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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended June 30, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________ to _________
Commission file number: 000-27941
NETGATEWAY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0591719
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 OCEANGATE, 5TH FLOOR, LONG BEACH, CALIFORNIA 90802
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (562) 506-4600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Based on the closing sale price on the Nasdaq National Market on September
12, 2000, the aggregate market value of the voting stock held by non-affiliates
of the registrant was $17,814,163. For the purposes of this calculation, shares
owned by officers, directors and 10% stockholders known to the registrant have
been deemed to be owned by affiliates. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant's common stock as of
September 12, 2000: 21,677,080.
Netgateway, CableCommerce, Netgateway Internet Commerce Center, Netgateway
ICC, StoresOnline, StoresOnline.com, Merchant Mission Control, Netgateway Where
Business Does Business on the Internet, Netgateway Knowledge and Commerce for
the Digital Age, StoresOnline.com Where Merchants Do Business on the Internet,
and the Netgateway swirl logo are trademarks of Netgateway, Inc and/or its
subsidiaries. All other trademarks mentioned are the property of their
respective owners.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this report, 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 our actual results could differ materially from those
anticipated expressly or implicitly in these forward-looking statements as a
result of many factors. The section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this report, and
similar discussions in our other Securities and Exchange Commission ("SEC")
filings, discuss some of the important risk factors that may affect our
business, results of operations and financial condition. You should carefully
consider those risks, in addition to the other information in this report and in
our other filings with the SEC, before deciding to invest in our company or to
maintain or increase your investment.
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 this report could materially and
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adversely affect the 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.
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PART I
ITEM 1. 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, 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.
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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% of the total U.S. adult population (over 18) that are now
regular Internet users, up 20% 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% 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% 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% 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% 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
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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 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.
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- 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. Instead, 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 that 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 and offer storefront creation and maintenance services. In addition,
we offer local and regional classified advertisements, community calendars and
coupons to optimize e-Mall content.
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 e-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,
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thereby increasing traffic and exposure to their site. In addition, we have
developed and feature an eCommerce search engine that searches within each
e-Mall, as well as across all e-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 sells 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 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 that are used by
its customers in marketing their own products or services. GalaxyMall'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 auto-responder e-mail addresses for its merchants.
The auto-responder e-mail address sends an instant reply to the
individual requesting information and then forward 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.
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- 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 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
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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
that allow a company or individual to deliver its message using sound,
video, text, photos, and that 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.
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.
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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 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 jointly developed 30-second spots each month 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
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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("GNPs"). First, was to incorporate
business-to-business eCommerce features that directly connect 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 Brunswig-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
11
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 systems 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
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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.
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 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 years ended June 30, 1999 and 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:
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- 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.
- 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
14
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 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 that 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 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
15
- 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 September 12, 2000, we had approximately 241 full-time employees,
including 12 executive personnel, approximately 79 in sales and marketing,
approximately 81 in the development of our e-Business solutions, approximately
30 in customer support and approximately 39 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
16
existing laws governing issues such as property ownership, libel and personal
privacy is uncertain. Future federal or state legislation or regulation could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
17
ITEM 2. PROPERTIES
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 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.
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 have entered into a
sublease with an unaffiliated third party to sublease excess space resulting
from our consolidation in Utah.
We have also entered into a sublease agreement with an unaffiliated third
party for our American Fork, Utah location which was 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.
ITEM 3. 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
18
Illinois and Utah, are believed to be ongoing. Hawaii has taken the position
that Galaxy Enterprises' 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of our stockholders was held on May 24, 2000. At this
meeting, we asked our stockholders to:
- Approve an amendment to our bylaws to adopt a classified board of
directors so that only one-half of the directors would be elected
annually. This proposal was approved by our stockholders as follows:
Shares
---------
Stockholders voting for 8,801,729
Stockholders voting against 433,153
Stockholders abstaining 33,622
Of those abstaining, 27,480 shares are broker non-votes.
- Elect six directors. This proposal was approved by our stockholders as
follows:
Shares
---------
Stockholders voting for 14,758,736
Stockholders abstaining 170,578
Of those abstaining, 19,958 shares are broker non-votes.
- Approve an amendment to our certificate of incorporation increasing
the number of authorized shares of common stock from 40,000,000 to
250,000,000. This proposal was approved by our stockholders as
follows:
Shares
---------
Stockholders voting for 14,246,875
Stockholders voting against 642,029
Stockholders abstaining 40,410
Of those abstaining, 16,410 shares are broker non-votes.
- Approve our 1999 Stock Option Plan for Non-Executives. This proposal
was approved by our stockholders as follows:
Shares
---------
Stockholders voting for 8,635,080
Stockholders voting against 612,973
Stockholders abstaining 22,951
Of those abstaining, 12,951 shares are broker non-votes.
19
- Approve an increase in the number of shares of our common stock
reserved for issuance under our 1999 Stock Option Plan for
Non-Executives from 2,000,000 shares to 5,000,000 shares. This
proposal was approved by our stockholders as follows:
Shares
---------
Stockholders voting for 8,612,460
Stockholders voting against 636,848
Stockholders abstaining 22,196
Of those abstaining, 12,196 shares are broker non-votes.
- Ratify the appointment of KPMG LLP as our independent auditors for our
1999 and 2000 fiscal years. This proposal was approved by our
stockholders as follows:
Shares
---------
Stockholders voting for 14,313,600
Stockholders voting against 188,779
Stockholders abstaining 26,935
Of those abstaining, 10,935 shares are broker non-votes.
We also held a special meeting of our stockholders on June 21, 2000. At
this meeting, we asked our stockholders to approve the merger agreement
providing for Netgateway, Inc.'s acquisition of Galaxy Enterprises, Inc. This
proposal was approved by our stockholders as follows:
Shares
---------
Stockholders voting for 9,888,727
Stockholders voting against 59,175
Stockholders abstaining 18,499
All shares abstaining are broker non-votes.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
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.
