may be resold under this
prospectus or any prospectus supplemented or amended to reflect
such transaction.
The selling stockholders may sell their shares at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices or at fixed prices. Each of the selling
stockholders reserves the right to accept, and together with their agents from
time to time, to reject, in whole or in part, any proposed purchase of the
common stock to be made directly or through agents.
The selling stockholders may sell their shares at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices. The selling stockholders may
use broker-dealers to sell their shares. If this happens, broker-dealers will
either receive discounts, commissions or concessions from purchasers of shares
for whom they acted as agents. Broker-dealers engaged by the selling
stockholders may allow other broker-dealers to participate in resales.
King William, LLC is an underwriter within the meaning of Section 2(11)
of the Securities Act of 1933 with respect to any shares of common stock that it
sells. The other selling stockholders and any broker-dealers or agents that act
in connection with the sale of shares might be deemed to be underwriters and any
commissions received by such broker-dealers and any profit on the resale of the
shares sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. Because King
William, LLC is an underwriter within the meaning of Section 2(11) of the
Securities Act and because the other selling stockholders might be deemed to be
underwriters, they will be subject to the prospectus delivery requirements of
the Securities Act. We have informed the selling stockholders that the
anti-manipulative provisions of Regulation M promulgated under the Securities
Exchange Act of 1934 may apply to their sales of our common stock in the market.
In addition to selling shares of our common stock under this
prospectus, the selling stockholders may:
- resell all or a portion of their shares in open market
transactions in reliance upon Rule 144 under the Securities
Act, provided that they meet the criteria and conform to the
requirements of Rule 144;
- agree to indemnify any broker-dealer or agent against certain
liabilities related to the selling of the common stock,
including liabilities arising under the Securities Act; or
- transfer their common stock in other ways not involving market
makers or established trading markets, including directly by
gift, distribution or other transfer.
Upon being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of the
shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
supplement to this prospectus if required under Rule 462(b) of the Securities
Act disclosing:
- the name of each such selling stockholder and the
participating broker-dealer;
- the number of shares involved;
- the price at which the shares were sold;
- the commissions paid or discounts or concessions allowed to
such broker-dealers, where applicable; and
- other facts material to the transaction.
In addition, upon being notified by a selling stockholder that a donee
or pledgee intends to sell more than 500 shares, we will file a supplement to
this prospectus.
DESCRIPTION OF OUR CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 250,000,000 shares of
common stock, par value $0.001 per share and 5,000,000 shares of preferred
stock, par value $0.001 per share. As of August 15, 2000, there were
21,677,090 shares of common stock outstanding held by 507 holders. This
number does not include 38,825,306 shares of common stock issuable (1) upon
conversion of the convertible debenture, (2) upon exercise of warrants to
purchase common stock, (3) under the terms of the equity line credit
agreement (4) upon exercise of employee stock options that were outstanding
as of June 30, 2000 or (5) upon the exercise of convertible subsidiary common
stock.
The following is a description of our capital stock and the material
provisions of our certificate of incorporation and bylaws. The following
discussion summarizes those documents. For a complete description of our capital
stock, you should review our certificate of incorporation and bylaws, copies of
which have been incorporated by reference as exhibits to the registration
statement of which this prospectus is a part.
COMMON STOCK
Holders of shares of our common stock are entitled to one vote per
share on all matters to be voted on by stockholders. Subject to preferences that
may be applicable to any outstanding preferred shares, the holders of shares of
common stock are entitled to receive such dividends, if any, as may be declared
from time to time by our board of directors out of funds legally available for
that purpose. Upon liquidation or dissolution,
46
<PAGE>
the holders of our common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to the rights of holders of
any outstanding shares of preferred stock. The holders of our common stock
have no preemptive or similar rights or subscription rights. There are no
redemption or sinking fund provisions applicable to the shares of common
stock.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder
approval, to issue from time to time up to 5,000,000 shares of preferred stock
in one or more series and to fix or alter the designations, powers and
preferences and relative, participating, optional or other special rights, if
any, and qualifications, limitations or restrictions for the preferred stock.
This includes the authority to set dividend rights, dividend rates, conversion
rights, terms of redemption, including sinking fund provisions, redemption price
or prices, liquidation preferences and the number of shares constituting any
series or designations of those series. No shares of preferred stock are
currently outstanding and we presently have no plans to issue any shares of
preferred stock.
WARRANTS
To date, we have issued warrants representing the right to purchase up
to 1,555,904 shares of our common stock at exercise prices ranging from $1.00 to
$11.04. The expiration dates range from March 11, 2001 to July 31, 2005. A total
of 331,000 shares of common stock issuable upon exercise of these warrants are
being registered pursuant to the registration statement of which this prospectus
is a part.
In addition, we are obligated to issue warrants to purchase 1,500
shares of common stock for each 10,000 shares of common stock issued under
the terms of the private equity credit agreement. A total of 2,887,225
shares of common stock issuable upon exercise of these warrants are also
being registered pursuant to the registration statement of which this
prospectus is a part.
In connection with the merger with Galaxy Enterprises, we assumed
certain outstanding warrants to purchase a total of 300,000 shares of Galaxy
Enterprises common stock. These warrants are exercisable for 191,529 shares of
our common stock at exercise prices ranging from $4.45 to $11.04. The expiration
dates range from March 11, 2001 to January 8, 2002.
REGISTRATION RIGHTS
Under the terms of the debenture and the equity line of credit
agreement, King William, Roth Capital and Carbon Mesa have registration rights
for the shares of common stock that they receive. This prospectus and the
registration statement to which it relates include the shares of common stock
issuable under the terms of the private equity credit agreement and the shares
of common stock issuable upon conversion of the debenture and exercise of the
warrants.
ELECTION AND REMOVAL OF DIRECTORS
Our certificate of incorporation and bylaws provide for the division of
our board of directors into two classes. The term of the first class expires at
the annual meeting following the end of fiscal year 2000 and the term of the
second class expires following the end of fiscal year 2001. At each annual
meeting following the end of fiscal year 2000, the terms of half of the
directors will expire and new directors will be elected to serve two years. This
classification system increases the difficulty of replacing a majority of the
directors and may tend to discourage a third party form making a tender offer or
otherwise attempting to gain control of us. It also may maintain the incumbency
of our board of directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Colonial Stock
Transfer.
EXPERTS
The consolidated balance sheets of Netgateway, Inc. and subsidiaries as
of June 30, 2000, and 1999 and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for each of the
years in the three-year period ended June 30, 2000, 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.
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.
47
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We are a reporting company and file annual, quarterly and current
reports, proxy materials and other information with the SEC. You may read and
copy these reports, proxy materials and other information at:
<TABLE>
<S> <C> <C>
Securities & Exchange Commission Regional Office of the SEC Regional Office of SEC
Public Reference Room 7 World Trade Center 500 West Madison Street
450 Fifth Street, N.W. Suite 1300 Suite 1400
New York, NY 10048 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You can request copies of these documents by writing to the SEC and
paying a fee for the copying costs. Please call the SEC at 1-800-SEC-0330 for
more information about the operation of the public reference room. Our SEC
filings are also available at the SEC's internet web site at
"http:\\www.sec.gov." Our common stock is quoted on The Nasdaq National Market.
Reports, proxy statements and other information concerning us may also be
inspected at The Nasdaq Stock Market, Reports Section, at 1735 K Street, N.W.,
Washington, D.C. 20006.
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act of 1933, as amended. This prospectus, which is a part of that
registration statement, omits certain information contained in the registration
statement. Statements made in this prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With respect
to each contract, agreement or other document filed as an exhibit to the
registration statement, we refer you to that exhibit for a more complete
description of the matter involved, and each statement is deemed qualified in
its entirety to that reference.
