UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
300 OCEANGATE, 5TH FLOOR, LONG BEACH, CALIFORNIA 90802
(Address of principal executive offices) (Zip code)
(562) 308-0010
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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
The number of shares outstanding of the registrant's common stock as of May
8, 2000: 17,660,543.
When we refer in this Form 10-Q to "Netgateway," the "Company," "we,"
"our," and "us," we mean Netgateway, Inc., a Delaware corporation, together with
our subsidiaries and their respective predecessors.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets at March 31, 2000 (unaudited) and at
June 30, 1999 ............................................................. 2
Unaudited Condensed Consolidated Statements of Operations for the three
and nine months ended March 31, 2000 and 1999 ............................. 3
Unaudited Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 2000 and 1999 ...................................... 4
Unaudited Condensed Consolidated Statement of Changes in Shareholders'
Equity for the nine months ended March 31, 2000 ........................... 5
Notes to the Unaudited Condensed Consolidated Financial Statements .......... 6
1
NETGATEWAY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2000 and June 30, 1999
March 31, June 30,
2000 1999
------------ ------------
(Unaudited)
Assets
Current assets:
Cash $ 8,739,972 569,472
Accounts receivable less allowance for doubtful accounts of $600
and $3,000 at March 31, 2000 and June 30, 1999, respectively 618,872 44,198
Unbilled receivables (note 6) 679,134 --
Note receivable (note 6) 450,000 --
Note receivable from officer -- 30,000
Debt issue costs -- 336,288
Prepaid offering costs -- 325,887
Deferred acquisition costs 361,628 --
Prepaid advertising 290,000 --
Prepaid expenses and other current assets 535,444 73,481
------------ ------------
Total current assets 11,675,050 1,379,326
Property and equipment, net 2,496,883 496,536
Intangible assets, net 1,323,556 1,562,635
Other assets 27,284 19,853
------------ ------------
$ 15,522,773 3,458,350
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of notes payable (note 4) $ -- 1,496,000
Convertible debentures (note 4) -- 200,000
Accounts payable 813,444 278,723
Accrued wages and benefits 1,233,125 278,741
Accrued interest -- 44,301
Accrued liabilities 987,900 543,632
Deferred revenue 115,529 67,694
Accrued contract losses -- 302,543
Current portion of notes payable to related parties -- 1,799
------------ ------------
Total current liabilities 3,149,998 3,213,433
Shareholders' equity (note 5):
Common stock, par value $.001 per share. Authorized
40,000,000 shares; issued and outstanding 17,508,327 and
9,912,304 at March 31, 2000 and June 30, 1999, respectively 17,508 9,913
Additional paid-in capital 55,950,432 15,639,160
Deferred compensation (744,172) (52,919)
Accumulated other comprehensive loss (4,396) (3,598)
Accumulated deficit (42,846,597) (15,347,639)
------------ ------------
Total shareholders' equity 12,372,775 244,917
Commitments and subsequent events
------------ ------------
Total liabilities and shareholders' equity $ 15,522,773 3,458,350
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
NETGATEWAY, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
Three months Three months Nine months Nine months
ended ended ended ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenue (note 3) $ 2,042,315 42,208 3,214,997 122,392
Cost of sales $ 508,464 33,525 1,399,025 102,489
------------ ------------ ------------ ------------
Gross profit 1,533,851 8,683 1,815,972 19,903
------------ ------------ ------------ ------------
Product development 2,342,665 257,589 4,104,599 911,236
Selling and marketing 1,356,764 306,974 3,093,634 333,437
General and administrative 1,993,223 1,976,326 16,873,064 6,514,569
Depreciation and amortization 294,708 97,321 608,621 144,702
------------ ------------ ------------ ------------
Total operating expenses 5,987,360 2,638,210 24,679,918 7,903,944
------------ ------------ ------------ ------------
Loss from operations (4,453,509) (2,629,527) (22,863,946) (7,884,041)
Loss on sale of equity securities -- -- -- 54,729
Interest (income) expense, net (133,040) 697,244 4,635,012 679,274
------------ ------------ ------------ ------------
Net loss before extraordinary item (4,320,469) (3,326,771) (27,498,958) (8,618,044)
Extraordinary gain on debt extinguishment -- -- -- 1,653,233
------------ ------------ ------------ ------------
Net loss $ (4,320,469) (3,326,771) (27,498,958) (6,964,811)
============ ============ ============ ============
Basic and diluted extraordinary
gain per share $ -- -- -- 0.19
============ ============ ============ ============
Basic and diluted loss per share $ (0.25) (0.37) (2.02) (0.80)
============ ============ ============ ============
Weighted average common shares outstanding -
basic and diluted 17,183,314 9,027,916 13,589,267 8,659,851
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
NET GATEWAY, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
Nine months Nine months
ended ended
March 31, March 31,
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $(27,498,958) (6,964,811)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 608,621 144,702
Common stock issued for services 3,402,313 902,100