HIGH LOW
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
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.
DIVIDEND POLICY
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.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the numbers
of shares of common stock sold by us, the number of options issued by us, and
the principal amount of debt instruments issued by us since March 4, 1998
(inception), the consideration received by us 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 our inception on March 4, 1998 through June 2, 1998, we issued to our
founding stockholders a total of 2,800,000 shares of common stock at a price of
$.001 per share.
From our inception on March 4, 1998 to June 30, 1998, we issued 600,000
shares of common stock to several of our existing stockholders in order to
reimburse such stockholders for satisfying $400,000 of our obligations. The
certificates evidencing the shares of common stock were appropriately legended.
In our opinion, 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.
21
In April 1998, we 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 S.T.E.P.S. to us of a sublicense relating to
proprietary courseware. The certificates evidencing the shares of common stock
were appropriately legended. In our opinion, 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, we issued 1,900,000 shares of common stock to Vision
Holdings, Inc. as consideration of the cancellation of $300,000 of indebtedness
owed by us to Vision. The certificates evidencing the shares of common stock
were appropriately legended. In our opinion, 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, we 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 our opinion, 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, we issued 100,000 shares to Alex Chafetz, one of our
employees, in payment for services. The certificates evidencing the shares of
common stock were appropriately legended. In our opinion, 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, we issued 184,000 shares of common stock to unaffiliated
third party creditors as consideration of the cancellation of $185,333 of
indebtedness owed by us to such creditors. The certificates evidencing the
shares of common stock were appropriately legended. In our opinion, 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, we 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 our opinion, 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, we 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 our
opinion, 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., we 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 our opinion, 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, we closed a private offering of 1,022,800 units, each unit
consisting of one share of common stock and one common stock purchase warrant
entitling the holder to acquire one share of common stock at a price of $4.00
per share (subsequently repriced to $2.00 per share). The units were sold at
$2.00 per unit. These warrants were exercisable through September 30, 1998, but
were extended through October 30, 1998. Warrants exercisable for an aggregate of
132,100 shares were exercised prior to expiration of the warrants. The
certificates evidencing the securities underlying the units were appropriately
legended. In our opinion, 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.
22
In connection with the Consulting and Advisory Agreement, dated October 20,
1998, with Burchmont Equities Group, Inc., we 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) we
become listed on the Nasdaq SmallCap Market, (2) we file a Registration
Statement on Form S-1 for its existing shares including these shares, and (3) we
file a Form 10 and becomes a 12(g) reporting company.
On October 20, 1998, we 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 our opinion, 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, we 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 our opinion, 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, we issued 25,000 shares of common stock in payment of
advisory services. The certificates evidencing the securities underlying the
units were appropriately legended. In our opinion, 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, we issued 10,000 shares of
common stock to the Chaffetz Family Trust. The certificates evidencing the
securities underlying the units were appropriately legended. In our opinion, 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, we 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 our opinion, 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, we 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 our opinion, 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., we 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 our opinion, 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, we issued 5,000 shares of common stock in payment of
advisory services. The certificates evidencing the securities underlying the
units were appropriately legended. In our opinion, the offer and the sale of the
units (and the securities constituting the units) was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
In connection with the Consulting Agreement, dated as of December 24, 1998,
between us and Glashow Associates LLC, we 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 our opinion, the offer and the sale
of the units (and the securities
23
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 our
opinion, 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., we issued 40,000 shares to such firm in payment for
advisory services. The certificates evidencing the shares of common stock were
appropriately legended. In our opinion, 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
our authorized, but unissued, common stock.
In connection with our then pending private offering of convertible
debentures, on February 15, 1999, we 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 our opinion, 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, we
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 our opinion, 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 our authorized, but unissued, common stock.
In March 1999, we 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 our opinion, 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, we 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 our opinion, 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, we issued 600 shares of common stock to Steve Jorgenson,
a professional golfer, in connection with Mr. Jorgenson acting as our spokesman.
On March 31, 1999, we 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 our opinion, 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, we 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
connection with the acquisition of Spartan Multimedia, Inc. The certificates
evidencing the shares were
24
appropriately legended. In our opinion, 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, we 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 our
opinion, 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, we 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 us. The certificates evidencing the warrants were appropriately
legended. In our opinion, 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, we issued warrants exercisable for an aggregate of 26,050
shares of common stock to Richard Berns in connection with our convertible
debenture private offering. The certificates evidencing the warrants were
appropriately legended. In our opinion, 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, we 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 us concerning the issuance of
certain of our common stock to Mr. Khaled. In addition, we authorized the
issuance of a warrant to purchase 100,000 shares of our common stock Mr. Khaled
in connection with the settlement. The certificates evidencing the warrants were
appropriately legended. In our opinion, 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, we 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 our opinion,
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, we 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 our opinion, 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, we 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 our opinion,
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, we issued an aggregate of 30,000 shares of common stock
in order to induce Joseph Py and Robert Ciri to make loans to us. The
certificates evidencing the shares of common stock were appropriately legended.
In our opinion, 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, we 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 our opinion, 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, we issued to Shopping Planet 35,000 shares of common stock
in connection with the acquisition by us of the technology of Shopping Planet.
On May 18 and June 4, 9, and 22, 1999, we closed a private offering of an
aggregate of 57.6 units, and in August and on September 24, 1999 we conducted
another closing of this offering of 71.57 units, in each case
25
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 our opinion, 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, we 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, we 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, we approved the issuance of 70,000 shares of common stock
to Glashow Associates LLC in consideration for consulting services rendered to
us, 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, we 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 our opinion, 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, we 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 our opinion, 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, we 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 us and MediaOne. The certificates evidencing the securities were
appropriately legended. In our opinion, 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, we issued 700 shares of common stock to Steve Jorgenson,
a professional golfer, in connection with Mr. Jorgenson acting as a spokesman
for us. The certificates evidencing the shares were appropriately legended. In
our opinion, 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, we 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 our opinion, 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, we 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, we 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.