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF
ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report..............................................................................F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999 .................................................F-3
Consolidated Statements of Operations for the Year Ended June 30, 2000, 1999 and 1998.....................F-4
Consolidated Statements of Stockholders' Deficit..........................................................F-5
Notes to Consolidated Financial Statements................................................................F-10
Valuation and Qualifying Accounts.........................................................................F-24
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Netgateway, Inc.:
We have audited the consolidated financial statements of Netgateway, Inc. and
subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Netgateway, Inc. and subsidiaries as of June 30, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ending June 30, 2000 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, present fairly, in all material respects, the information
set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 3 to the financial statements, the
Company has suffered recurring losses from operations and has a net capital
deficiency that 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 3. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Los Angeles, California
August 21, 2000
F-2
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash................................................................. $2,607,491 $967,672
Trade receivable (net of allowance for doubtful accounts of $960,601
and $36,925 at June 30, 2000 and 1999, respectively).............. 2,383,544 210,160
Related party trade receivables...................................... 2,519 30,000
Unbilled receivables................................................. 12,293 -
Inventories.......................................................... 98,372 44,133
Prepaid advertising.................................................. 395,074 -
Other current assets................................................. 726,648 927,308
------------- ------------
Total current assets.............................................. 6,225,941 2,179,273
Property and equipment, net.......................................... 3,026,487 711,367
Intangible assets, net............................................... 2,167,024 2,412,945
Other assets......................................................... 889,948 49,436
------------- ------------
$12,309,400 $5,353,021
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable..................................................... $2,839,727 $1,201,577
Bank overdraft....................................................... 330,307 60,974
Accrued wages and benefits........................................... 1,454,819 278,741
Accrued interest..................................................... - 44,301
Accrued liabilities.................................................. 1,311,859 1,291,740
Capital leases short term............................................ 87,897 -
Current portion of notes payable .................................... 102,326 1,535,242
Current portion of deferred revenue.................................. 14,943,860 7,058,417
------------- ------------
Total current liabilities...................................... 21,070,795 11,470,992
------------- ------------
Deferred revenue..................................................... 1,023,292 499,626
Other liabilities.................................................... 449,785 95,920
Capital leases ...................................................... 47,379 -
------------- ------------
22,591,251 12,066,538
Minority interest.................................................... 494,449 1,392,858
Stockholders' deficit:
Preferred stock, par value $.001 per share. Authorized 5,000,000
shares; issued and outstanding 0 shares........................ - -
Common stock, par value $.001 per share. Authorized 250,000,000
shares; issued and outstanding 21,648,732 and 13,559,209 at
June 30, 2000 and 1999, respectively........................... 21,649 13,559
Additional paid-in capital........................................ 58,012,244 15,909,086
Deferred compensation............................................. (724,994) (52,919)
Accumulated other comprehensive loss.............................. (4,267) (3,598)
Accumulated deficit............................................... (68,080,932) (23,972,503)
------------- ------------
Total stockholders' deficit.................................... (10,776,300) (8,106,375)
------------- ------------
$12,309,400 $5,353,021
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Service revenue.......................................................... $22,149,649 10,280,440 7,268,425
Product sales............................................................ 5,275,110 288,245 -
------------ ----------- ----------
27,424,759 10,568,685 7,268,425
Cost of service revenue.................................................. 8,495,126 3,838,574 2,532,538
Cost of sales............................................................ 5,437,805 231,121 -
------------ ----------- ----------
Gross profit............................................................. 13,491,828 6,498,990 4,735,887
Product development...................................................... 6,462,999 1,496,563 25,047
License fees............................................................. - - 3,822,000
Selling and marketing.................................................... 18,901,847 8,730,366 6,495,547
General and administrative............................................... 25,250,624 11,595,071 2,658,449
Depreciation and amortization............................................ 1,217,074 494,874 193,557
Bad debt expense......................................................... 1,159,022 3,000 43,832
------------ ----------- ----------
Total operating expenses........................................... 52,991,566 22,319,874 13,238,432
------------ ----------- ----------
Loss from operations............................................... (39,499,738) (15,820,884) (8,502,545)
------------ ----------- ----------
Other income (expense)................................................... (33,550) (39,729) 5,000
Interest expense......................................................... (4,575,141) (933,097) (23,277)
------------ ----------- ----------
Total other income (expense)................................... (4,608,691) (972,826) (18,277)
------------ ----------- ----------
Net loss before extraordinary item............................. (44,108,429) (16,793,710) (8,520,822)
Extraordinary gain on extinguishment of debt............................. - 1,653,232 -
------------ ----------- ----------
Net loss .......................................................... $ (44,108,429) (15,140,478) (8,520,822)
============= ============ ===========
Basic and diluted extraordinary gain per share.......................... $ - $ 0.13 $ -
============= ============ ===========
Basic and diluted loss per share........................................ $ (2.38) $ (1.21) $ (0.97)
============= ============ ===========
Weighted average common shares outstanding-basic and diluted............. 18,511,137 12,536,021 8,788,052
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------ PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT LOSS DEFICIT
------ ------ ------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1997.......... 3,365,426 $3,365 $ 111,815 $(2,044,644) $(1,929,464)
Sale of common stock for cash.. 1,130,545 1,131 647,869 649,000
Exercise of stock options...... 6,384 6 13,744 13,750
Common stock issued for
services.................... 1,745,455 1,746 382,254 384,000
Common stock issued in
exchange for stockholder's
payment of Company debt..... 600,000 600 399,400 400,000
Common stock issued to acquire
license..................... 2,900,000 2,900 635,100 638,000
Adjustment resulting from
reverse acquisition......... 450,000 450 (310) 140
Common stock issued in
business acquisition........ 400,000 400 399,600 400,000
Conversion of debt to capital
contribution................ 100,000 100,000
Conversion of debt to common
stock....................... 184,000 184 185,349 185,533
Stock issued for deferred
compensation................ 100,000 100 99,900 (114,080) (14,080)
Amortization of deferred
compensation................ 1,760 1,760
Net loss....................... (8,520,822) (8,520,822)
----------- ------- ----------- --------- ------------ ------ -----------
Balance June 30, 1998 10,881,810 10,882 2,974,721 (112,320) (10,565,466) 0 (7,692,183)
Sale of common stock for cash.. 1,564,134 $1,565 $4,199,413 4,200,978
Common stock issued for
services.................... 366,500 366 1,261,834 1,262,200
Exercise of warrants........... 132,100 132 264,068 264,200
Cashless exercise of warrants.. 2,570 2 (2) 0
Warrants issued for services... 2,340,720 2,340,720
Stock compensation paid by
stockholders................ 400,000 400,000
Stock option compensation 233,211 (233,211) -
Forfeited stock................ (48,000) (48) (10,512) 10,560 -
Options issued for legal
services.................... 479,708 479,708
Warrants issued for debt issue
costs....................... 775,585 775,585
Common stock issued for debt
issue costs................. 30,000 30 127,470 127,500
Common stock issued to acquire
technology..................... 35,000 35 174,965 175,000
Conversion of debt to capital
contribution................... 200,000 200,000
Conversion of debt to common
stock.......................... 320,000 320 950,680 951,000
</TABLE>
F-5
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------ PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT LOSS DEFICIT
------ ------ ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Amortization of deferred
compensation................... $ $ $ 282,052 $ 282,052
Exercise of common
stock option................ 7,470 7 8,093 8,100
Sale of common stock for cash.. 108,017 108 449,892 450,000
Sale of common stock for cash.. 159,608 160 999,840 1,000,000
Warrants issued for debt issue
costs....................... 79,400 79,400
Components of comprehensive
loss:
Net loss....................... (15,140,478) (15,140,478)
Foreign currency translation
adjustment.................. (3,598) (3,598)
-----------
Comprehensive loss............. (15,144,076)
Elimination of duplicate
period of pooled companies.. 1,733,441 1,733,441
---------- ------ ---------- ---------- ----------- ------ -----------
Balance June 30, 1999.......... 13,559,209 13,559 15,909,086 (52,919) (23,972,503) (3,598) (8,106,375)
Common stock issued for
prepaid advertising......... 50,000 50 299,950 300,000
Common stock issued for
services.................... 538,598 539 3,659,959 3,660,498
Warrants issued for services... 53,534 53,534
Sale of common stock for cash.. 4,155,350 4,155 25,309,708 25,313,863
Warrants issued for debt issue
costs....................... 145,876 145,876
Conversion of debt to common
stock....................... 80,000 80 199,920 200,000
Options issued for services.... 172,853 172,853
Stock option compensation...... 1,069,900 (1,069,900) -
Amortization of deferred
compensation................ 615,825 615,825
Exercise of warrants........... 25,870 26 27,845 27,871
Cashless exercise of options
and warrants................ 1,188,773 1,188 (1,188) -
Common stock issued for
cancellation of options..... 1,200,000 1,200 8,398,800 8,400,000
Exercise of stock options...... 345,724 346 1,174,473 1,174,819
Common stock issued upon
conversion of subsidiary
common stock................ 239,576 240 898,169 898,409
Sale of common stock for cash.. 145,926 146 299,854 300,000
</TABLE>
F-6
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(CONTINUED)
<TABLE>
<CAPTION> ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------ PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT LOSS DEFICIT
------ ------ ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock option compensation...... $ $ 255,000 $(218,000) $ $ $ 37,000
Common stock issued in
business acquisition ....... 119,706 120 138,505 138,625
Components of comprehensive
loss:
Net loss....................... (44,108,429) (44,108,429)
Foreign currency adjustment.... (669) (669)
-----------
Comprehensive loss............. (44,109,098)
---------- ------ ---------- ---------- ----------- ------ -----------
Balance June 30, 2000.......... 21,648,732 $21,649 $58,012,244 $(724,994) $(68,080,932) $(4,267) $(10,776,300)
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $(44,108,429) $(15,140,478) $(8,520,822)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 1,217,074 494,963 193,557
Bad debt expense.......................................................... 1,159,022 3,000 43,832
Amortization and write-off of license fees................................ - - 3,822,000
Loss on sale of equity securities......................................... - 54,729 -
Amortization of deferred compensation..................................... 652,825 282,052 -
Gain on extinguishments of debt........................................... - (1,653,232) -
Stock compensation paid by stockholders................................... - 400,000 -
Interest expense on debt converted to equity.............................. - 236,488 19,277
Interest expense on warrants issued as debt issue costs................... - 535,535 -
Write-off of note receivable.............................................. - 800,000 -
Common stock issued for services.......................................... 3,660,498 1,262,200 371,680
Stock issued in exchange for cancellation of options...................... 8,400,000 - -
Amortization of debt issue costs.......................................... 585,592 144,000 -
Amortization of debt discount............................................. 4,022,550 - -
Options and warrants issued for services.................................. 263,387 2,820,428 -
Changes in assets and liabilities: -
Accounts receivable and unbilled receivables............................ (3,321,699) 14,699 (94,488)
Prepaid offering costs.................................................. - (325,887) -
Inventories............................................................. (54,239) (44,133) -
Other assets............................................................ (1,072,983) (260,568) (66,741)
Deferred revenue........................................................ 8,496,419 1,617,563 3,729,290
Accounts payable and accrued expenses................................... 3,460,210 1,787,550 109,620
------------- ------------- -------------
Net cash used in operating activities................................ (16,639,773) (6,971,091) (392,795)
------------- ------------- -------------
Cash flows from investing activities:
Cash received in acquisition.............................................. - 4,781 3,321
Purchase of equity securities............................................. - (100,733) -
Proceeds from sale of equity securities................................... - 46,004 -
Loan for note receivable.................................................. - (830,000) (75,000)
Repayment of notes receivable............................................. 30,000 50,000 -
Purchase of property and equipment........................................ (2,946,055) (652,302) (164,534)
------------- ------------- -------------
Net cash used in investing activities................................ (2,916,055) (1,482,250) (236,213)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock.................................... 25,313,863 5,782,760 649,000
Proceeds from exercise of options and warrants............................ 1,202,690 272,300 13,750
Repayments of note payable................................................ (6,433,500) - -
Proceeds from issuance of notes payable................................... 1,114,950 100,000 232,429
Proceeds from issuance of notes payable and convertible debt.............. - 2,506,000 -
Cash paid for debt issue costs............................................ (64,771) (181,018) -
Bank borrowing 64,883 (77,557) -
Repayment of notes payable to related party............................... (1,799) (990,630) (100,000)
------------- ------------- -------------
Net cash provided by financing activities............................ 21,196,316 7,411,855 795,179
------------- ------------- -------------
Net increase in cash................................................. 1,640,488 (1,041,486) 166,171
Cash at beginning of the year................................................... 967,672 279,315 113,144
Effect of elimination of duplicate period of pooled companies................... - 1,733,441 -
Effect of exchange rate changes on cash balances................................ (669) (3,598) -
------------- ------------- -------------
Cash at end of year: $ 2,607,491 $ 967,672 279,315
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest................................................................. 883,139 933,097 4,142
Supplemental disclosures of non-cash transactions:
Issuance of common stock for business acquisition......................... 138,625 - 400,000
Issuance of convertible stock in business acquisition..................... - 1,392,858 -
Capital contributed upon extinguishment of debt........................... - 200,000 100,000
Conversion of debt to common stock........................................ 200,000 1,401,000 185,533
Common stock issued in exchange for stockholders' payment of Company debt. - - 400,000
Common stock issued for internal-use software............................. - 175,000 -
Warrants issued for debt issue costs...................................... 145,876 775,585 -
Stock issued for debt issue costs......................................... - 127,500 -
Common stock issued to acquire license.................................... - - 638,000
Common stock issued for prepaid advertising............................... 300,000 - -
</TABLE>
F-9
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS; SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 quickly and effectively, with minimal investment. Netgateway
develops, hosts, licenses, and supports a wide range of built-to-order
business-to-business, business-to-consumer and business-to-employee
applications, including enterprise portals, e-retail, e-procurement and
e-marketplace solutions.
