AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NETGATEWAY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 7373 87-0591719
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------
NETGATEWAY, INC.
300 OCEANGATE
5TH FLOOR
LONG BEACH, CALIFORNIA 90802
(Address of principal place of business)
------------------------------
KEITH D. FREADHOFF
Chairman of the Board of Directors
DONALD M. CORLISS, JR.
President
DAVID BASSETT-PARKINS
Chief Financial Officer and Chief Operating Officer
Netgateway, Inc.
300 Oceangate
5th Floor
Long Beach, California 90802
(562)308 0010/(562)308 0021 (Telecopy)
KDFREADHOFF@NETGATEWAY.NET
DMCORLISS@NETGATEWAY.NET
DBPARKINS@NETGATEWAY.NET
(Name, address, and telephone number of principal executive offices and agent
for service)
------------------------------
COPIES TO:
ROBERT STEVEN BROWN, ESQ. STEPHEN WEISS, ESQ.
KIM ELLEN LEFKOWITZ, ESQ. LINDA MINTZ, ESQ.
Brock Silverstein LLC Greenberg Traurig
One Citicorp Center Met Life Building
153 East 53rd Street 200 Park Avenue
New York, New York 10022-4611 New York, New York 10166
(212) 371-2000 / (212) 371-5500 (Telecopy) (212) 801-9200 / (212) 801-6400 (Telecopy)
RBROWN@BROCKFIRM.COM WEISSS@GTLAW.COM
KLEFKOWITZ@BROCKFIRM.COM MINTZL@GTLAW.COM
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
SEE ATTACHED PAGE.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
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CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) FEE
2,875,000
Common Stock, par value, $.001 per share.......... shares(2) $14.625 $42,046,875 $11,689.04
250,000
Representative's Warrants......................... warrants(3) $0.001 $250.00 $0.07
Common Stock, par value, $.001 per share, issuable
upon exercise of the Representative's
Warrants........................................ 250,000 shares(4) $17.55 $4,387,500 $1,219.73
Total............................................. -- -- $46,434,625 $12,908.84
(1) Estimated solely for purposes of calculation of the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended.
(2) Includes 375,000 shares of the Common Stock, par value $.001 per share, of
the Registrant, which the underwriters have the option to purchase solely to
cover over allotments, if any.
(3) To be acquired by the Representative.
(4) Issuable upon exercise of the Representative's Warrants.
SUBJECT TO COMPLETION, DATED JUNE 1, 1999
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
2,500,000 SHARES
NETGATEWAY
COMMON STOCK
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We are a provider of turn-key electronic commerce, or eCommerce, services
designed to enable clients to extend their business to the Internet. Our
Internet Commerce Center provides our clients with a variety of features ranging
from simple Internet storefronts to complex systems designed to enable them to
conduct business-to-business eCommerce.
Our common stock currently trades on the OTC Bulletin Board under the symbol
"NGWY." We have applied to have the common stock quoted on the Nasdaq National
Market under the symbol "NGWY." On May 25, 1999, the last reported sale price of
our common stock on the OTC Bulletin Board was $14.625.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PER SHARE TOTAL
Public Offering Price................................. $ $
Underwriting Discounts and Commissions................ $ $
Proceeds, before expenses, to Netgateway.............. $ $
The underwriters may, under certain circumstances, for 45 days after the
date of this prospectus, purchase up to an additional 375,000 shares of common
stock from us at the public offering price, less underwriting discounts and
commissions.
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[LOGO]
THE DATE OF THIS PROSPECTUS IS , 1999
INSIDE FRONT COVER
PICTURES OR DIAGRAMS OF THE "HUB AND SPOKE" MODEL OF THE INTERNET COMMERCE
CENTER,
BRIEF SUMMARY OF SERVICES PROVIDED, AND IDENTIFICATION OF CERTAIN OF THE
PUBLICLY RECOGNIZABLE CLIENTS OF NETGATEWAY.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary......................................................................................... 3
Risk Factors............................................................................................... 10
Use of Proceeds............................................................................................ 23
Dividend Policy............................................................................................ 24
Capitalization............................................................................................. 25
Dilution................................................................................................... 26
Selected Financial Data.................................................................................... 27
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 28
Business................................................................................................... 32
Management................................................................................................. 43
Principal Stockholders..................................................................................... 50
Related Party Transactions................................................................................. 52
Description of Securities.................................................................................. 54
Shares Eligible for Future Sale............................................................................ 56
Underwriting............................................................................................... 57
Legal Matters.............................................................................................. 59
Experts.................................................................................................... 59
Additional Information..................................................................................... 59
Index to Financial Statements.............................................................................. F-1
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND
OUR BUSINESS AND THIS OFFERING FULLY, YOU SHOULD READ THIS ENTIRE PROSPECTUS
CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THE RELATED NOTES BEGINNING ON
PAGE F-1. WHEN WE REFER IN THIS PROSPECTUS TO "NETGATEWAY," "THE COMPANY," "WE,"
"OUR," AND "US," WE MEAN NETGATEWAY, INC., A DELAWARE CORPORATION, TOGETHER WITH
OUR SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS.