26
During the period December 1999 through June 2000, we 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 our opinion, 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, we 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 our opinion, 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 us and Daniel V. Angeloff and Shawn Sedaghat, on or about
January 1, 2000, we 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 our opinion, 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, we issued 1,250 shares of common stock to MediaOne of
Colorado, Inc., in connection with its participation on our CableCommerce
Advisory Board. The certificates evidencing the shares were appropriately
legended. In our opinion, 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, we issued 900 shares of common stock to Steve Jorgenson,
a professional golfer, in connection with Mr. Jorgenson acting as a spokesman
for us. The certificates evidencing the shares were appropriately legended. In
our opinion, 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 us and Star Associates LLC, on May 31, 2000, we issued 20,000 shares of
common stock to such firm in payment for consulting services. The certificates
evidencing the shares were appropriately legended. In our opinion, 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.
27
ITEM 6. 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 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 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.
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(In thousands, except share data)
(unaudited) (unaudited)
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
28
ITEM 7. 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. 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 our 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 the 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
29
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 media
business. 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.
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
30
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 our 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 our Internet training workshops. The number of
workshops increased to 133 workshops from 120 in the 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 revenues
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, 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.
31
LICENSE FEE
License fee represents a one time non-cash charge in fiscal year 1998 to
amortize and write off a license that we acquired and subsequently wrote 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.
32
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.
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 payable 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,
33
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
the 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
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 to King William 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.
In connection with the securities purchase agreement, 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 with Galaxy Enterprises into one of
our wholly owned subsidiaries. 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.
34
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe we have material market risk exposure. We do not invest
in market risk sensitive instruments for trading purposes. Our excess cash is
placed in short-term interest-bearing accounts or instruments that are based on
money market rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are
included in Part IV, Item 14 of this report and are presented beginning on page
50.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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.
NAME AGE POSITION
- ---- --- --------
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
* 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
36
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 that, 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.
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.
37
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, 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, chief
financial officer and a director of NYB Corporation, a manufacturer of women's
sport 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.
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, 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.
38
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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors, executive officers and persons who own more than 10% of the our
common stock (collectively, "Reporting Persons") to file with the SEC initial
reports of ownership and changes in ownership of our common stock. Reporting
Persons are required by SEC regulations to furnish us with copies of all Section
16(a) reports they file. To our knowledge, based solely on our review of the
copies of such reports received or written representations from certain
Reporting Persons that no other reports were required, we believe that during
our fiscal year ended June 30, 2000, all Reporting Persons complied with all
applicable filing requirements, with the following exceptions: Keith D.
Freadhoff filed a late amended Form 4 reporting two transactions in January 2000
and a late Form 4 reporting one transaction in March 2000; Hanh Ngo, a former
executive, filed a late Form 4 reporting one transaction in March 2000; Ronald
Spire filed a late Form 4 reporting eleven transactions in January 2000; John
Dillon did not file a Form 4 with respect to two transactions in March 2000,
which transactions were subsequently reported in Mr. Dillon's Form 5; R. Scott
Beebe filed a late Form 4 reporting 54 transactions in May 2000; William Brock,
a former director, filed a late Form 3; and Joseph Roebuck filed a late Form 3.
39
ITEM 11. 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 officer, who were serving as executive
officers at the end of fiscal year 2000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------- -----------------------------
RESTRICTED
STOCK STOCK
NAME AND SALARY BONUS AWARDS OPTIONS
PRINCIPAL POSITION YEAR ($) ($) ($) (1) (#)
- ------------------ ---- --- --- ------- ---
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)..............
Chief Executive Officer and 2000 164,315 28,750 3,375,000(5) 200,000(6)
Director 1999 -- -- -- --
Donald M. Corliss, Jr.............. 2000 192,697 55,000 -- --
President, Chief Operating 1999 96,250 50,000 3,200,000(7) (7)
Officer and Director
David Bassett-Parkins(8) .......... 2000 175,075 50,000 -- --
Chief Financial Officer and 1999 87,500 50,000 3,200,000(9) (9)
Chief Operating Officer
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)
- ----------
(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
40
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.
EMPLOYMENT AGREEMENTS
The following table summarizes the key provisions of the employment
agreements of Netgateway's executive officers.
CONTRACT CONTRACT
COMMENCEMENT TERMINATION PER ANNUM BONUS
NAME/POSITION DATE DATE SALARY ARRANGEMENTS
------------- ---- ---- ------ ------------
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 (2)
(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.
41
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.
INDIVIDUAL GRANTS
-------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR OPTION TERM
UNDERLYING GRANTED TO CLOSING ($)
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION SALE ------------------------------------
NAME GRANTED FISCAL YEAR BASE PRICE ($) DATE PRICE($) 5% 10% 0%(1)
- ---- ---------- ------------- -------------- ---------- -------- ------------------------------------
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 9.25 687,394 1,094,559 422,000
50,000 1.72 9.25 12/23/09 9.25 687,394 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
* 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.
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.
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
- ---- ----------- ------------- ----------- -------------
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 - -
- ----------
(1) Based on the closing sale price of our common stock on the Nasdaq National
Market 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.
42
(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.
43
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.
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;
44
- 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.
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
45
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.
46
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.
47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 12, 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, 5th Floor, Long Beach, California
90802.