In June 2000, the Company acquired Galaxy Enterprises, Inc. ("Galaxy
Enterprises")for a total consideration of 3,929,988 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.
The following is a summary of our significant accounting principles:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
Netgateway and its wholly owned subsidiaries. As more fully
described in Note 2, the Company's acquisition of Galaxy Enterprises
on June 26, 2000 was accounted for under the pooling-of-interest
method and accordingly all periods prior to the acquisition have
been restated to include the accounts and results of operations of
Galaxy Enterprises for all periods presented. All Galaxy Enterprises
common stock and common stock option information has been adjusted
to reflect the exchange ratio. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(b) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory consists mainly of manufactured multimedia
products.
(c) Property and Equipment
Property and equipment are stated at cost. 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 ranging from 3 to 5 years. The cost of
leasehold improvements is being depreciated using the straight-line
method over the shorter of the estimated useful life of the asset or
the terms of the related leases. Depreciable lives by asset group
are as follows:
<TABLE>
<S> <C>
Computer and office equipment...............3 to 5 years
Furniture and fixtures......................4 years
Computer software...........................3 years
Leasehold improvements......................4 years (term of lease)
</TABLE>
Normal maintenance and repair items are expensed 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.
F-10
<PAGE>
(d) 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) Research and Development Expenditures
Research and development costs are expensed as incurred.
(f) 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.
(g) Financial Instruments
The carrying values of cash, accounts receivable, notes receivable,
accounts payable, accrued liabilities and current portion of notes
payable at June 30, 2000 and 1999 approximated fair value due to the
short maturity of those instruments. All financial instruments are
held for purposes other than trading.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
The asset and liability method recognizes deferred income taxes for
the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that
includes the enactment date.
Deferred tax assets are to be recognized for temporary differences
that will result in deductible amounts in future years and for tax
carryforwards if, in the opinion of management, it is more likely
than not that the deferred tax assets will be realized.
(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.
F-11
<PAGE>
(j) 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.
Revenue from Internet training workshops (which entitle the
customer to attend the workshop, activate web sites and receive
customer web site hosting) 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 recognized as services provided and
reported on a net basis.
Revenues from banner advertising and mentor services are
recognized when delivered.
(k) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130)
establishes standards for reporting and displaying comprehensive
income (loss) and its components in a full set of general-purpose
financial statements. This statement requires that an enterprise
classify items of other comprehensive income (loss) by their nature
in a financial statement and display the accumulated balance of
other comprehensive income (loss) separately from retained earnings
and additional paid-in capital in the equity section of a statement
of financial position. The Company has components of other
comprehensive income (loss), which are classified in the statement
of stockholders' deficit.
(l) Business Segments and Related Information
SFAS 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 stockholders. 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 two principal business segments, as presented in
Note 17. Substantially all the Company's business operations are in
the United States.
(m) Investment Securities
The Company accounts for investment securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS no. 115). SFAS No. 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 stockholders' equity and other 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.
(n) 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 SFAS 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 stockholders' equity and other comprehensive income
(loss). There were no gains or losses resulting from realized
foreign currency transactions (transactions denominated in a
currency other than the entity's functional currency) during the
twelve months ended June 30, 2000, 1999 and 1998.
(o) Loss Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common stockholders 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 4,512,647 options and 1,224,904 warrants to purchase
shares of common stock and 131,853 shares of convertible subsidiary
common stock that were outstanding as of June 30, 2000 which were
not included in the computation of diluted loss per share because
the impact would have been antidilutive. There were 4,089,766
options and 1,941,629 warrants to purchase shares of common stock
and 371,429 shares of convertible subsidiary common stock that were
outstanding as of June 30, 1999 which were not included in the
computation of diluted loss per share because the impact would have
been antidilutive. There were 756,711 options and 73,000 warrants
to purchase shares of common stock that were outstanding as of
June 30, 1998 which were not included in the computation of diluted
loss per share because the impact would have been antidilutive.
(p) 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.
(q) Use of Estimates
F-12
<PAGE>
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.
(r) Reclassifications
Certain amounts have been reclassified to conform with current year
presentation.
(2) BUSINESS COMBINATION
On June 26, 2000, Netgateway, Inc. issued 3,929,988 shares of its common stock
in exchange for all of the outstanding common stock of Galaxy Enterprises. This
business combination has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of operations
of Galaxy Enterprises.
Prior to the combination, Galaxy Enterprises' fiscal year ended December 31.
In recording the pooling-of-interests combination, Galaxy Enterprises'
financial statements for the twelve months ended June 30, 1999, were combined
with Netgateway's financial statements for the same period and Galaxy
Enterprises' financial statements for the year ended December 31, 1998 were
combined with Netgateway's financial statements for the year ended June 30,
1998. An adjustment has been made to stockholders' equity to eliminate the
effect of including Galaxy Enterprises' results of operations for the six
months ended December 31, 1998, in both the years ended June 30, 1999 and
June 30, 1998. The adjustment results in the Company eliminating the related
net income of $1,733,441 from accumulated deficit in fiscal year 1999, which
includes $3.7 million in revenue.
The results of operations as previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below:
<TABLE>
<CAPTION>
Years Ended June 30,
Nine months ended ------------------------------------
March 31, 2000 1999 1998
------------------- ------------ -----------
<S> <C> <C> <C>
Net revenues:
Netgateway $ 2,535,863 $ 157,282 $ 2,800
Galaxy Enterprises 17,840,271 10,411,403 7,265,625
----------- ----------- ----------
Combined $20,376,134 $10,568,685 $7,268,425
Extraordinary item:
Netgateway $ - $(1,653,232) $ -
Galaxy Enterprises - - -
----------- ----------- ----------
Combined $ - $(1,653,232) $ -
Net loss:
Netgateway $28,178,092 $10,775,703 $4,571,936
Galaxy Enterprises 7,232,861 4,364,775 3,948,886
----------- ----------- ----------
Combined $35,410,953 $15,140,478 $8,520,822
</TABLE>
Prior to completion of the combination between Netgateway and Galaxy
Enterprises 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 was secured by a pledge of Galaxy
Enterprises common stock from John J. Poelman, the chief executive officer
and largest shareholder of Galaxy Enterprises prior to the merger. The notes
bore interest at 9.5% and were due and payable on the earlier of June 1, 2000
or the consummation date of the merger. The maturity date of the notes was
later extended to the earlier of September 1, 2000 or the consummation date
of the merger.
After completion of the merger, the Company forgave these loans to its
subsidiary, Galaxy Enterprises, and released the pledges securing those loans.
Prior to the consummation of the merger, the Company entered into certain
transactions in the normal course of business with Galaxy Enterprises. For
the twelve months ended June 30, 2000, Netgateway generated revenue of
$470,000 from Galaxy Enterprises. For the twelve months ended June 30, 2000,
Galaxy Enterprises generated revenue of $350,000 from Netgateway. The
revenue and expenses associated with these intercompany transactions have
been eliminated in the combination of these entities.
F-13
<PAGE>
(3) 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 has generated
significant losses. 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.
(4) ACQUISITIONS
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
stockholders 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 185,715 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.
The StoresOnline.com Ltd. shares held by third parties has been recognized as
a minority interest until such time the shares are converted to the Company's
common stock. As of June 30, 2000, 239,345 shares had been converted and
recorded in stockholders deficit.
Effective May 31, 1999, Galaxy Enterprises 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. The terms of the Impact Media 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 June 30, 2000, one of the targets had been met and
119,706 shares of Netgateway, Inc. common stock was transferred to the former
owners of Impact Media. The value of the shares issued was recorded as
$138,625 in goodwill and $138,625 as an additional investment in Galaxy
Enterprises subsidiary, IMI, Inc. 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 June 30, 1999 and 1998, assuming the acquisitions had taken
place at the beginning of each of those years.