Loss on sale of equity securities -- 54,729
Amortization of deferred compensation 466,147 89,260
Gain on extinguishment of debt -- (1,653,233)
Stock compensation paid by shareholders -- 400,000
Stock issued in exchange for cancellation of options 8,400,000 --
Amortization of debt issue costs 585,592 --
Amortization of debt discount 4,022,550 35,488
Interest expense on warrants issued as debt issue costs -- 668,904
Options and warrants issued for services 172,853 2,224,987
Provision for doubtful accounts -- 23,876
Write-off of note receivable -- 800,000
Changes in assets and liabilities:
Accounts receivable (574,674) (18,921)
Unbilled receivables (679,134) --
Other assets (494,385) 41,297
Accounts payable and accrued expenses 1,687,897 1,094,763
------------ ------------
Net cash used in operating activities (9,901,178) (2,156,859)
------------ ------------
Cash flows from investing activities:
Cash assumed in business acquisition -- 4,781
Loan for notes receivable (450,000) (800,000)
Repayment of notes receivable 30,000 50,000
Purchase of equity securities -- (100,733)
Proceeds from sale of equity securities -- 46,004
Purchase of property and equipment (2,369,888) (118,927)
------------ ------------
Net cash used in investing activities (2,789,888) (918,875)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 25,313,863 2,164,800
Proceeds from exercise of options and warrants 1,173,028 264,200
Proceeds from issuance of notes payable to related parties -- 100,000
Repayment of notes payable (6,633,500) --
Proceeds from issuance of notes payable and
convertible debentures 1,114,950 1,160,000
Cash paid for debt issue costs (104,178) --
Repayment of notes payable to related parties (1,799) (730,630)
------------ ------------
Net cash provided by financing activities 20,862,364 2,958,370
Effect of exchange rate changes on cash balances (798) (1,639)
------------ ------------
Net increase in cash 8,170,500 (119,003)
Cash at beginning of period 569,472 254,597
------------ ------------
Cash at end of period $ 8,739,972 135,594
============ ============
Supplemental schedule of noncash activities:
Acquisition of StoresOnline -- 1,021,429
Conversion of debt to common stock $ 200,000 762,500
Common stock issued for prepaid advertising 300,000 --
Capital contributed upon extinguishment of debt -- 200,000
Warrants issued to settle an obligation 53,534 --
Warrants issued for debt issue costs 145,876 746,076
Stock issued for debt issue costs -- 75,000
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
4
NETGATEWAY INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement of Changes in Shareholders' Equity
Common stock
--------------------------- Additional Deferred Comprehensive
Shares Amount paid-in capital Compensation Loss
------------ ------------ --------------- ------------ -------------
Balance at June 30, 1999 9,912,304 $ 9,913 15,639,160 (52,919)
Common stock issued for prepaid advertising 50,000 50 299,950 -- --
Common stock issued for services 515,150 515 3,489,298 (87,500) --
Warrants issued to settle an obligation -- -- 53,534 -- --
Sale of common stock for cash, net 4,155,350 4,155 25,309,708 -- --
Warrants issued for debt issue costs -- -- 145,876 -- --
Shares issued for debenture conversion 80,000 80 199,920 -- --
Options granted for services -- -- 172,853 -- --
Stock option compensation -- -- 1,069,900 (1,069,900) --
Amortization of deferred compensation -- -- -- 466,147 --
Exercise of warrants 25,170 25 27,145 -- --
Cashless exercise of options and warrants 1,098,773 1,098 (1,098) -- --
Shares issued for cancellation of options 1,200,000 1,200 8,398,800 -- --
Shares issued for exercise of options 326,720 327 1,145,531 -- --
Shares issued upon conversion of
subsidiary common stock 144,860 145 (145) -- --
Comprehensive loss:
Net loss -- -- -- -- (27,498,958)
Foreign currency translation adjustment -- -- -- -- (798)
------------
(27,499,756)
============
Total comprehensive loss
------------ ------------ ------------ ------------
Balance at March 31, 2000 17,508,327 $ 17,508 55,950,432 (744,172)
============ ============ ============ ============
Accumulated
Other Total
Accumulated Comprehensive Shareholders'
Deficit Loss equity
------------ ------------- ---------------
Balance at June 30, 1999 (15,347,639) (3,598) 244,917
Common stock issued for prepaid advertising -- -- 300,000
Common stock issued for services -- -- 3,402,313
Warrants issued to settle an obligation -- -- 53,534
Sale of common stock for cash, net -- -- 25,313,863
Warrants issued for debt issue costs -- -- 145,876
Shares issued for debenture conversion -- -- 200,000
Options granted for services -- -- 172,853
Stock option compensation -- -- --
Amortization of deferred compensation -- -- 466,147
Exercise of warrants -- -- 27,170
Cashless exercise of options and warrants -- -- --
Shares issued for cancellation of options -- -- 8,400,000
Shares issued for exercise of options -- -- 1,145,858
Shares issued upon conversion of subsidiary
common stock -- -- --
Comprehensive loss:
Net loss (27,498,958) -- (27,498,958)
Foreign currency translation adjustment -- (798) (798)
Total comprehensive loss
------------ ------- ------------
Balance at March 31, 2000 (42,846,597) (4,396) 12,372,775
============ ======= ============
See accompanying notes to unaudited condensed consolidated financial statements.