NUMBER OF WARRANTS OR
OPTION GRANTS UNDER
NETGATEWAY STOCK TOTAL BENEFICIAL PERCENT OF CLASS
NAME OF BENEFICIAL OWNER SHARES OWNED OPTIONS PLANS(1) OWNERSHIP(2) BENEFICIALLY OWNED
- ------------------------ ------------ --------------------- ---------------- ------------------
Keith D. Freadhoff........ 1,520,3215 5,000 1,525,215(3) 7.0%
Roy W. Camblin III........ 500,000 225,000 725,000 3.3%
Donald M. Corliss, Jr..... 552,000 5,000 557,000 2.6%
David Bassett-Parkins..... 633,567 0 633,567 2.9%
Simon Spencer............. 7,000 30,000 37,000 *
Craig S. Gatarz........... 0 118,071 118,071 *
John Dillon............... 5,000 33,333 38,333 *
R. Scott Beebe............ 704,000 40,000 744,000 3.4%
Joseph Roebuck............ 0 30,000 30,000 *
All current directors and
executive officers as
a group
(10 persons)(4)........ 3,289,215 613,746 3,902,961 17.5%
- ----------
* Less than 1 percent.
(1) Reflects warrants or options that will be vested as of September 12, 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 September 12, 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.
48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2000, we entered into a three-month consulting agreement with one
of our directors, R. Scott Beebe, pursuant to which Mr. Beebe will render
services related to the consolidation of our operations in Orem, Utah. Pursuant
to the agreement, Mr. Beebe receives $9,000 per month for such services. The
consulting agreement expires on October 24, 2000.
In May 1999, Keith 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 50,000 shares of common stock and warrants
exercisable for an aggregate of 300,000 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.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following consolidated financial statements, and related notes thereto, of
the Netgateway, Inc. and the Independent Auditors' Report are filed as part of
this Form 10-K.
PAGE
----
Independent Auditors' Report 51
Consolidated Balance Sheets as of June 30, 2000 and 1999 52
Consolidated Statements of Operations for the Years Ended June 30, 2000, 1999 and 1998 53
Consolidated Statements of Stockholders' Deficit 54
Consolidated Statements of Cash Flows for the Years Ended June 30, 2000, 1999 and 1998 56
Notes to Consolidated Financial Statements 58
2. Financial Statement Schedules.
The following financial statement schedule of Netgateway, Inc. is filed as
part of this Form 10-K. All other schedules have been omitted because they are
not applicable, not required, or the information is included in the consolidated
financial statements or notes thereto.
PAGE
----
Schedule II - Valuation and Qualifying Accounts 78
3. Exhibits.
The exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby incorporated
by reference into, this Form 10-K.
(b) Reports on Form 8-K.
On March 21, 2000, we filed a report on Form 8-K regarding the announcement
of our agreement to merge with Galaxy Enterprises, Inc.
On June 29, 2000, we filed a report on Form 8-K regarding the consummation
of our merger with Galaxy Enterprises, Inc.
50
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 also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and the 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, presents
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
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Los Angeles, California
August 21, 2000
51
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND 1999
YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
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.................................... (10,776,308) (8,106,375)
------------ ------------
$ 12,309,400 $5,353,021
============ ============
See accompanying notes to consolidated financial statements.
52
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR YEAR YEAR
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
---- ---- ----
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 4,735,887
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
See accompanying notes to consolidated financial statements.
53
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------ PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT LOSS DEFICIT
------- ------ --------- ------------ ------------- -------------- -------------
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) -
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
54
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(CONTINUED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------ PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT LOSS DEFICIT
------- ------ --------- ------------ ------------- -------------- -------------
Amortization of deferred
compensation................ $ $ $ 282,052 $ 282,052
Exercise of stock options...... 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
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 to settle an
obligation.................. 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................ 239,576 240 898,169 898,404
Sale of common stock for cash.. 145,926 146 299,854 300,000
Stock option compensation...... $ $ 255,000 $ (218,000) $ $ 37,000
Common stock issued in
business acquisition........ 119,706 120 138,505 138,625
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)
See accompanying notes to consolidated financial statements.
55
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- -------------
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
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
56
NETGATEWAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................................... 883,139 993,097 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 -- --
57
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 multi-media
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:
Computer and office equipment ............... 3 to 5 years
Furniture and fixtures ...................... 4 years
Computer software ........................... 3 years
Leasehold improvements ...................... 4 years (term of lease)
58
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.
(d) Intangible Assets
Intangible assets are amortized on a straight-line basis over their
estimated useful lives as follows:
Acquired technology ................................... 5 to 7 years
Goodwill .............................................. 10 years
(e) 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
59
Compensation," whereby compensation expense is recognized over the
vesting period based on the fair value of the options on the date of
grant.
(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.
60
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
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.
61
(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 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:
Years Ended June 30,
Nine months ended --------------------
March 31, 2000 1999 1998
------------------ ---- ----
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
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 consolidation of these entities.
62
(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,
63
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.
1999 1998
---------------- ---------------
Revenue ................. $ 11,295,026 $ 10,485,371
Net loss ................ (24,991,214) (8,414,670)
Loss per share .......... (1.99) (0.96)
(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:
Net Loss Loss per Share
------------ --------------
Three months ended September 30, 1999 ....... $ 8,294 $0.0
Twelve months ended June 30, 1999 ........... $ 13,858 $0.0
(6) PROPERTY AND EQUIPMENT
Property and equipment balances at June 30, 2000 and 1999 are summarized as
follows:
2000 1999
------------ ------------
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
============ ============
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:
2000 1999
------------ ------------
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
============ ============
64
(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
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.
65
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.
66
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.