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Revenue......................... $11,295,026 $10,485,371
Net loss........................ (24,991,214) (8,414,670)
Loss per share.................. (1.99) (0.96)
</TABLE>
F-14
<PAGE>
(5) 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 September 30, 1999 $35,031 $0.0
Twelve months ended June 30, 1999 $13,858 $0.0
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment balances at June 30, 2000 and 1999 are summarized as
follows:
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Computers and office equipment................. $2,670,627 $ 624,701
Furniture and fixtures......................... 104,854 8,833
Leasehold improvements......................... 96,170 15,471
Software....................................... 1,140,081 251,796
Less accumulated depreciation.................. (985,245) (189,434)
---------- ---------
$3,026,487 $ 711,367
========== =========
</TABLE>
Amounts included in property and equipment for assets capitalized under
capital lease obligations at June 30, 2000 and 1999 are $172,472 and $18,346,
respectively. Accumulated depreciation for the items under capitalized leases
was $40,594 and $2,072 at June 30, 2000 and 1999, respectively.
(7) INTANGIBLE ASSETS
Intangible asset balances at June 30, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Acquired technology........................................ $1,510,548 $1,510,548
Goodwill................................................... 1,358,476 1,219,851
---------- ---------
2,869,024 2,730,399
Less accumulated amortization............................. (702,000) (317,454)
---------- ---------
$2,167,024 $2,412,945
========== ==========
</TABLE>
(8) NOTES RECEIVABLE AND NOTES RECEIVABLE FROM OFFICER
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 stockholders 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.
(9) LICENSE AGREEMENTS
F-15
<PAGE>
In March 1998, the Company entered into a sublicense agreement related to
proprietary courseware with Training Resources International (TRI), which is
wholly-owned by Michael Khaled, a stockholder of the Company, in exchange for
the assumption of TRI's obligation of $1,600,000 to the original licensor,
ProSoft I-Net Solutions, Inc. (ProSoft). Michael Khaled personally guaranteed
the repayment of the Company's obligation under the sublicense agreement with
TRI to ProSoft. TRI entered into the original license agreement with ProSoft
in January 1998.
In April 1998, the Company entered into a sublicense agreement related to
proprietary courseware with S.T.E.P.S., Inc. (Steps), whose primary
stockholder is Scott Beebe, a stockholder and director of the Company, in
exchange for (1) the assumption of Steps' remaining obligation of $1,500,000
to the original licensor, ProSoft, (2) the assumption of Step's obligation of
$200,000 to Vision Holdings Inc. (Vision), an unrelated entity, which had
advanced funds to Steps, and (3) the issuance of 1,000,000 shares of common
stock valued at $220,000 to Steps. Scott Beebe personally guaranteed the
repayment of the Company's obligation under the sublicense agreement with
Steps to ProSoft. Additionally, the Company acquired supplies, books and
other materials related to the licensed technology from Vision in exchange
for $84,000. The Company had previously entered into a separate loan
agreement for $100,000 with Vision. The Company's chief executive officer,
Keith Freadhoff, was the chief executive officer at ProSoft when the original
license agreement with Steps was entered into. Don Danks is a stockholder of
the Company and was an officer of ProSoft at the time the original license
agreements were entered into.
In April 1998, the Company converted the $300,000 obligation to Vision into
1,900,000 shares of common stock, valued at $418,000. As a result, license
fees of $418,000 were recorded for the incremental increase of the stock
exchanged for the note payable cancellation.
In June 1998, the Company changed its business plan and began focusing on
developing technology to enable businesses and other organizations to conduct
commerce over the Internet. Therefore, the Company determined that the
license fees would not ultimately be recoverable. Accordingly, the costs of
acquiring the sub-license agreements and related supplies are included as
license fees expense in the accompanying consolidated statements of
operations for the year ended June 30, 1998.
(10) NOTES PAYABLE AND CONVERTIBLE DEBENTURES
During the year ended June 30, 1998, an officer and stockholder 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 extinguishments of
debt. Accordingly, the Company recognized $1,653,232 as gain on
extinguishments of debt during the year ended June 30, 1999.
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 were due in December 1999. As of June 30, 2000, all of the
convertible debentures had been converted into shares of common stock. The
convertible debentures were 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 was 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 were 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 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 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.
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 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.
F-16
<PAGE>
In October and November 1999, $200,000 of convertible debentures were
converted into 80,000 shares of common stock. Notes payable and notes payable
to related parties at June 30, 2000 and 1999 consists of the following:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<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 - $1,496,000
stock....................................................
Non-interest bearing note payable to an officer
and stockholder, due within 10 days of the close of
bridge financing......................................... - 1,799
June 2001, interest at 10.75%at June 30, 2000
and 1999................................................ $ 4,547 12,443
Note payable to a financial institution due
September 14, 2000, interest at prime plus
3%(11.50%at June 30, 2000 and 1999), secured by
common stock pledged by a major stockholder............. 97,779 25,000
---------- ----------
102,326 1,535,242
Less current portion....................................... (102,326) (1,535,242)
---------- ----------
Long term portion.......................................... $ - $ -
========== ==========
</TABLE>
Interest paid during the years ended June 30, 2000 and June 30, 1999 was
approximately $883,139 and $933,097, respectively. Interest expense for the year
ended June 30, 2000 includes amortization of debt issuance costs of
approximately $3,692,002.
The note payable of $102,326 matures in 2001. There are no other obligations
thereafter.
(11) CAPITAL LEASES
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
June 30, 2000:
<TABLE>
<S> <C>
2001 $ 91,204
2002 44,969
2003 2,884
Thereafter -
--------
Total minimum lease payments 139,057
Amount representing interest (3,781)
--------
Present value of net minimum lease 135,276
Current portion of capital lease 87,897
--------
Long-term portion of capital lease $ 47,379
========
</TABLE>
(12) 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 June 30, 2000,
exclusive of taxes and insurance, are as follows:
<TABLE>
Operating
Leases
----------
<S> <C>
Year ending June 30,
2001 $754,332
2002 485,987
2003 308,919
2004 289,695
</TABLE>
F-17
<PAGE>
<TABLE>
<S> <C>
Thereafter 26,510
---------
Total $1,865,443
=========
</TABLE>
Rental expense totaled approximately $720,954 and $241,071 for the years ended
June 30, 2000 and 1999, 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.
From time to time, prior to the acquisition of Galaxy Enterprises, Galaxy
Enterprises received inquiries from attorneys general offices and other
regulators about civil and criminal compliance matters with various state and
federal regulations. These inquiries sometimes rose 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
attorneys general of 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 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
GalaxyMall, Inc. under the Kentucky business opportunity statute. On December
15, 1998, an order of dismissal was entered based on GalaxyMall agreeing to
advise the Kentucky Attorney General's office of any complaints from
GalaxyMall 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' business or operations.
(13) INCOME TAXES
Income tax expense for the year ended June 30, 2000 and 1999 represents the
California state minimum franchise tax and is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Income tax expense attributable to loss from operations during the year ended
June 30, 2000 and 1999, 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>
2000 1999 1998
---- ----- ----
<S> <C> <C> <C>
Computed "expected" tax benefit............................. $(14,996,866) $(5,709,861) $ (2,897,079)
Decrease (increase) in income taxes resulting from:
State and local income tax benefit, net of federal effect.... (2,114,471) (805,057) (408,471)
Change in the valuation allowance for deferred tax assets.... 14,133,260 6,470,884 3,305,550
Other........................................................ 122,077 44,034
Nondeductible stock compensation ............................ 2,856,000 - -
------------ ----------- -----------
Income tax expense $ - $ - $ -
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2000 and
1999 are presented below:
<TABLE>
<CAPTION>
2000 1999
----- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 13,848,761 $ 4,811,830
Stock option expense......................................... 2,199,764 1,128,171
Intangible assets, principally due to differences in
amortization................................................. 34,778 16,902
Deferred compensation........................................ 368,151 121,821
Accounts receivable principally due to allowance for
doubtful accounts.......................................... 802,120 107,850
Accrued expenses............................................. 542,632 186,508
Other........................................................ 112,926 114,899
Deferred revenue............................................. 5,977,552 4,133,938
Legal fees................................................... 460,524 -
Debt issuance costs.......................................... 407,971 -
------------ -----------
Total gross deferred tax assets............................ 24,755,179 10,621,919
Less valuation allowance................................... (24,737,878) (10,604,618)
------------ -----------
Deferred tax liability:
Property and equipment, principally due to differences
in depreciation............................................ (17,301) (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 scheduled
F-18
<PAGE>
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. 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, 2000, the Company had approximately $34,707,304 and 24,137,952
of net operating loss carryforwards available for Federal and state income
tax purposes, respectively, which expire between 2006 and 2020. The ultimate
realization of the net operating loss carryforwards will be limited by
Section 382 of the Internal Revenue Code as a result of a change of control.
(14) STOCK OPTION PLAN
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.
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. 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. 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. The fair value of the options on the date of the grant was estimated to
be $0.59 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, among other things, a non-qualified
stock option 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 983,348 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 $2.00 to $13.30 per share. The weighted-average fair value
of options granted during the year ended June 30, 1999 under the Program was
$3.44 per share. During the year ended June 30, 2000, the Company granted
126,416 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 $3.50 to $6.00 per share. The weighted-average fair value of
options granted during the year ended June 30, 2000 under the Program was
$3.59 per share. As of June 30, 2000, 27,870 options were available for
future grants under the Program.
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. During the year ended June 30, 1999, the Company
granted 2,546,667 options under the Plan at exercise prices greater than and
below the estimated market price of the Company's common stock on the date of
grant ranging from $2.00 to $6.50 per share. The weighted-average fair value
of the options granted under the Plan during the year ended June 30, 1999 was
$2.69 per share. Subsequent to June 30, 1999, 2,246,667 of these options were
cancelled. During the year ended June 30, 2000, the Company granted 550,714
options under the Plan at exercise prices greater than and below the
estimated market price of the Company's common stock on the date of grant
ranging from $3.50 to $9.25 per share. The weighted-average fair value of the
options granted under the Plan during the year ended June 30, 2000 was $6.73
per share. As of June 30, 2000, there were 4,149,286 options available for
future grants under the Plan.