5
NETGATEWAY, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Description of Business
Netgateway, Inc. and subsidiaries ("Netgateway" or the "Company"), was
formed on March 4, 1998 as a Nevada corporation. Netgateway provides
eCommerce services designed to enable clients to extend their business to
the Internet to conduct commercial transactions between business
enterprises and between business enterprises and consumers. The hub of
Netgateway's eCommerce solution is its proprietary Internet Commerce
Center, which consists of the hardware, proprietary and licensed software,
and the related technical services necessary for Netgateway's clients to
transact eCommerce. Netgateway also designs and builds custom interfaces,
or spokes, to connect business clients to the Internet Commerce Center.
Netgateway's Internet Commerce Center permits a continuum of sophisticated
and technologically complex, or scalable, solutions ranging from a simple
Internet storefront advertising their products and taking orders through
e-mail to a highly complex system of secure client extranets allowing
vendors to interact and transact business-to-business eCommerce with one or
more specific customers.
Prior to October 1, 1999, the Company was a development stage enterprise as
defined in Statement of Financial Accounting Standards ("SFAS") No. 7.
Planned principal operations commenced and began producing significant
revenue on October 1, 1999, and accordingly, Netgateway is no longer
considered a development stage company.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Revenue Recognition
Revenues from the design and development of Internet Web sites and
related consulting projects are recognized using the
percentage-of-completion method. Unbilled receivables represent time
and costs incurred on projects in progress in excess of amounts billed,
and are recorded as assets. Deferred revenue represents amounts billed
in excess of costs incurred, and is recorded as a liability. To the
extent costs incurred and anticipated costs to complete projects in
progress exceed anticipated billings, a loss is recognized in the
period such determination is made for the excess.
(c) Business Segments and Related Information
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131) establishes standards for the way
public business enterprises are to report information about operating
segments in annual financial statements and requires enterprises to
report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards
for related disclosure about products and services, geographic areas
and major customers. It replaces the "industry segment" concept of SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise,"
with a "management approach" concept as the basis for identifying
reportable segments. The Company has only one operating segment. The
Company formed its wholly-owned Canadian subsidiary, StoresOnline.com,
Ltd., in January 1999. Prior to that time, the Company only had
operations in the United States. All revenues during the three and nine
months ended March 31, 2000 and 1999 were generated in the United
States. Substantially all of the Company's long-lived assets were
located in the United States at March 31, 2000.
6
NETGATEWAY, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(d) Investment Securities
The Company accounts for investment securities in accordance with
Financial Accounting Standards Board Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115
requires investments to be classified based on management's intent in
one of the three categories: held-to-maturity securities,
available-for-sale securities and trading securities. Held-to-maturity
securities are recorded at amortized cost. Available-for-sale
securities are recorded at fair value with unrealized gains and losses
reported as a separate component of shareholders' equity and
comprehensive income (loss). Trading securities are recorded at market
value with unrealized gains and losses reported in operations. The
Company's investment securities have been classified as
available-for-sale.
(e) Foreign Currency Translation
The financial statements of the Company's Canadian subsidiary,
StoresOnline.com, Ltd. have been translated into U.S. dollars from its
functional currency in the accompanying consolidated financial
statements in accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation." Balance sheet
accounts of StoresOnline.com, Ltd. are translated at period-end
exchange rates while income and expenses are translated at actual
exchange rates on the date of the transaction. Translation gains or
losses that related to StoresOnline.com, Ltd.'s net assets are shown as
a separate component of shareholders' equity and comprehensive income
(loss). There were no gains or losses resulting from realized foreign
currency transactions (transactions denominated in a currency other
than the entities' functional currency) during the three and nine
months ended March 31, 2000 and 1999.
(f) Loss Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number
of common shares outstanding during the period in accordance with SFAS
No. 128 "Earnings Per Share". Diluted earnings (loss) per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. Diluted earnings (loss) per share is
computed similarly to fully diluted earnings (loss) per share pursuant
to Accounting Principles Board (APB) Opinion No. 15. There were
2,933,407 options and 1,189,075 warrants to purchase shares of common
stock that were outstanding during the three and nine months ended
March 31, 2000 which were not included in the computation of diluted
loss per share because the impact would have been antidilutive. There
were 3,608,596 options and 1,468,300 warrants to purchase shares of
common stock that were outstanding during the three and nine months
ended March 31, 1999 which were not included in the computation of
diluted loss per share because the impact would have been antidilutive.
(g) Costs of Start-Up Activities
Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities," the Company expenses all the costs of
start-up activities as incurred.
7
NETGATEWAY, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(h) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the balance sheet
date and the reporting of revenues and expenses during the reporting
periods to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
(i) Reclassifications
Certain amounts have been reclassified to conform with current year
presentation.
(j) Credit Concentration Risk
Revenue from one customer represented 49% and 31% of the Company's
revenues and from an additional customer, Galaxy Enterprises, Inc.,
(see Note 6) represented 33% and 21% of the Company's revenue for the
three months and nine months ended March 31, 2000, respectively.