67
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:
2000 1999
---------- ----------
12% senior notes payable due the earlier of
April 30, 2000 or upon the close of a public
Sale of the Company's common stock....................... $ - $1,496,000
---------- ----------
Non-interest bearing note payable to an officer
and stockholder, due within 10 days of the close of
bridge financing........................................ - 1,799
Note payable to a financial institution due
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.......................................... $ - $ -
========== ==========
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:
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
=========
68
(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:
Operating
Leases
---------
Year ending June 30,
2001............................................ $ 754,332
2002............................................ 485,987
2003............................................ 308,919
2004............................................ 289,695
Thereafter 26,510
----------
Total $1,865,443
==========
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 statement of
operations.
69
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:
2000 1999 1998
------------ ----------- -----------
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 --
Non-deductible stock compensation............................. 2,856,000 -- --
------------ ----------- -----------
Income tax expense........................................ $ -- $ -- $ --
============ =========== ===========
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:
2000 1999
------------ ------------
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 ............................ $ -- $ --
============ ============
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 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
70
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.
71
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 canceled. 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.
The following is a summary of stock option activity under the Company's stock
option plans:
Weighted
average
Number of Shares exercise price
---------------- --------------
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
============
The following table summarizes information about shares under option at June 30,
2000:
Weighted-average
Remaining Weighted
Range of Number Contractual Average Number
exercise prices Outstanding Life Exercise price Exercisable
- -------------------- --------------- ------------------- ------------------ ---------------
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
=============== ================
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.
72
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:
Net Loss-as reported............. $ (44,108,429)
Net Loss-pro forma.............. $ (46,776,831)
(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 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.
73
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.
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.
74
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, the Company 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 at June 30, 2000 of $152,060 and
$47,190 as of June 30, 2000 and 1999, respectively.
75
(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 segment. An analysis and reconciliation of the
Company's business segment information to the respective information in the
consolidated financial statements is as follows:
YEARS ENDED JUNE 30,
---------------------
2000 1999
------ ------
Service revenue:
Internet services......................................... $ 22,149,649 $ 10,280,440
Multimedia 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)
Multimedia services....................................... (1,317,197) 3,013
------------- --------------
$(39,499,738) $(15,820,884)
============= ==============
Net (loss) income:
Internet services......................................... $(42,789,914) $(15,143,491)
Multimedia services....................................... (1,318,515) 3,013
------------- --------------
$(44,108,429) $(15,140,478)
============= ==============
Depreciation and amortization:
Internet services......................................... $ 1,133,091 $ 494,874
Multimedia services....................................... 25,931 -
------------- --------------
$ 1,159,022 $ 494,874
============= ==============
Extraordinary gain on extinguishment of debt:
Internet services......................................... $ - $1,653,232
- -
------------- --------------
Multimedia services....................................... $ - $1,653,232
============= ==============
Capital expenditures:
Internet services......................................... $ 2,870,296 $ 632,640
Multimedia services....................................... 75,759 19,662
------------- ----------
$ 2,946,055 $ 652,302
============= ==============
Assets:
Internet services......................................... $ 11,593,681 $5,093,797
Multimedia services....................................... 715,719 259,224
------------- --------------
Total consolidated assets.................................... $12,309,400 $5,353,021
============= ==============
(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
76
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.
77
NETGATEWAY, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
Balance at Charged to Balance at
Beginning Costs and Deductions/ End of
of Period Expenses Write-offs Period
----------- ---------- ---------- -------------
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 -- 48,832
78
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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(11)
3.2 Amended and Restated Bylaws(11)
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)
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 Agreement dated July 1, 1999, between Netgateway
and Glashow Associates LLC(2)
10.18 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)
10.19 Electronic Commerce Services Agreement dated as of March 24,
1999 between Netgateway, Inc. and CB Richard Ellis(3)
10.20 Reseller and Mall Agreement dated as of May 20, 1999 among
Netgateway, Inc., StoresOnline.com, Inc. and WirelessOne,
Inc.(3)
10.21[R] Reseller and Mall Agreement dated as of May 20, 1999 among
Netgateway, Inc., StoresOnline.com, Inc. and WirelessOne,
Inc.(4)
10.22 Cable Reseller and Mall Agreement dated as of July 26, 1999
among StoresOnline.com, Inc., Netgateway, Inc. and MediaOne
of Colorado, Inc.(3)
10.23[R] Cable Reseller and Mall Agreement dated as of July 26, 1999
among StoresOnline.com, Inc., Netgateway, Inc. and MediaOne
of Colorado, Inc.(4)
10.24 Stock Purchase Agreement dated as of July 16, 1999 between
Netgateway, Inc. and MediaOne of Colorado, Inc.(3)
79
EXHIBIT NO. DESCRIPTION
10.25[R] Stock Purchase Agreement dated as of July 16, 1999 between
Netgateway, Inc. and MediaOne of Colorado, Inc.(4)
10.26 Distributor Mall/Storefront Agreement dated as of August 25,
1999 between Netgateway, Inc. and BuySellBid.com, Inc.(3)
10.27[R] Distributor Mall/Storefront Agreement dated as of August 25,
1999 between Netgateway, Inc. and BuySellBid.com, Inc.(4)
10.28 Joint Marketing and Promotion Agreement dated August 25,
1999 between Netgateway, Inc. and BuySellBid.com, Inc.(3)
10.29[R] Joint Marketing and Promotion Agreement dated August 25,
1999 between Netgateway, Inc. and BuySellBid.com, Inc.(4)
10.30 Cable Reseller and Mall Agreement dated as of August 30,
1999 among Netgateway, Inc., StoresOnline and B2BStores.com,
Inc.(3)
10.31[R] Cable Reseller and Mall Agreement dated as of August 30,
1999 among Netgateway, Inc., StoresOnline and B2BStores.com,
Inc.(4)
10.32 Electronic Commerce Services Agreement dated as of July 28,
1999 between Netgateway, Inc. and B2BStores.com, Inc.(3)
10.33[R] Electronic Commerce Services Agreement dated as of July 28,
1999 between Netgateway, Inc. and B2BStores.com, Inc.(4)
10.34+ Form of Employment Agreement between Netgateway, Inc. and
Roy W. Camblin III(3)
10.35 Reseller and Mall Agreement dated as of July 27, 1999 among
Frontiervision, Netgateway, Inc. and StoresOnline.com,
Inc.(3)
10.36[R] Reseller and Mall Agreement dated as of July 27, 1999 among
Frontiervision, Netgateway, Inc. and StoresOnline.com,
Inc.(4)
10.37 1999 Stock Option Plan for Non-Executives.(3)
10.38 Master Trust-Oceangate Trust dated as of December 10, 1998
among Keith Freadhoff as the Trustee and the
Beneficiaries(3)