In July 1999, the Board of Directors adopted the 1998 Stock Option Plan for
Non-Executives. An aggregate of 2,000,000 shares were reserved for issuance
under the Plan; the reserve amount was later increased to 5,000,000 shares.
During the year ended June 30, 2000, the Company granted 2,237,832 options
under the Plan at exercise prices greater than and below the estimated market
price of the Company's common stock on the date of grant ranging from $1.78
to $14.50 per share. The weighted-average fair value of the options granted
under the Plan during the year ended June 30, 2000 was $7.34 per share. Also
during the year ended June 30, 2000, 279,779 of these options were cancelled.
As of June 30, 2000, there were 3,041,947 options available for future grants
under the Plan.
Pursuant to the terms of the Company's merger with Galaxy Enterprises, each
outstanding option to purchase shares of Galaxy Enterprises' common stock under
Galaxy Enterprises' 1997 Employee Stock Option Plan was assumed by the Company,
whether or not vested and exercisable. The Company assumed options exercisable
for an aggregate of 1,063,470 shares of Netgateway common stock.
F-19
<PAGE>
The following is a summary of stock option activity under the Company's stock
option plans:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
---------------- ---------------
<S> <C> <C>
Balance at June 30, 1997.................................. - -
Granted....................................... 792,623 $2.13
Exercised..................................... (6,384) 2.16
Canceled or expired........................... (29,528) 1.28
----------
Balance at June 30, 1998................................... 756,711 $2.62
Granted........................................ 3,827,983 3.80
Exercised...................................... (6,895) 1.17
Canceled....................................... (488,033) 3.27
----------
Balance at June 30, 1999................................... 4,089,766 3.65
Granted........................................ 3,460,500 6.60
Exercised...................................... (345,724) 3.40
Canceled....................................... (2,691,895) 3.13
----------
Balance at June 30, 2000................................... 4,512,647 6.24
==========
</TABLE>
The following table summarizes information about shares under option at June 30,
2000:
<TABLE>
<CAPTION>
Weighted-average
remaining Weighted
Range of Number contractual Average Number
exercise prices Outstanding life Exercise price Exercisable
------------------ --------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
1.17 - 5.48 2,579,224 8.88 2.87 1,117,823
5.49 - 7.50 537,941 9.26 6.83 272,219
7.51 - 9.25 928,347 9.47 8.72 192,720
9.26 - 13.30 467,135 9.32 10.59 227,372
--------- ---------
4,512,647 1,810,134
========= =========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for stock options granted
to employees under which no compensation cost for stock options is recognized
for stock option awards granted at or above fair market value. During the year
ended June 30, 1999, the Company recognized $282,052 of compensation expense for
options granted below fair market value. During the year ended June 30, 2000,
the Company recognized $652,825 of compensation expense for options granted
below fair market value.
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, 2000:
<TABLE>
<S> <C>
Net Loss-as reported............ $(44,108,429)
Net Loss-pro forma.............. (46,776,831)
</TABLE>
F-20
<PAGE>
(15) STOCKHOLDERS' EQUITY
During the year ended 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.
During the the year ended 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 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 stockholders'
deficit to reflect the unearned compensation. During the year ended 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 common shares were forfeited.
During the year ended June 30, 1998, Michael Khaled, Don Danks and Lynn
Turnbow, stockholders 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 stockholder 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 $185,533, including $1,533 of
accrued interest.
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 year ended June 30, 1999, the Company sold 1,564,134 units in
exchange for $4,200,978. 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 anytime 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 at $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 366,500 shares of
common stock valued at $1,262,200 as payment of consulting and legal
services.
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 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 $2,340,720 in 1999 and $53,534 in
2000, debt issuance costs of $240,050 and interest expense of $535,535 was
recorded in the accompanying consolidated financial statements.
In November 1998, the Company entered into a settlement agreement with
Michael Khaled, a stockholder of the Company, whereby four stockholders 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 the four stockholders 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.
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 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.
In January 1999, Galaxy Enterprises sold a $500,000 convertible promissory
note bearing interest at 7% per annum to an institutional investor. During
1999, the note was converted into 108,017 shares of common stock for
outstanding debt of $450,000. Along with the convertible promissory note,
Galaxy Enterprises issued the institutional investor warrants to purchase
31,922 shares of common stock. The warrants are exercisable at $11.04 per
share and expire January 11, 2002.
During February and March 1999, Galaxy Enterprises entered into an agreement
with an institutional investor, whereby the investor invested $1 million in
exchange for 159,608 shares of Netgateway common stock. The investor was also
issued warrants to purchase up to 159,608 additional shares of Netgateway
common stock at an exercise price of $4.45 per share. The warrants expire
March 18, 2001.
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.
F-21
<PAGE>
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 June 30, 2000, the
performance criteria had not been met.
During the year ended June 30, 2000, the Company issued 538,598 shares of
common stock valued at $3,660,498 for services, of which 500,000 shares were
issued to the chief executive officer of the Company.
In November and December 1999, the Company sold 4,155,350 shares of common
stock in a public offering generating net proceeds of $25,313,863. The
Company also granted 190,250 warrants as stock issuance costs.
In October 1999, the Company issued 1,188,773 shares of common stock upon the
cashless exercise of warrants, and 1,200,000 shares of common stock valued at
$8,400,000 to three executives upon the cancellation of 1,980,000 options.
During the period December 1999 through June 2000, the Company issued 239,576
shares of common stock upon the exchange of common stock of its
StoresOnline.com, Ltd. Subsidiary, pursuant to the terms of the original
issuance of StoresOnline.com Ltd.'s common stock.
During the year ended June 30, 2000, Galaxy Enterprises sold 145,926 shares
of common stock in exchange for cash of $300,000.
(16) RELATED ENTITY TRANSACTIONS
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
June 30, 2000 and 1999 totaled approximately $1,110,404 and $483,387,
respectively. The Company also has a receivable from ECI for leases in
process of $152,060 and $47,190 as of June 30, 2000 and 1999, respectively.
(17) SEGMENT INFORMATION
The Company has two principal business segments (Internet services and
multimedia products). The first is primarily engaged in the business of
providing its customers 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
F-22
<PAGE>
segment. An analysis and reconciliation of the Company's business segment
information to the respective information in the consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------
2000 1999
------------- --------------
<S> <C> <C>
Service revenue:
Internet services........................................... $ 22,149,649 $ 10,280,440
Multi-media services........................................ 5,275,110 288,245
------------ ------------
Total consolidated revenue $ 27,424,759 $ 10,568,685
============ ============
(Loss) income from operations:
Internet services........................................... $(38,182,541) $(15,823,897)
Multi-media services........................................ (1,317,197) 3,013
------------ ------------
$(39,499,738) $(15,820,884)
============ ============
Net (loss) income:
Internet services........................................... $(42,789,914) $(15,143,491)
Multi-media services........................................ (1,318,515) 3,013
------------ ------------
$(44,108,429) $(15,140,478)
============ ============
Depreciation and amortization:
Internet services........................................... $ 1,133,091 $ 494,874
Multi-media services........................................ 25,931 -
------------ ------------
$ 1,159,022 $ 494,874
============ ============
Extraordinary gain on extinguishment of debt:
Internet services........................................... $ - $ 1,653,232
Multi-media services........................................ - -
------------ ------------
$ - $ 1,653,232
============ ============
Capital expenditures:
Internet services........................................... $ 2,870,296 $ 632,640
Multi-media services........................................ 75,759 19,662
------------ ------------
$ 2,946,055 $ 652,302
============ ============
Assets:
Internet services........................................... $ 11,593,681 $ 5,093,797
Multi-media services........................................ 715,719 259,224
------------ ------------
Total consolidated assets...................................... $ 12,309,400 $ 5,353,021
============ ============
</TABLE>
(18) SUBSEQUENT EVENTS (Unaudited)
In July 2000, Netgateway announced plans to consolidate its existing
operations with those acquired through its merger with Galaxy Enterprises.
Netgateway intends to move its headquarters from Long Beach, CA to the
existing facility acquired by Galaxy Enterprises in Orem, UT. Restructuring
charges are estimated to be approximately $275,000 which includes $175,000
for severance packages, relocation expenses of $84,000 and equipment moving
costs of $15,000.
In July 2000, the Company entered into a securities purchase agreement with
King William, LLC ("King William"). Under the terms of the agreement, the
Company issued an 8% convertible debenture in the principal amount of $4.5
million. The purchase price of the debenture is payable to the Company in two
tranches. The first tranche, in the amount of $2.5 million, net of closing
costs of approximately $300,000, was paid at the closing in July 2000. The
second tranche, in the amount of $2.0 million, may be drawn down by the
Company three (3) business days after the registration statement registering
the shares issuable upon conversion has been declared effective. The
debenture is convertible into shares of the Company's common stock at the
lower of $1.79 per share or a conversion rate of 80% of the market price at
the time of conversion, subject to certain conditions and adjustments. This
conversion feature represents a beneficial conversion feature. Accordingly,
the value of the beneficial conversion feature will be recorded as capital
and a reduction of debt and will be recorded as interest expense from the
earliest date of conversion. The beneficial conversion feature on the first
tranche is approximately $625,000. In addition, the Company issued to King
William warrants to purchase 231,000 shares of common stock. The Company also
issued to Roth Capital Partners, Inc. warrants to purchase 90,000 shares of
common stock and to Carbon Mesa Partners, LLC warrants to purchase 10,000
shares of common stock. The shares of common stock issuable upon conversion
of the debenture and exercise of these warrants may be sold pursuant to the
terms of the securities purchase agreement and applicable securities laws.