(3) Change in Method of Accounting for Revenue
Effective October 1, 1999, the Company changed its method of accounting for
revenue from the completed contract method to the percentage-of-completion
method. The Company believes the percentage of completion method more accurately
reflects the current earnings process under the Company's contracts. The
percentage of completion method is preferable according to Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, issued by the American Institute of Certified Public
Accountants. The new method has been applied retroactively by restating the
Company's consolidated financial statements for prior periods in accordance with
Accounting Principles Board Opinion No. 20.
The impact of the accounting change was a decrease in net loss and loss per
share as follows:
Net Loss Loss per Share
------------ ---------------
Three months ended March 31, 2000 $ 80,978 .005
Nine months ended March 31, 2000 665,279 .049
Three months ended March 31, 1999 8,433 .001
Nine months ended December 31, 1999 8,433 .001
8
NETGATEWAY, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(4) Notes Payable and Convertible Debentures
In August and September 1999, the Company obtained bridge financing whereby 12%
senior notes payable and 357,850 shares of common stock were issued generating
proceeds of $2,744,290, net of $803,612 of issuance costs. The senior notes
payable are due the earlier of April 30, 2000 or upon the close of a public sale
of the Company's common stock. The Company also granted 149,375 warrants to
purchase an equivalent number of shares of common stock at an exercise price of
$10 per share as additional issuance costs. The warrants are exercisable for a
period of four years commencing May 18, 2000. The fair value of the warrants on
the dates of issuance was estimated to be $469,402 using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%;
risk-free interest rate of 5%; volatility of 100% and an expected life of 2
years. The net proceeds from the bridge financing were allocated to the senior
notes payable and common stock based on their relative fair values. Accordingly,
$957,450 was recorded as notes payable, $2,035,140 as equity, net of $555,313 of
stock issuance costs, and $248,299 as debt issuance costs.
In September 1999, the Company issued a 12% senior note payable of $500,000 and
50,000 shares of common stock valued at $350,000 stock, the proceeds of which
were received in October 1999. The note is due the earlier of April 30, 2000 or
upon the close of a public sale of the Company's common stock. In October 1999,
the Company issued a 12% senior note payable of $25,000 and 2,500 shares of
common stock valued at $17,500 generating net proceeds of $22,500. The note is
due the earlier of April 30, 2000 or upon the close of a public sale of the
Company's common stock. The Company also granted 1,250 warrants valued at
$3,349. The net proceeds were allocated to the senior notes payable and common
stock based on their relative fair value.
In November 1999, the Company repaid all of the $6,633,500 12% senior notes
payable. Upon repayment of the senior notes, the remaining debt discount balance
of $3,253,469 was recognized as interest expense.
In October and November 1999, $200,000 of convertible debentures were converted
into 80,000 shares of common stock.
(5) Shareholders' Equity
In July 1999, the Board of Directors adopted the 1999 Stock Option Plan for
Non-Executives (the "Plan"). An aggregate of 2,000,000 shares were reserved
for issuance under the Plan. Stockholder approval is necessary in order to
adopt a new plan. As stockholder approval had not been obtained prior to
March 31, 2000, all options granted are not considered outstanding and have
not been included in the preceding analysis. Management will seek stockholder
approval at a special meeting of the Company's stockholders on May 24, 2000.
Once stockholder approval is obtained, the additional options will be
effectively granted and the appropriate calculations to determine
compensation can be completed. During the nine months ended March 31, 2000,
the Company granted 1,803,482 options under the Plan at exercise prices
ranging from $3.50 to $12.50 per share. The Company also granted 535,714
options under the 1998 Executive Plan during the nine months ended March 31,
2000 at exercise prices ranging from $3.50 to $8.18 per share. The Company
also granted 123,916 options under the 1998 Employee Stock Option Plan during
the nine months ended March 31, 2000 at exercise prices ranging from $3.50 to
$4.19 per share.
In July 1999, the Company entered into a Cable Reseller and Mall agreement with
MediaOne of Colorado, Inc. (MediaOne) whereby the Company also issued to
MediaOne 50,000 shares of common stock and warrants to purchase 200,000 shares
of common stock. The exercise price of the warrants is dependent upon the market
price of the Company's common stock on the date that the warrants are earned
under certain performance criteria. As of December 31, 1999, the performance
criteria had not been met.
9
NETGATEWAY, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
During the nine months ended March 31, 2000, the Company issued 515,150 shares
of common stock valued at $3,489,813 for services, of which 500,000 shares were
issued to the chief executive officer of the Company.
In October, the Company issued 969,810 shares of common stock upon the cashless
exercise of warrants, 100 shares of common stock upon the exercise of warrants
for $100, 1,200,000 shares of common stock valued at $8,400,000 to three
executives upon the cancellation of 1,980,000 options, and 80,000 shares of
common stock upon the conversion of $200,000 of convertible debentures. In
November 1999, the Company issued 270 shares of common stock upon the exercise
of warrants for $270.