10.39 Form of Individual Trust-Oceangate Trust between Keith D.
Freadhoff as Trustor, and Keith Freadhoff as Trustee for the
benefit of the Beneficiary(3)
10.40 Internet Services Agreement dated as of October 25, 1999
between Netgateway, Inc. and Bergen Brunswig Drug Company(4)
10.41 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and John J. Poelman.(6)
10.42 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and Sue Ann Cochran(6)
10.43 Form of Affiliate Lock-Up Agreement(6)
10.44 Form of Employment Agreement(6)
10.45 Stock Option Agreement dated as of March 10, 2000, by and
among Netgateway, Inc. and John J. Poelman(6)
10.46[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)
10.47[R] Cable Reseller and Mall Agreement, dated as of December 9,
1999 among Netgateway, StoresOnline.com, Inc. and Intermedia
Partners Southeast(7)
10.48 Pledge Agreement dated as of January 7, 2000 between John J.
Poelman and Netgateway, Inc.(7)
10.49 Promissory Note in the principal amount of $300,000, dated
January 7, 2000 issued to Netgateway, Inc. (7)
10.50 Pledge Agreement dated as of February 4, 2000 between John
J. Poelman and Netgateway, Inc.(7)
10.51 Promissory Note in the principal amount of $150,000, dated
February 4, 2000 issued to Netgateway, Inc.(7)
10.52+ Employment Agreement dated as of December 15, 1999 between
Jill Padwa and Netgateway, Inc.(7)
10.53 Letter of Intent, dated December 12, 1999 between Galaxy
Enterprises, Inc., a Nevada corporation and Netgateway,
Inc.(7)
10.54+ Employment Agreement by and between John J. Poelman and
Galaxy Enterprises, Inc. dated March 10, 2000(9)
10.55+ Employment Agreement by and between Frank C. Heyman and
Galaxy Enterprises, Inc. dated March 10, 2000(9)
10.56+ Employment Agreement by and between David Wise and Galaxy
Enterprises, Inc. dated March 10, 2000(9)
10.57+ Employment Agreement by and between Brandon Lewis and Galaxy
Enterprises, Inc. dated March 10, 2000(9)
10.58+ Employment Agreement by and between Robert Green and IMI,
Inc. dated March 10, 2000(9)
10.59+ Employment Agreement by and between Benjamin Roberts and
IMI, Inc. dated March 10, 2000(9)
10.60 Affiliate Lock-up Agreement by and between Netgateway and
Darral Clarke dated March 10, 2000(9)
10.61 Affiliate Lock-up Agreement by and between Netgateway and
Brandon B. Lewis dated March 10, 2000(9)
10.62 Affiliate Lock-up Agreement by and between Netgateway and
David Wise dated March 10, 2000(9)
10.63 Affiliate Lock-up Agreement by and between Netgateway and
Frank C. Heyman dated March 10, 2000(9)
10.64 Affiliate Lock-up Agreement by and between Netgateway and
John J. Poelman dated March 10, 2000(9)
80
EXHIBIT NO. DESCRIPTION
10.65 Affiliate Lock-up Agreement by and between Netgateway and
Benjamin Roberts dated March 10, 2000(9)
10.66 Affiliate Lock-up Agreement by and between Netgateway and
Robert Green dated March 10, 2000(9)
10.67 Electronic Commerce Services Agreement dated March 1, 2000
between Netgateway, Inc. and Galaxy Enterprises, Inc.(9)
10.68 Statement of Work for Galaxy Mall and Store Conversion dated
March 1, 2000 between Netgateway, Inc. and GalaxyMall(9)
10.69[R] Systems Integrator Agreement dated as of March 6, 2000
between Netgateway and Complete Business Solutions, Inc.(8)
10.70[R] Systems Integrator Agreement dated as of April 4, 2000
between Netgateway and Complete Business Solutions (India)
Ltd.(8)
10.71[R] Reseller and Mall Agreement dated as of April 18, 2000 among
CableRep, Inc., Netgateway and StoresOnline.com, Inc.(8)
10.72 Securities Purchase Agreement dated July 31, 2000 between
Netgateway, Inc. and King William, LLC(11)
10.73 Form of 8% Convertible Debenture Due July 31, 2003(11)
10.74 Registration Rights Agreement dated July 31, 2000 between
Netgateway, Inc. and King William, LLC(11)
10.75 Form of Common Stock Purchase Warrant(11)
10.76 Private Equity Credit Agreement dated August 2, 2000 between
Netgateway, Inc. and King William, LLC(11)
10.77 Registration Rights Agreement dated August 2, 2000 between
Netgateway, Inc. and King William, LLC(11)
10.78+ Amendment to Employment Agreement dated July 25, 2000
between Netgateway and Roy W. Camblin III(11)
10.79*+ Consulting Agreement dated July 24, 2000 between Netgateway
and R. Scott Beebe
18.1 Letter dated February 9, 2000 from KPMG LLP(7)
21.1 Subsidiaries of Netgateway(11)
23.1* Consent of KPMG LLP
- ----------------
(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.
81
(11) Incorporated by reference from Registrant's Registration Statement on
Form S-1 (File No. 333-45356) filed on September 7, 2000.