In August 2000, the Company entered into a private equity credit agreement
with King William. Under the terms of the agreement, the Company has the
right to issue and sell to King William up to $10 million of the Company's
common stock at the market price at the time of sale, subject to certain
conditions and adjustments. The number of shares issuable under the
securities purchase agreement (convertible debt and warrants) and the private
equity credit agreement are limited to approximately 4 million shares of
common stock, subject to stockholder approval. Accordingly, prior to
stockholder approval, the Company may be limited in the number of shares it
may issue under the private equity credit agreement. King William may resell
these shares of common stock pursuant to the terms of the securities purchase
agreement and applicable securities laws. In addition, for each 10,000 shares
of common stock that the Company issues and sells to King William, the
Company will issue a warrant to King William to purchase 1,500 shares of the
Company's common stock at an exercise price equal to the market price of the
Company's common stock on the put date. The shares issuable upon exercise of
these warrants may also be sold pursuant to the terms of the securities
purchase agreement and applicable securities laws.
F-23
<PAGE>
NETGATEWAY, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning of Costs and Deductions/ at End
Period Expenses Write-offs of Period
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended June 30, 2000
Deducted from Accounts Receivable:
Allowance for doubtful accounts
and sales returns 36,925 1,159,022 235,346 960,601
Year ended June 30, 1999
Deducted from Accounts Receivable:
Allowance for doubtful accounts
and sales returns 43,832 3,000 9,907 36,925
Year ended June 30, 1998
Deducted from Accounts Receivable:
Allowance for doubtful accounts
and sales returns - 43,832 - 43,832
</TABLE>
F-24
<PAGE>
32,955,901 Shares of Common Stock
[LOGO]
NETGATEWAY, INC.
----------------------
Prospectus
----------------------
Until [ ], 2000, all dealers that effect transactions in the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This delivery requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
[ ], 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC registration fee...............................................$10,370
Nasdaq National Market listing fee................................. 7,500
Accounting fees and expenses....................................... 50,000
Legal fees and expenses............................................ *
Printing expenses.................................................. *
Transfer agent fees................................................ *
Miscellaneous...................................................... *
-------------------
TOTAL........................................................$ *
</TABLE>
----------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Delaware General Corporation Law, Section 102(b)(7), enables a
corporation in its original certificate of incorporation, or an amendment
thereto validly approved by stockholders, to eliminate or limit personal
liability of members of its Board of Directors for violations of a director's
fiduciary duty of care. However, the elimination or limitation shall not
apply where there has been a breach of the duty of loyalty, failure to act in
good faith, intentional misconduct or a knowing violation of a law, the
payment of a dividend or approval of a stock repurchase which is deemed
illegal or an improper personal benefit is obtained. 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 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below in chronological order is information regarding the
numbers of shares of common stock sold by Netgateway, the number of options
issued by Netgateway, and the principal amount of debt instruments issued by
Netgateway since March 4, 1998 (inception), the consideration received by
Netgateway for such shares, options and debt instruments and information
relating to the section of the Securities Act or rule of the Securities and
Exchange Commission under which exemption from registration was claimed. None
of these securities was registered under the Securities Act. Except as
otherwise indicated, no sales of securities involved the use of an
underwriters and no commissions were paid in connection with the sale of any
securities.
From Netgateway's inception on March 4, 1998 through June 2, 1998,
Netgateway issued to its founding stockholders a total of 2,800,000 shares of
common stock at a price of $.001 per share.
II-1
<PAGE>
From Netgateway's inception on March 4, 1998 to June 30, 1998,
Netgateway issued 600,000 shares of common stock to several of its existing
stockholders in order to reimburse such stockholders for satisfying $400,000
of obligations of Netgateway. The certificates evidencing the shares of
common stock were appropriately legended. In the opinion of Netgateway, the
offer and the sale of the shares was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder. Each of these
stockholders were "accredited investors" as defined in Rule 501 under the
Securities Act.
In April 1998, Netgateway issued 1,000,000 shares of common stock to
S.T.E.P.S., Inc., the primary stockholder of which is Scott Beebe, a Director
of Netgateway, in connection with the granting by Steps to Netgateway of a
sublicense relating to proprietary courseware. The certificates evidencing
the shares of common stock were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
In April 1998, Netgateway issued 1,900,000 shares of common stock to
Vision Holdings, Inc. as consideration of the cancellation of $300,000 of
indebtedness owed by Netgateway to Vision. The certificates evidencing the
shares of common stock were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
In April 1998, Netgateway issued 100,000 shares of common stock to
Eric Richardson in payment for legal consulting services. Of such shares of
common stock, 36,000 vested immediately and 64,000 vested upon performance of
consulting services by Mr. Richardson. An aggregate of 52,000 shares of
common stock were issued to Mr. Richardson pursuant to this arrangement. The
certificates evidencing the shares of common stock were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the shares
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
In June 1998, Netgateway issued 100,000 shares to Alex Chafetz, an
employee of Netgateway, in payment for services. The certificates evidencing
the shares of common stock were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
In June 1998, Netgateway issued 184,000 shares of common stock to
unaffiliated third party creditors of Netgateway as consideration of the
cancellation of $185,333 of indebtedness owed by Netgateway to such
creditors. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
On June 2, 1998, Netgateway issued 400,000 shares of common stock
(including contingent issuances) in connection with the acquisition of
Digital Genesis. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
In June 1998, Netgateway closed a private offering of 687,000 shares
of its common stock. The shares were sold at the price of $1.00 per share,
resulting in gross proceeds of $687,000. Each of the investors agreed to
acquire the shares for investment purposes only and not with a view to
distribution. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder. Of the investors in the offering 16 were
"accredited investors" as defined in Rule 501 under the Securities Act and 11
were not accredited investors.
In connection with the Legal Fees Services Option Agreement, dated
as of June 3, 1998 with Nida & Maloney P.C., Netgateway issued to such firm
options to purchase 100,000 shares of common stock (subsequently adjusted
through certain antidilution provisions to be 240,000 shares of common stock)
at a strike price of $2.50 per share. In the opinion of Netgateway, the offer
and the sale of the shares was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
In July 1998, Netgateway closed a private offering of 1,022,800 units,
each unit consisting of one share of common stock and one common stock purchase
warrant entitling the holder to acquire one share of common stock at a price of
$4.00 per share (subsequently repriced to $2.00 per share). The units were sold
at $2.00 per unit. These warrants were exercisable through September 30, 1998,
but were extended through October 30, 1998. Warrants exercisable for an
aggregate of 132,100 shares were exercised prior to expiration of the warrants.
The certificates evidencing the securities
II-2
<PAGE>
underlying the units were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder. Of the investors in the
offering 75 were "accredited investors" as defined in Rule 501 under the
Securities Act and 22 were not accredited investors.
In connection with the Consulting and Advisory Agreement, dated
October 20, 1998, with Burchmont Equities Group, Inc., Netgateway issued
100,000 shares of common stock the Burchmont Equities Group, Inc. in payment
for advisory services. The shares will vest upon the happening of all of the
following events: (1) Netgateway becomes listed on the Nasdaq SmallCap
Market, (2) Netgateway files a Registration Statement on Form S-1 for its
existing shares including these shares, and (3) Netgateway files a Form 10
and becomes a 12(g) reporting company.
On October 20, 1998, Netgateway issued warrants exercisable for an
aggregate of 225,000 shares of common stock to Dean Dumont and 75,000 shares
of common stock to Maylena Burchmont in payment of consulting services. The
certificates evidencing the warrants and any securities underlying the
warrants were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the units (and the securities constituting the units) was
exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
On October 21, 1998, Netgateway issued warrants exercisable for an
aggregate of 300,000 shares of common stock to Howard Effron in payment of
consulting services. The certificates evidencing the warrants and any
securities underlying the warrants were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the units (and the
securities constituting the units) was exempt by virtue of Section 4(2) of
the Securities Act and the rules promulgated thereunder.
In connection with a Consulting and Advisory Agreement with Richard
Berns, on October 21, 1998, Netgateway issued 25,000 shares of common stock
in payment of advisory services. The certificates evidencing the securities
underlying the units were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
In payment for merger and acquisition advisory services related to
the acquisition of Spartan Multimedia, in November 1998, Netgateway issued
10,000 shares of common stock to the Chaffetz Family Trust. The certificates
evidencing the securities underlying the units were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the units (and the
securities constituting the units) was exempt by virtue of Section 4(2) of
the Securities Act and the rules promulgated thereunder.
On November 20, 1998, Netgateway issued warrants exercisable for an
aggregate of (i) 50,000 shares to each of Keith D. Freadhoff, Scott Beebe,
Donald D. Danks, and Michael Vanderhoff and (ii) 100,000 shares to Michael
Khaled. The certificates evidencing the warrants and any securities
underlying the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
On November 20, 1998, Netgateway issued warrants exercisable for an
aggregate of 100,000 shares to Ronald Spire in payment for consulting
services. The certificates evidencing the warrants and any securities
underlying the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
In connection with the Consulting and Advisory Agreement, dated
November 1, 1998, with North Coast Securities Corp., Netgateway issued 10,000
shares of common stock to North Coast Securities Corp. in payment for
advisory services. The certificates evidencing the shares of common stock
were appropriately legended. In the opinion of Netgateway, the offer and the
sale of the units (and the securities constituting the units) was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In connection with a Consulting and Advisory Agreement with Gerold
Czuchna, on December 14, 1998, Netgateway issued 5,000 shares of common stock in
payment of advisory services. The certificates evidencing the securities
underlying the units were appropriately legended. In the opinion of Netgateway,
the offer and the sale of the units (and the securities constituting the units)
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
II-3
<PAGE>
In connection with the Consulting Agreement, dated as of December
24, 1998, between Netgateway, Inc. and Glashow Associates LLC, Netgateway
issued 170,000 shares of common stock and warrants exercisable for an
aggregate of 150,000 shares to such firm in payment for consulting services.