In November and December 1999, the Company sold 3,795,000 shares of common stock
in a public offering generating net proceeds of $23,057,844. The Company also
granted 190,250 warrants as stock issuance costs.
In December 1999, January, February, and March 2000, the Company issued 86,544
10,586, 10,586, and 37,144 shares of common stock, respectively, upon the
conversion of common stock of its Storesonline.com subsidiary.
In January, February, and March 2000, the Company issued 128,963 shares of
common stock upon the cashless exercise of warrants and 24,800 shares of common
stock upon the exercise of warrants for $26,800.
In January, February, and March 2000, the Company issued 326,720 shares of
common stock upon the exercise of options under the Company's plans for
$1,145,858.
(6) Galaxy Acquisition
In March 1999, the Company signed a definitive agreement under which the Company
will acquire Galaxy Enterprises, Inc. ("Galaxy Enterprises") for total
consideration of approximately 3.9 million shares. Among other things, Galaxy
Enterprises, through its subsidiary Galaxy Mall, Inc., engages in the business
of selling electronic home pages, or "storefronts" on its Internet shopping
mall, and hosts those storefront sites on its Internet server. Galaxy
Enterprises also conducts Internet training seminars throughout the United
States for its customers and for others interested in extending their businesses
to the Internet.
In connection with the merger, on January 7, 2000, the Company advanced $300,000
in bridge financing to Galaxy Enterprises for working capital purposes and for
the payment of certain professional fees incurred by Galaxy Enterprises in
connection with the merger. On February 4, 2000, the Company advanced an
additional $150,000 to Galaxy Enterprises for working capital purposes and for
the payment of certain professional fees incurred by Galaxy Enterprises in
connection with the merger. Each loan is secured by a pledge of Galaxy
Enterprises common stock from John J. Poelman, the chief executive officer and
largest shareholder of Galaxy Enterprises. The notes bear interest at 9.5% and
are due and payable on the earlier of June 1, 2000 or the consummation date of
the merger.
Pending completion of the merger, the Company has entered into certain
transactions in the normal course of business with Galaxy Enterprises, Inc. Such
transactions are at negotiated prices and on arm's length terms comparable to
transactions with other customers of the Company. For the three months ended
March 31, 2000, Netgateway's sales to Galaxy Enterprises totaled $679,134.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
expected results. All statements other than statements of historical fact that
we make in this Form 10-Q are forward looking and include, but are not limited
to, statements as to: expectations regarding future revenue opportunities; the
completion of the Galaxy Enterprises, Inc. merger and related matters; the
development of the business-to-business eCommerce market and the future growth
of our customer base; future expense levels, including research and development
expenses, selling and marketing expenses and 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 our sales and marketing 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 results of
operations or financial position.
Forward-looking statements reflecting our current expectations are
inherently uncertain. Our actual results may differ significantly from our
expectations. Factors that may cause such differences include, but are not
limited to, those discussed (i) under the heading "Risk Factors" in our
Registration Statement on Form S-1, as filed with the Securities and Exchange
Commission (the "SEC") on June 1, 1999, as amended by Amendment No. 1 filed with
the SEC on July 21, 1999, amended by Amendment No. 2 filed with the SEC on
October 14, 1999, amended by Amendment No. 3 filed with the SEC on November 12,
1999 and amended by Amendment No. 4 filed with the SEC on November 17, 1999
(Registration No. 333-79571), (ii) under the heading "Risk Factors" in our
Registration Statement on Form S-4, as filed with the SEC on May 5, 2000
(Registration No. 333-36360), and (iii) elsewhere in this quarterly report.
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.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our financial
statements and the related notes included elsewhere in this quarterly report.
GENERAL
We provide electronic commerce services designed to allow clients to extend
their business to the Internet to conduct commercial transactions between
business enterprises and
11
between business enterprises and consumers. The hub of our electronic commerce
solution is our proprietary Internet Commerce Center, which consists of the
hardware, proprietary and licensed software, and the related technical services
necessary for our clients to transact eCommerce. We also design and build custom
interfaces, or spokes, to connect business clients to our Internet Commerce
Center. Our Internet Commerce Center provides our clients a continuum of
increasingly sophisticated and technologically complex solutions, ranging from a
simple internet storefront advertising their products and taking orders through
e-mail to a highly complex system of secure extranets allowing vendors to
interact and transact business-to-business eCommerce with one or more specific
customers.
Prior to October 1, 1999, we were a development stage enterprise as defined
in Statement of Financial Accounting Standards ("SFAS") No. 7. Planned principal
operations commenced and began producing significant revenue on October 1, 1999,
and accordingly, we are no longer considered a development stage company.
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 Principles Board Opinion No. 20.
Commencing with the quarter ended March 31, 2000, we have elected to
classify all project development and customer support expenses as cost of sales
for all periods presented. All product development expenses are separately
disclosed in operating expenses. We believe this expense classification better
reflects the relationship between our revenue and expenses.
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 because we cannot
identify which companies, if any, we may acquire in the foreseeable future.