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
(b) Please note that certain confidential technical and commercial
information has been redacted from some of the exhibits attached to this Form
S-1 in order to preserve the confidentiality of such information. All of the
confidential information which has been redacted is on file with the Securities
and Exchange Commission and may be obtained in accordance with the Freedom of
Information Act. Exhibits to this Form S-1 which have had confidential
information redacted are indicated as follows on the exhibit list above: "[R]."
Within the exhibits to this Form S-1, redacted material is indicated by the
following sign where such redacted text would have appeared in the relevant
exhibit: "[REDACTED]"
FINANCIAL STATEMENT SCHEDULES
PAGE
----
Schedule II - Consolidated Valuation and Qualifying Accounts 78
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Long
Beach, State of California, on September 21, 2000.
NETGATEWAY, INC.
By: /s/ ROY W. CAMBLIN III
--------------------------
Roy W. Camblin III
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Netgateway, Inc., do hereby
constitute and appoint Roy W. Camblin III, and Donald M. Corliss, Jr., and each
of them, our true and lawful attorneys-in-fact and agents, each with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or 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 of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
--------- ----- ----
/s/ KEITH D. FREADHOFF Chairman of the Board of Directors September 21, 2000
- -----------------------------
Keith D. Freadhoff
/s/ ROY W. CAMBLIN III Chief Executive Officer September 21, 2000
- -----------------------------
Roy W. Camblin III
/s/ DONALD M. CORLISS, JR. President and September 21, 2000
- ----------------------------- Chief Operating Officer
Donald M. Corliss, Jr.
/s/ R. SCOTT BEEBE Director September 21, 2000
- -----------------------------
R. Scott Beebe
/s/ JOHN DILLON Director September 21, 2000
- -----------------------------
John Dillon
/s/ JOSEPH ROEBUCK Directors September 21, 2000
- -----------------------------
Joseph Roebuck
/s/ FRANK C. HEYMAN Acting Chief Financial Officer September 21, 2000
- ----------------------------- (principal accounting officer)
Frank C. Heyman
/s/ CRAIG S. GATARZ General Counsel and Corporate
- ----------------------------- Secretary September 21, 2000
Craig S. Gatarz
/s/ JILL GLASHOW PADWA Executive Vice President - Sales and September 21, 2000
- ----------------------------- Marketing
Jill Glashow Padwa
/s/ SIMON SPENCER Chief Information Officer September 21, 2000
- -----------------------------
Simon Spencer
83
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
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(11)
3.2 Amended and Restated Bylaws(11)
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)
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 Agreement dated July 1, 1999, between Netgateway
and Glashow Associates LLC(2)
10.18 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)
10.19 Electronic Commerce Services Agreement dated as of March 24,
1999 between Netgateway, Inc. and CB Richard Ellis(3)
10.20 Reseller and Mall Agreement dated as of May 20, 1999 among
Netgateway, Inc., StoresOnline.com, Inc. and WirelessOne,
Inc.(3)
10.21[R] Reseller and Mall Agreement dated as of May 20, 1999 among
Netgateway, Inc., StoresOnline.com, Inc. and WirelessOne,
Inc.(4)
10.22 Cable Reseller and Mall Agreement dated as of July 26, 1999
among StoresOnline.com, Inc., Netgateway, Inc. and MediaOne
of Colorado, Inc.(3)
10.23[R] Cable Reseller and Mall Agreement dated as of July 26, 1999
among StoresOnline.com, Inc., Netgateway, Inc. and MediaOne
of Colorado, Inc.(4)
10.24 Stock Purchase Agreement dated as of July 16, 1999 between
Netgateway, Inc. and MediaOne of Colorado, Inc.(3)
10.25[R] Stock Purchase Agreement dated as of July 16, 1999 between
Netgateway, Inc. and MediaOne of Colorado, Inc.(4)
10.26 Distributor Mall/Storefront Agreement dated as of August 25,
1999 between Netgateway, Inc. and BuySellBid.com, Inc.(3)
10.27[R] Distributor Mall/Storefront Agreement dated as of August 25,
1999 between Netgateway, Inc. and BuySellBid.com, Inc.(4)
10.28 Joint Marketing and Promotion Agreement dated August 25,
1999 between Netgateway, Inc. and BuySellBid.com, Inc.(3)
10.29[R] Joint Marketing and Promotion Agreement dated August 25,
1999 between Netgateway, Inc. and BuySellBid.com, Inc.(4)
1
EXHIBIT NO. DESCRIPTION
----------- -----------
10.30 Cable Reseller and Mall Agreement dated as of August 30,
1999 among Netgateway, Inc., StoresOnline and B2BStores.com,
Inc.(3)
10.31[R] Cable Reseller and Mall Agreement dated as of August 30,
1999 among Netgateway, Inc., StoresOnline and B2BStores.com,
Inc.(4)
10.32 Electronic Commerce Services Agreement dated as of July 28,
1999 between Netgateway, Inc. and B2BStores.com, Inc.(3)
10.33[R] Electronic Commerce Services Agreement dated as of July 28,
1999 between Netgateway, Inc. and B2BStores.com, Inc.(4)
10.34+ Form of Employment Agreement between Netgateway, Inc. and
Roy W. Camblin III(3)
10.35 Reseller and Mall Agreement dated as of July 27, 1999 among
Frontiervision, Netgateway, Inc. and StoresOnline.com,
Inc.(3)
10.36[R] Reseller and Mall Agreement dated as of July 27, 1999 among
Frontiervision, Netgateway, Inc. and StoresOnline.com,
Inc.(4)
10.37 1999 Stock Option Plan for Non-Executives.(3)
10.38 Master Trust-Oceangate Trust dated as of December 10, 1998
among Keith Freadhoff as the Trustee and the
Beneficiaries(3)