The certificates evidencing the shares of common stock were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the units
(and the securities constituting the units) was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
In connection with acquisition of Spartan Multimedia, in January
1999, StoresOnline.com Ltd. issued 371,429 shares of class B common stock,
each of which is convertible into one share of Netgateway common stock. The
certificates evidencing the shares of common stock were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the units
(and the securities constituting the units) was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
In connection with the Consulting Agreement, dated as of January 26,
1999, with Stock Maker, Inc., Netgateway issued 40,000 shares to such firm in
payment for advisory services. The certificates evidencing the shares of
common stock were appropriately legended. In the opinion of Netgateway, the
offer and the sale of the units (and the securities constituting the units)
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder. This consulting agreement was terminated in June 1999
and Stock Maker returned these shares to the authorized, but unissued, common
stock of Netgateway.
In connection with Netgateway's then pending private offering of
convertible debentures, on February 15, 1999, Netgateway issued warrants
exercisable for an aggregate of (i) 129,000 shares to Dean Dumont,(ii) 12,750
shares to Todd Torneo, (iii) 3,000 shares to Tradeway Securities Group, (iv)
4,250 to John Borcich, (v) 66,800 shares to Y2K Capital, (vi) 35,000 to
Roxanne Melotte, and (vii) 32,500 shares to Michael Vanderhoff. The
certificates evidencing the warrants and any securities underlying the
warrants were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the units (and the securities constituting the units) was
exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
In payment for financial consulting services, on February 15, 1999,
Netgateway issued an aggregate of 30,000 shares of common stock to two
individuals. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the units (and the securities constituting the units) was exempt by virtue
of Section 4(2) of the Securities Act and the rules promulgated thereunder.
These shares were subsequently returned to the authorized, but unissued,
common stock of Netgateway.
In March 1999, Netgateway closed a private offering of $1 million
principal amount of convertible debentures for gross proceeds of $1 million.
The debentures are convertible into shares of common stock at the conversion
price of $2.50 per share. These debentures mature December 31, 1999. The
certificates evidencing debentures, as well as any shares of common stock
issued upon the conversion thereof, were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the debentures was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. All of the investors in the offering were "accredited investors"
as defined in Rule 501 under the Securities Act.
On March 17, 1999, Netgateway issued warrants exercisable for an
aggregate of 25,000 shares of common stock to XOOM.com, Inc. These warrants
were exercisable at $12.00 per share and were exercisable on a cashless
basis. The warrants were exercised in full on a cashless basis on April 14,
1999 for an aggregate of 2,570 shares of common stock. The certificates
evidencing the warrants, as well as any shares of common stock issued upon
the exercise thereof, were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the debentures was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On March 31, 1999, Netgateway issued 600 shares of common stock to
Steve Jorgenson, a professional golfer, in connection with Mr. Jorgenson
acting as a spokesman for Netgateway.
On March 31, 1999, Netgateway approved the issuance of 5,000 shares
of common stock to Gerold Czuchna and 5,000 shares of common stock to Web
Walker Media Link, in connection with Mr. Czuchna performing consulting
services. The certificates evidencing the shares were appropriately legended.
In the opinion of Netgateway, the offer and sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On March 31, 1999, Netgateway approved the issuance of 10,000 shares
of common stock to Jason E. Chaffetz and Julie Marie Chaffetz, Trustees of
the Chaffetz Family Trust, udo 4/14/96, as compensation for Mr. Chaffetz's
efforts in
II-4
<PAGE>
connection with the acquisition of Spartan Multimedia, Inc. The certificates
evidencing the shares were appropriately legended. In the opinion of
Netgateway, the offer and sale of the shares was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
In April 1999, Netgateway closed a private offering of 329,000
shares of its common stock. The shares were sold at the price of $3.00 per
share, resulting in gross proceeds of $987,000. Each of the investors agreed
to acquire the shares for investment purposes only and not with a view to
distribution. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder. All of the investors in the offering were
"accredited investors" as defined in Rule 501 under the Securities Act.
On April 1, 1999, Netgateway issued warrants exercisable for an
aggregate of 5,000 shares of common stock to Andrew Glashow in order to
induce such individual to make a loan to Netgateway. The certificates
evidencing the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On April 1, 1999, Netgateway issued warrants exercisable for an
aggregate of 26,050 shares of common stock to Richard Berns in connection
with Netgateway's convertible debenture private offering. The certificates
evidencing the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On April 16, 1999, Netgateway authorized the issuance of warrants to
purchase 50,000 shares of common stock of Netgateway to each of Donald Danks,
Keith Freadhoff, Michael Vanderhoof and Scott Beebe, all in connection with
the settlement of a dispute between Michael Khaled and Netgateway concerning
the issuance of certain common stock of the corporation to Khaled. In
addition, Netgateway authorized the issuance of a warrant to purchase 100,000
shares of common stock of Netgateway to Michael Khaled in connection with the
settlement. The certificates evidencing the warrants were appropriately
legended. In the opinion of Netgateway, the offer and sale of the warrants
was exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
On April 26, 1999, Netgateway issued 25,000 shares of common stock
to Berns Capital, L.P. for consulting services provided by Richard A. Berns.
The certificates evidencing the shares were appropriately legended. In the
opinion of Netgateway, the offer and sale of the shares was exempt by virtue
of Section 4(2) of the Securities Act and the rules promulgated thereunder.
On April 26, 1999, Netgateway issued 25,000 shares of common stock
to Todd Torneo for consulting services provided by Mr. Torneo. The
certificates evidencing the shares were appropriately legended. In the
opinion of Netgateway, the offer and sale of the shares was exempt by virtue
of Section 4(2) of the Securities Act and the rules promulgated thereunder.
On April 26, 1999, Netgateway issued 25,000 shares of common stock
to Joseph Py in consideration for Mr. Py making available $150,000 to
Netgateway. The certificates evidencing the shares were appropriately
legended. In the opinion of Netgateway, the offer and sale of the shares was
exempt by virtue of Section 4(2) of the Securities Act and the rules
promulgated thereunder.
On April 26, 1999, Netgateway issued an aggregate of 30,000 shares
of common stock in order to induce Joseph Py and Robert Ciri to make loans to
Netgateway. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the debentures was exempt by virtue of Section 4(2) of the Securities Act
and the rules promulgated thereunder.
On May 3, 1999, Netgateway issued warrants exercisable for an
aggregate of 5,000 shares of common stock to GMR for consulting services. The
certificates evidencing the warrants were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On May 15, 1999, Netgateway issued to Shopping Planet 35,000 shares of
common stock in connection with the acquisition by Netgateway of the technology
of Shopping Planet.
II-5
<PAGE>
On May 18 and June 4, 9, and 22, 1999, Netgateway closed a private
offering of an aggregate of 57.6 units, and in August and on September 24,
1999 Netgateway conducted another closing of this offering of 71.57 units, in
each case each unit consisting of $50,000 principal amount of Series A 12%
Senior Notes due 2000 and 5,000 shares of common stock. The notes mature on
the earlier of April 30, 2000 and the date of the closing of this offering.
The units were sold at the price of $50,000 per unit, resulting in gross
proceeds of $6,608,500. Each of the investors agreed to acquire the shares
for investment purposes only and not with a view to distribution. The
certificates evidencing the securities underlying the units were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder. All of the investors in the offering were
"accredited investors" as defined in Rule 501 under the Securities Act. In
addition, in connection with this private offering, Netgateway granted to
Cruttenden Roth and the other agents responsible for placing such securities
warrants exercisable for an aggregate of 147,750 shares of common stock at an
exercise price of $10.00 per share.
In June 1999, Netgateway issued to Nida & Maloney, a law firm, three
units identical to the units described in the immediately preceding
paragraph, in satisfaction of its obligation for legal fees.
On June 15, 1999, Netgateway approved the issuance of 70,000 shares
of common stock to Glashow Associates LLC in consideration for consulting
services rendered to Netgateway, which shares were issued at the direction of
Glashow Associates as follows: 30,000 shares to Andrew Glashow, 3,000 shares
to Diana Glashow, 2,000 shares to Bernard Brown and 35,000 shares to Robert
Ciri. In connection with the services rendered by Glashow Associates,
Netgateway also approved the issuance of 150,000 warrants for the purchase of
common stock in the following amounts: 37,500 to Andrew Glashow, 37,500 to
Robert Ciri and 75,000 to Corporate Management Consultants, Inc. The
certificates evidencing the securities were appropriately legended. In the
opinion of Netgateway, the offer and sale of the securities was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On June 16, 1999, Netgateway approved the issuance of 125,000
warrants for the purchase of common stock to Howard P. Effron for consulting
services provided by Mr. Effron, which warrants were issued as follows at the
direction of Mr. Effron: 92,000 to Mr. Effron and 33,000 to Richard A. Berns.
The certificates evidencing the shares were appropriately legended. In the
opinion of Netgateway, the offer and sale of the warrants was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On July 26, 1999, Netgateway issued 50,000 shares of common stock
and warrants for the purchase of up to an additional 200,000 shares of common
stock to MediaOne of Colorado, Inc. in connection with the consummation of a
business transaction between Netgateway and MediaOne. The certificates
evidencing the securities were appropriately legended. In the opinion of
Netgateway, the offer and sale of the securities was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On July 26, 1999, Netgateway issued 700 shares of common stock to
Steve Jorgenson, a professional golfer, in connection with Mr. Jorgenson
acting as a spokesman for Netgateway. The certificates evidencing the shares
were appropriately legended. In the opinion of Netgateway, the offer and sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
On July 26, 1999, Netgateway issued 28,000 warrants for purchase of
common stock to Burchmont Equities Group for consulting services performed.
The certificates evidencing the warrants were appropriately legended. In the
opinion of Netgateway, the offer and sale of the warrants was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In October 1999, Netgateway issued to each of Keith D. Freadhoff, its
Chairman of the Board of Directors, Donald M. Corliss, its President, and David
Bassett-Parkins, its Chief Financial and Chief Operating Officer, 400,000 shares
of common stock, subject to forfeiture in exchange for options granted to such
individuals under its existing stock option plans.