RESULTS OF OPERATIONS
REVENUE
Revenue includes revenues related to web site development and the design of
electronic storefronts, internet-based shopping mall development and design,
transaction processing and
12
licensing fees for the licensing of our technology. Revenues for the three and
nine month periods ended March 31, 2000 increased to $2,042,315 and $3,214,997,
respectively, from $42,208 and $122,392 in the comparable prior periods. The
growth in our revenues was attributable primarily to the addition of new
customers to our Internet Commerce Center and to the licensing of our software
to certain customers. In addition, our average price for system development has
increased as the scope and technical requirements of our customers utilizing our
Internet Commerce Center has increased.
GROSS PROFIT
Gross profit is calculated as net sales less the cost of sales, which
consists of the cost of project development and customer support expenses. Gross
profit for the three and nine month periods ended March 31, 2000 increased to
$1,533,851 and $1,815,972, respectively, from $8,683 and $19,904 in the
comparable prior periods. Gross profit increased in absolute dollars over the
same periods in 1999, primarily reflecting our increased sales volume. Gross
margin percentages increased over the same periods due to the introduction of
our software licensing program, which has significantly higher margins than our
existing revenue base.
PRODUCT DEVELOPMENT
Product development expenses consist primarily of payroll and related
expenses for development, editorial, creative and systems personnel and
outside contractors. Product development expenses for the three and nine
month periods ended March 31, 2000 increased to $2,342,665 and $4,104,599,
respectively, from $257,589 and $911,236 in the comparable prior periods.
Product development expenses have increased as we continue to upgrade our
Internet Commerce Center. Our focus continues to be large corporate clients
in the business-to-business sector; accordingly, our increased product
development expenses are consistent with our need to meet the more complex
technical requirements of that customer base.
SELLING AND MARKETING
Selling and marketing expenses consist of payroll and related expenses for
sales and marketing and the cost of advertising, promotional and public
relations expenditures and related expenses for personnel engaged in sales and
marketing activities. Selling and marketing expenses for the three and nine
month periods ended March 31, 2000 increased to $1,356,764 and $3,093,634,
respectively, from $306,974 and $333,437 in the comparable prior periods. The
increases in selling and marketing expenses are primarily attributable to
increased payroll-related and other infrastructure costs as we expand and incur
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
three and nine month periods ended March 31, 2000 increased to $1,988,668 and
$16,862,109, respectively, from $1,976,326 and
13
$6,514,569 in the comparable prior periods. The increase in general and
administrative expenses is attributable primarily to non-cash compensation
expense from common stock issued to executives in December 1999 valued at
$11,775,000. The increases in general and administrative expenses are also
attributable to increased payroll-related and other infrastructure costs as we
expand and incur additional costs related to the growth of our business.
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 (the "Convertible
Debentures"), and $6,633,500 of our Series A 12% Senior Notes (the "Senior
Notes"). The Senior Notes were issued in connection with our May through
October 1999 bridge financing private placements (the "Bridge Financing").
Interest expense, net for the nine month period ended March 31, 2000,
increased to $4,635,012 from $679,274 in the comparable prior period. The
increase in interest expense for the nine month period is attributable
primarily to the amortization of promissory note discounts incurred in
conjunction with the Bridge Financing. The amortization of the debt discount
aggregated $4,356,934 during the nine month period ended March 31, 2000,
respectively. All of the Convertible Debentures were converted into common
stock as of December 31, 1999. The Senior Notes were repaid in full in
November 1999. The net interest income for the nine month period ended March
31, 2000 is attributable to interest earned on cash balances.
INCOME TAXES
We have not generated any taxable income to date and therefore have not
paid any federal income taxes since our inception except for minimum state tax.
Utilization of our net operating loss carry forwards, which begin to expire in
2013, may be subject to certain limitations under Section 382 of the Internal
Revenue Code of 1986, as amended.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had $8,739,972 in cash, an increase of
$8,170,500 from June 30, 1999.
Net cash used in operating activities was $9,901,178 for the nine month
period ended March 31, 2000. Net cash used in operations was primarily
attributable to $27,498,958 in net losses and increases in assets, partially
offset by non-cash charges as well as increases in accounts payable and accrued
expenses. Increases in assets included $574,674 in accounts receivable and
$679,134 in unbilled receivables resulting from the growth in our revenues
during the nine month period ended March 31, 2000. Non-cash charges include
$3,402,313 for common stock issued for services, $8,400,000 for stock issued for
cancellation of options and $4,022,550 from the amortization of debt discount.
Accounts payable and accrued expenses increased $1,687,897 and resulted
primarily from the accrual of wages and benefits and balances owed on
expenditures.
14
Net cash used in investing activities was $2,789,888 for the nine month
period ended March 31, 2000 and consisted primarily of purchases of property and
equipment for the upgrade of our technological infrastructure.
Net cash provided by financing activities of $20,862,364 for the nine month
period ended March 31, 2000 resulted primarily from $1,114,950 in proceeds from
the issuance of Senior Notes and $25,313,863 in proceeds from the issuance of
common stock in connection with the Senior Notes and our secondary offering,
which we completed in November and December 1999. These proceeds were partially
offset by $6,633,500 used to repay the Bridge Financing loans in their entirety.