10.39 Form of Individual Trust-Oceangate Trust between Keith D.
Freadhoff as Trustor, and Keith Freadhoff as Trustee for the
benefit of the Beneficiary(3)
10.40 Internet Services Agreement dated as of October 25, 1999
between Netgateway, Inc. and Bergen Brunswig Drug Company(4)
10.41 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and John J. Poelman.(6)
10.42 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and Sue Ann Cochran(6)
10.43 Form of Affiliate Lock-Up Agreement(6)
10.44 Form of Employment Agreement(6)
10.45 Stock Option Agreement dated as of March 10, 2000, by and
among Netgateway, Inc. and John J. Poelman(6)
10.46[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)
10.47[R] Cable Reseller and Mall Agreement, dated as of December 9,
1999 among Netgateway, StoresOnline.com, Inc. and Intermedia
Partners Southeast(7)
10.48 Pledge Agreement dated as of January 7, 2000 between John J.
Poelman and Netgateway, Inc.(7)
10.49 Promissory Note in the principal amount of $300,000, dated
January 7, 2000 issued to Netgateway, Inc. (7)
10.50 Pledge Agreement dated as of February 4, 2000 between John
J. Poelman and Netgateway, Inc.(7)
10.51 Promissory Note in the principal amount of $150,000, dated
February 4, 2000 issued to Netgateway, Inc.(7)
10.52+ Employment Agreement dated as of December 15, 1999 between
Jill Padwa and Netgateway, Inc.(7)
10.53 Letter of Intent, dated December 12, 1999 between Galaxy
Enterprises, Inc., a Nevada corporation and Netgateway, Inc.(7)
10.54+ Employment Agreement by and between John J. Poelman and
Galaxy Enterprises, Inc. dated March 10, 2000(9)
10.55+ Employment Agreement by and between Frank C. Heyman and
Galaxy Enterprises, Inc. dated March 10, 2000(9)
10.56+ Employment Agreement by and between David Wise and Galaxy
Enterprises, Inc. dated March 10, 2000(9)
10.57+ Employment Agreement by and between Brandon Lewis and Galaxy
Enterprises, Inc. dated March 10, 2000(9)
10.58+ Employment Agreement by and between Robert Green and IMI,
Inc. dated March 10, 2000(9)
10.59+ Employment Agreement by and between Benjamin Roberts and
IMI, Inc. dated March 10, 2000(9)
10.60 Affiliate Lock-up Agreement by and between Netgateway and
Darral Clarke dated March 10, 2000(9)
10.61 Affiliate Lock-up Agreement by and between Netgateway and
Brandon B. Lewis dated March 10, 2000(9)
10.62 Affiliate Lock-up Agreement by and between Netgateway and
David Wise dated March 10, 2000(9)
10.63 Affiliate Lock-up Agreement by and between Netgateway and
Frank C. Heyman dated March 10, 2000(9)
10.64 Affiliate Lock-up Agreement by and between Netgateway and
John J. Poelman dated March 10, 2000(9)
2
EXHIBIT NO. DESCRIPTION
----------- -----------
10.65 Affiliate Lock-up Agreement by and between Netgateway and
Benjamin Roberts dated March 10, 2000(9)
10.66 Affiliate Lock-up Agreement by and between Netgateway and
Robert Green dated March 10, 2000(9)
10.67 Electronic Commerce Services Agreement dated March 1, 2000
between Netgateway, Inc. and Galaxy Enterprises, Inc.(9)
10.68 Statement of Work for Galaxy Mall and Store Conversion dated
March 1, 2000 between Netgateway, Inc. and GalaxyMall(9)
10.69[R] Systems Integrator Agreement dated as of March 6, 2000
between Netgateway and Complete Business Solutions, Inc.(8)
10.70[R] Systems Integrator Agreement dated as of April 4, 2000
between Netgateway and Complete Business Solutions (India)
Ltd.(8)
10.71[R] Reseller and Mall Agreement dated as of April 18, 2000 among
CableRep, Inc., Netgateway and StoresOnline.com, Inc.(8)
10.72 Securities Purchase Agreement dated July 31, 2000 between
Netgateway, Inc. and King William, LLC(11)
10.73 Form of 8% Convertible Debenture Due July 31, 2003(11)
10.74 Registration Rights Agreement dated July 31, 2000 between
Netgateway, Inc. and King William, LLC(11)
10.75 Form of Common Stock Purchase Warrant(11)
10.76 Private Equity Credit Agreement dated August 2, 2000 between
Netgateway, Inc. and King William, LLC(11)
10.77 Registration Rights Agreement dated August 2, 2000 between
Netgateway, Inc. and King William, LLC(11)
10.78+ Amendment to Employment Agreement dated July 25, 2000
between Netgateway and Roy W. Camblin III(11)
10.79*+ Consulting Agreement dated July 24, 2000 between Netgateway
and R. Scott Beebe
18.1 Letter dated February 9, 2000 from KPMG LLP(7)
21.1 Subsidiaries of Netgateway(11)
23.1* Consent of KPMG LLP
- -----------
(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.
3
(11) Incorporated by reference from Registrant's Registration Statement on Form
S-1 (File No. 333-45356) filed on September 7, 2000.
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
(b) Please note that certain confidential technical and commercial information
has been redacted from some of the exhibits attached to this Form S-1 in order
to preserve the confidentiality of such information. All of the confidential
information which has been redacted is on file with the Securities and Exchange
Commission and may be obtained in accordance with the Freedom of Information
Act. Exhibits to this Form S-1 which have had confidential information redacted
are indicated as follows on the exhibit list above: "[R]." Within the exhibits
to this Form S-1, redacted material is indicated by the following sign where
such redacted text would have appeared in the relevant exhibit: "[REDACTED]"
4