In October 1999, Netgateway issued an aggregate of 962,444 shares of
common stock upon the exercise on a cashless basis of an aggregate of
1,184,730 warrants then outstanding. Each of such transactions was exempt
from registration under the Securities Act by virtue of the provisions of
Section 4(2) and/or Section 3(b) of the Securities Act. Each purchaser of the
securities described below has represented that he/she/it understands that
the securities acquired may not be sold or otherwise transferred absent
registration under the Securities Act or the availability of an exemption
from the registration requirements of the Securities Act, and each
certificate evidencing the securities owned by each purchaser bears or will
bear upon issuance a legend to that effect.
II-6
<PAGE>
During the period December 1999 through June 2000, the Company
issued 239,576 shares of common stock upon the exchange of common stock of
its subsidiary, StoresOnline.com, Ltd.. The certificates evidencing the
shares were appropriately legended. In the opinion of Netgateway, the offer
and sale of the shares was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
During the period January 2000 through June 2000, the Company issued
218,963 shares of common stock upon the cashless exercise of warrants and
25,500 shares of common stock upon the exercise of warrants for $27,500. The
certificates evidencing the shares were appropriately legended. In the
opinion of Netgateway, the offer and sale of the shares was exempt by virtue
of section 4(2) of the Securities Act and the rules promulgated thereunder.
In connection with certain Consulting Agreements, each dated as of
January 1, 2000, between Netgateway, Inc. and Daniel V. Angeloff and Shawn
Sedaghat, on or about January 1, 2000, Netgateway issued 5,000 shares of
common stock to each of Messrs. Angeloff and Sedaghat in payment for
consulting services. The certificates evidencing the shares were
appropriately legended. In the opinion of Netgateway, the offer and the sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
On February 14, 2000, Netgateway issued 1,250 shares of common stock
to MediaOne of Colorado, Inc., in connection with its participation on
Netgateway's CableCommerce Advisory Board. The certificates evidencing the
shares were appropriately legended. In the opinion of Netgateway, the offer
and sale of the shares was exempt by virtue of Section 4(2) of Securities Act
and the rules promulgated thereunder.
On March 3, 2000, Netgateway issued 900 shares of common stock to
Steve Jorgenson, a professional golfer, in connection with Mr. Jorgenson
acting as a spokesman for Netgateway. The certificates evidencing the shares
were appropriately legended. In the opinion of Netgateway, the offer and sale
of the shares was exempt by virtue of Section 4(2) of the Securities Act and
the rules promulgated thereunder.
In connection with the Consulting Agreement dated as of May 25, 2000
between Netgateway, Inc. and Star Associates LLC, on May 31, 2000, Netgateway
issued 20,000 shares of common stock to such firm in payment for consulting
services. The certificates evidencing the shares were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt
by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On July 31, 2000, we privately issued an 8% convertible debenture in
the aggregate principal amount of $4.5 million to King William, LLC, a Cayman
Islands limited liability company, pursuant to a securities purchase
agreement dated July 31, 2000. The debenture is convertible into shares of
common stock at the lower of $1.79 per share or 80% of the average current
market price during the 20-day trading period immediately preceding the
conversion date. The offering was made pursuant to Rule 506 of Regulation D
and Section 4(2) of the Securities Act of 1933 in a negotiated transaction.
The purchaser of the debenture is an accredited investor with access to
information regarding the registrant. In connection with the issuance of the
debenture, we also issued to King William warrants to purchase 231,000 shares
of common stock at an exercise price of $1.625 per share. Warrants to
purchase an additional 90,000 and 10,000 shares were issued to Roth Capital
Partners, Inc. and Carbon Mesa Partners, LLC, respectively, at an exercise
price of $1.625. The recipients of the warrants are accredited investors with
access to information regarding the registrant.
ITEM 16. EXHIBITS.
See Index of Exhibits on page II-4.
ITEM 17. UNDERTAKINGS.
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, as amended (the "Act");
(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 form 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% 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 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.
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
Pursuant to the requirements of the Securities Act of 1933, the
Registrant 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 Septemer 7, 2000.
NETGATEWAY, INC.
BY: /s/ ROY W. CAMBLIN III
--------------------------------
Roy W. Camblin III
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose
names appear below appoints and constitutes Roy W. Camblin III and Donald M.
Corliss, Jr. and each of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to execute any and all
amendments to the within Registration Statement, including post-effective
amendments, and to sign any and all registration statements relating to the
same offering of securities as this Registration Statement that are filed
pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to
file the same, together with all exhibits thereto, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorney-in-fact and agent may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons
in the capacities indicated below and as of the dates indicated.
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
--------- ----- ----
<S> <C> <C>
/s/ KEITH D. FREADHOFF
---------------------------------------- Chairman of the Board of Directors September 7, 2000
Keith D. Freadhoff
/s/ ROY W. CAMBLIN III
---------------------------------------- Chief Executive Officer September 7, 2000
Roy W. Camblin III
/s/ DONALD M. CORLISS, JR. President, Chief Operating Officer and September 7, 2000
----------------------------------------- Director
Donald M. Corliss, Jr.
/s/ FRANK C. HEYMAN
---------------------------------------- Acting Chief Financial Officer September 7, 2000
Frank C. Heyman
/s/ JILL GLASHOW PADWA
---------------------------------------- Executive Vice President-Sales and Marketing September 7, 2000
Jill Glashow Padwa
/s/ CRAIG S. GATARZ
---------------------------------------- General Counsel and Corporate Secretary September 7, 2000
Craig S. Gatarz
/s/ JOSEPH ROEBUCK
---------------------------------------- Director September 7, 2000
Joseph Roebuck
/s/ R. SCOTT BEEBE
---------------------------------------- Director September 7, 2000
R. Scott Beebe
/s/ JOHN DILLON
---------------------------------------- Director September 7, 2000
John Dillon
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C>
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, as amended
3.2* Amended and Restated Bylaws
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
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)
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)
10.25 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)
10.31 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)
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
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)
10.49 Letter, dated December 9, 1998, from Netgateway, Inc. to
Jerry Czucha(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. Vanderhoff(3)
10.56 Master Trust-Oceangate Trust dated as of December 10, 1998
among Keith Freadhoff as the Trustee and the
Beneficiaries(3)
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)
10.64 Internet Services Agreement dated as of October 25, 1999
between Netgateway, Inc. and Bergen Brunswig 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 Netgateway, Inc.(7)
10.72 Promissory Note in the principal amount of $300,000, dated
January 7, 2000 issued to Netgateway, Inc. (7)
10.73 Pledge Agreement dated as of February 4, 2000 between John
J. Poelman and Netgateway, Inc.(7)
10.74 Promissory Note in the principal amount of $150,000, dated
February 4, 2000 issued to Netgateway, Inc.(7)
10.75 Employment Agreement dated as of December 15, 1999 between
Jill Padwa and Netgateway, Inc.(7)
10.76 Letter of Intent, dated December 12, 1999 between Galaxy
Enterprises, Inc., a Nevada corporation and Netgateway,
Inc.(7)
10.77 Employment Agreement by and between John J. Poelman and
Galaxy Enterprises, Inc. dated March 10, 2000(9)
10.78 Employment Agreement by and between Frank C. Heyman and
Galaxy Enterprises, Inc. dated March 10, 2000(9)
10.79 Employment Agreement by and between David Wise and Galaxy
Enterprises, Inc. dated March 10, 2000(9)
10.80 Employment Agreement by and between Brandon Lewis and Galaxy
Enterprises, Inc. dated March 10, 2000(9)
10.81 Employment Agreement by and between Robert Green and IMI,
Inc. dated March 10, 2000(9)
10.82 Employment Agreement by and between Benjamin Roberts and
IMI, Inc. dated March 10, 2000(9)
10.83 Affiliate Lock-up Agreement by and between Netgateway and
Darral Clarke dated March 10, 2000(9)
10.84 Affiliate Lock-up Agreement by and between Netgateway and
Brandon B. Lewis dated March 10, 2000(9)
10.85 Affiliate Lock-up Agreement by and between Netgateway and
David Wise dated March 10, 2000(9)
10.86 Affiliate Lock-up Agreement by and between Netgateway and
Frank C. Heyman dated March 10, 2000(9)
10.87 Affiliate Lock-up Agreement by and between Netgateway and
John J. Poelman dated March 10, 2000(9)
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C> <C>
10.88 Affiliate Lock-up Agreement by and between Netgateway and
Benjamin Roberts dated March 10, 2000(9)
10.89 Affiliate Lock-up Agreement by and between Netgateway and
Robert Green dated March 10, 2000(9)
10.90 Electronic Commerce Services Agreement dated March 1, 2000
between Netgateway, Inc. and Galaxy Enterprises, Inc.(9)
10.91 Statement of Work for Galaxy Mall and Store Conversion dated
March 1, 2000 between Netgateway, Inc. and GalaxyMall(9)
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)
10.95* Securities Purchase Agreement dated July 31, 2000 between
Netgateway, Inc. and King William, LLC.
10.96* Form of 8% Convertible Debenture Due July 31, 2003
10.97* Registration Rights Agreement dated July 31, 2000 between
Netgateway, Inc. and King William, LLC
10.98* Form of Common Stock Purchase Warrant
10.99* Private Equity Credit Agreement dated August 2, 2000 between
Netgateway, Inc. and King William, LLC
10.100* Registration Rights Agreement dated August 2, 2000 between
Netgateway, Inc. and King William, LLC
10.101* Amendment to Employment Agreement dated July 25, 2000
between Netgateway and Roy W. Camblin III
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 Nida & Maloney, LLP (included in Exhibit 5.1)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
-----------
(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.
(9) Incorporated by reference from Registrant's Registration Statement
Report on Form S-4 (File No. 333-36360) filed on May 5, 2000.
(10) Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-79751) filed on May
24, 2000.
* Filed herewith
+ To be filed by amendment
(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 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]"
II-11