We believe that our existing capital resources are adequate to meet our
cash requirements for at least the next six months. We anticipate that we will
incur additional capital expenditures spending during the fourth quarter of our
fiscal year to continue upgrading our technological infrastructure.
RECENT EVENTS
In January 2000, we 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 store building services.
In January 2000, we also entered into an agreement with PharMerica, a
subsidiary of Bergen Brunswig Corporation, and the nation's foremost provider of
professional, quality and cost effective pharmacy products and services to the
long-term care, assisted living, sub-acute and skilled nursing industries. Under
the agreement, 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 March 1999, we executed a definitive agreement and plan of merger under
which we will acquire Galaxy Enterprises, Inc. ("Galaxy Enterprises") for total
consideration of approximately 3.9 million shares of our common stock. Among
other things, Galaxy Enterprises, through its subsidiary, Galaxy Mall, Inc.,
engages in the business of selling electronic home pages, or "storefronts," on
its Internet shopping mall, and hosts those storefront sites on its Internet
server. Galaxy Enterprises also conducts Internet training seminars throughout
the United States for its customers and for others interested in extending their
businesses to the Internet.
In connection with the merger, on January 7, 2000, we 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,
15
2000, we advanced an additional $150,000 to Galaxy Enterprises for working
capital purposes and for the payment of certain professional fees incurred by
Galaxy Enterprises in connection with the merger. Each loan is secured by a
pledge of Galaxy Enterprises common stock from John J. Poelman, the chief
executive officer and largest shareholder of Galaxy Enterprises. The notes bear
interest at 9.5% and are due and payable on the earlier of June 1, 2000 or the
consummation date of the merger.
In connection with the Galaxy Enterprises merger, and to ease the
transition of Netgateway and Galaxy Enterprises into the combined company from
the signing of the merger agreement until the effective time of the merger, we
entered into an electronic commerce services agreement with Galaxy Enterprises
dated as of March 1, 2000. This agreement provides that we will, among other
things, rebuild and update Galaxy Enterprises' GalaxyMall.com Web site to our
software. The services provided by us under this agreement will include the
conversion of all Galaxy Mall storefronts, enhancing the look and ease of use
and adding new features to the GalaxyMall.com Web site. In addition, we will
rebuild Galaxy Enterprise's search engine, Matchsite.com. The estimated payments
to be made by Galaxy Enterprises to us under this agreement include $600,000 for
rebuilding the GalaxyMall.com Web site, $75 for the conversion of each of the
approximately 3,200 storefronts on that site and $50,000 to rebuild the
MatchSite.com search engine. We will also be paid hosting fees of approximately
$2,000 per month.
In March 2000, we entered 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 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, Netgateway
entered into an 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 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 its 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 storebuilding services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
None.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
10.1 Agreement and Plan of Merger dated as of March 10, 2000 by and
among Netgateway, Inc., Galaxy Acquisition Corp. and Galaxy
Enterprises, Inc.(1)
10.2 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and John J. Poelman(1)
10.3 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and Sue Ann Cochran(1)
10.4 Form of Affiliate Lock-Up Agreement(1)
10.5 Form of Employment Agreement(1)
10.6 Stock Option Agreement dated as of March 10, 2000, by and
among Netgateway, Inc. and John J. Poelman(1)
10.7 Pledge Agreement, dated as of January 7, 2000, between John J.
Poelman and the Company(2)
10.8 Promissory Note in the principal amount of $300,000, dated
January 7, 2000
17
issued to Netgateway, Inc. (2)
10.9 Pledge Agreement, dated as of February 4, 2000, between John
J. Poelman and Netgateway, Inc.(2)
10.10 Promissory Note in the principal amount of $150,000, dated
February 4, 2000 issued to Netgateway, Inc.(2)
10.11 Employment Agreement, dated as of December 15, 1999, between
Jill Padwa and Netgateway, Inc.(2)
10.12 Letter of Intent, dated December 12, 1999 between Galaxy
Enterprises, Inc. and Netgateway, Inc.(2)
10.13 Affiliate Lock-up Agreement by and between Netgateway, Inc and
Darral Clarke dated March 10, 2000(3)
10.14 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and Brandon B. Lewis dated March 10, 2000(3)
10.15 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and David Wise dated March 10, 2000(3)
10.16 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and Frank C. Heyman dated March 10, 2000(3)
10.17 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and John J. Poelman dated March 10, 2000(3)
10.18 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and Benjamin Roberts dated March 10, 2000(3)
10.19 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and Robert Green dated March 10, 2000(3)
10.20 Electronic Commerce Services Agreement dated March 1, 2000
between Netgateway and Galaxy Enterprises, Inc. (3)
10.21 Statement of Work for Galaxy Mall and Store Conversion dated
March 1, 2000 between Netgateway and Galaxy Mall(3)
10.22[R] Systems Integrator Agreement dated as of March 6, 2000 between
Netgateway and Complete Business Solutions, Inc.
10.23[R] Systems Integrator Agreement dated as of April 4, 2000 between
Netgateway and Complete Business Solutions (India) Ltd.
10.24[R] Reseller and Mall Agreement dated as of April 18, 2000, among
CableRep, Inc., Netgateway and StoresOnline.com, Inc.
27 Financial Data Schedule
- -------------------------------
(1) Incorporated by reference from Netgateway's Report on Form 8-K filed on
March 21, 2000.
(2) Incorporated by reference from Netgateway's Quarterly Report on Form 10-Q
filed on February 15, 2000 for the quarter ended December 31, 1999.
(3) Incorporated by reference from Netgateway's Registration Statement on Form
S-4, as filed with the SEC on May 5, 2000 (Registration No. 333-36360).
Please note that certain confidential technical and commercial information has
been redacted from some of the exhibits attached to this Form 10-Q 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 10-Q which have had confidential information redacted
are indicated as follows on the exhibit list above: "[R]." Within the exhibits
to this Form 10-Q, redacted material is indicated by the following sign where
such redacted text would have appeared in the relevant exhibit: "[REDACTED]."
(b) Reports on Form 8-K
On March 21, 2000, the Company filed a report on Form 8-K relating to
its agreement to merge with Galaxy Enterprises, Inc.
18
SIGNATURES
Pursuant to the requirements 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.
NETGATEWAY, INC.
Date: May 11, 2000 /s/ Roy W. Camblin III
--------------------------------
Name: Roy W. Camblin III
Chief Executive Officer
Date: May 11, 2000 /s/ Donald M. Corliss, Jr.
-------------------------------
Name: Donald M. Corliss, Jr.
Title: President and Chief
Operating Officer
19
EXHIBIT INDEX
Exhibit No. Description
10.1 Agreement and Plan of Merger dated as of March 10, 2000 by and
among Netgateway, Inc., Galaxy Acquisition Corp. and Galaxy
Enterprises, Inc.(1)
10.2 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and John J. Poelman(1)
10.3 Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and Sue Ann Cochran(1)
10.4 Form of Affiliate Lock-Up Agreement(1)
10.5 Form of Employment Agreement(1)
10.6 Stock Option Agreement dated as of March 10, 2000, by and
among Netgateway, Inc. and John J. Poelman(1)
10.7 Pledge Agreement, dated as of January 7, 2000, between John J.
Poelman and the Company(2)
10.8 Promissory Note in the principal amount of $300,000, dated
January 7, 2000 issued to Netgateway, Inc. (2)
10.9 Pledge Agreement, dated as of February 4, 2000, between John
J. Poelman and Netgateway, Inc.(2)
10.10 Promissory Note in the principal amount of $150,000, dated
February 4, 2000 issued to Netgateway, Inc.(2)
10.11 Employment Agreement, dated as of December 15, 1999, between
Jill Padwa and Netgateway, Inc.(2)
10.12 Letter of Intent, dated December 12, 1999 between Galaxy
Enterprises, Inc. and Netgateway, Inc.(2)
10.13 Affiliate Lock-up Agreement by and between Netgateway, Inc and
Darral Clarke dated March 10, 2000(3)
10.14 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and Brandon B. Lewis dated March 10, 2000(3)
10.15 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and David Wise dated March 10, 2000(3)
10.16 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and Frank C. Heyman dated March 10, 2000(3)
10.17 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and John J. Poelman dated March 10, 2000(3)
10.18 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and Benjamin Roberts dated March 10, 2000(3)
10.19 Affiliate Lock-up Agreement by and between Netgateway, Inc.
and Robert Green dated March 10, 2000(3)
10.20 Electronic Commerce Services Agreement dated March 1, 2000
between Netgateway and Galaxy Enterprises, Inc. (3)
10.21 Statement of Work for Galaxy Mall and Store Conversion dated
March 1, 2000
20
between Netgateway and Galaxy Mall(3)
10.22[R] Systems Integrator Agreement dated as of March 6, 2000 between
Netgateway and Complete Business Solutions, Inc.
10.23[R] Systems Integrator Agreement dated as of April 4, 2000 between
Netgateway and Complete Business Solutions (India) Ltd.
10.24[R] Reseller and Mall Agreement dated as of April 18, 2000, among
CableRep, Inc., Netgateway and StoresOnline.com, Inc.
27 Financial Data Schedule
- ------------------------------
(1) Incorporated by reference from Netgateway's Report on Form 8-K filed on
March 21, 2000.
(2) Incorporated by reference from Netgateway's Quarterly Report on Form 10-Q
filed on February 15, 2000 for the quarter ended December 31, 1999.
(3) Incorporated by reference from Netgateway's Registration Statement on Form
S-4, as filed with the SEC on May 5, 2000 (Registration No. 333-36360).
Please note that certain confidential technical and commercial information has
been redacted from some of the exhibits attached to this Form 10-Q 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 10-Q which have had confidential information redacted
are indicated as follows on the exhibit list above: "[R]." Within the exhibits
to this Form 10-Q, redacted material is indicated by the following sign where
such redacted text would have appeared in the relevant exhibit: "[REDACTED]."
21