NETGATEWAY
OUR BUSINESS
We provide turn-key eCommerce services designed to enable clients to extend
their business to the Internet to conduct commercial transactions between
business enterprises. The hub of our eCommerce 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 the ICC. Our ICC is a scalable solution which allows
clients to select services 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.
OUR SERVICES
Our services currently include
- Web site development and design, including the development of electronic
storefronts for the conduct of eCommerce on the Internet,
- Internet mall and secure client extranet development and design,
- transaction processing and clearing through standardized order formats and
commercial terms,
- data warehousing and transaction reporting,
- customer support services, and
- connectivity solutions.
We believe that our eCommerce services have a number of advantages over
other currently available alternatives, in that
- Our customers do not invest in hardware, software, and staffing, but
rather connect to our existing Netgateway infrastructure, which we believe
is a highly economic method to obtain and maintain an eCommerce presence.
- Clients with existing Web sites can maintain their investment in the
creation of that presence while seamlessly adding eCommerce capabilities.
- Because our infrastructure permits scalable eCommerce solutions, we can
offer incremental services to our clients through the activation of
additional proprietary software modules in response to client growth or
commercial requirements quickly and cost-effectively.
- Because our proprietary and other software resides only on our servers, we
can offer clients easy access to additional functionality on a test or
temporary basis in order to permit our clients to try new or additional
services with their respective customers on their Web sites, and can
provide real time "best of breed" updates, patches, and fixes to software
with no additional effort by the client.
3
OUR MARKET
IDC, an industry research firm, forecasts that the market for Internet and
eCommerce services worldwide will grow from $4.6 billion in 1997 to $43.7
billion by 2002. Forrester Research, another technology industry research firm,
estimates that the market for Internet and eCommerce services will grow from
$5.4 billion in 1998 to $32.7 billion by 2002. These projections represent a
compound annual growth rate of more than 55% over these periods.
As a result of the recent growth of eCommerce and its acceptance as a
mainstream medium for commercial transactions, businesses are investing in the
strategic use of Internet solutions to transform their core business and
technology strategies. This, in turn, has created a significant and growing
demand for third-party Internet professional services and has resulted in a
proliferation of companies offering specialized solutions, such as connectivity,
transaction reporting, security, and Web site design to business customers. This
specialization has resulted in a fragmented market that often requires the
business customer to seek solutions from a number of different providers using
differing, or even contradictory, strategies, models, and designs.
SIGNIFICANT RECENT DEVELOPMENTS
XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS:
XMCM), an eCommerce Web portal with over 7.8 million members. Under the terms of
the agreement, we are the sole provider of a private labeled version of
XOOM.com's Web storefront building and hosting products and services and are the
sole provider of eCommerce processing services to XOOM.com's eCommerce
customers. In addition, XOOM.com is reselling our eCommerce services and we are
developing XOOM.com's Internet mall located at WWW.XOOMMEMBERSTORES.COM.
CB RICHARD ELLIS. In March 1999, we entered into an electronic commerce
services agreement with CB Richard Ellis (NYSE: CBG), one of the world's largest
building management and real estate services companies with over 12,000
properties under management and over $1 billion of revenue during 1998. Under
this agreement, we have been engaged to develop, manage, and service CB Richard
Ellis' eCommerce mall and client extranet. This Web site is designed to permit
CB Richard Ellis personnel to conduct all of their corporate materials
purchasing, including computers and building and maintenance supplies, and all
global facilities management by means of the Internet. In addition, CB Richard
Ellis will be able to offer to the tenants in the buildings they manage volume
purchasing services on the Internet for a variety of office products and
supplies. In connection with this agreement, we issued to CB Richard Ellis
warrants exercisable for up to 550,000 shares of our common stock at an exercise
price of $11.00 per share, which warrants are earned and vest upon the
achievement by CB Richard Ellis of designated eCommerce volume milestones
through our ICC.
GATEWAY. In March 1999, we entered into an agreement with Gateway Inc.
(NYSE: GTW), a manufacturer of personal and business computers and service
provider. Under the terms of this agreement, we will offer our Internet
storefront services package, including Web site design, hosting, and transaction
processing services, to Gateway customers.
OTHER RESELLERS. We have also recently entered into reseller agreements,
pursuant to which the reseller offers our services to their customers, with
FedPage (www.fedpage.com), a division of Federal Business Council, Inc., the
industry leader in the production of on site federal technology shows, Ayrix
Technologies, OKC Webshopper, Country Wide Net, Hill Country Network, Encom
Industries, Epicycle Business Solutions, Integrated Systems Solutions, and Looks
Creative Designing Arts.
OUR HISTORY AND STRUCTURE
We were incorporated under the laws of the State of Nevada on April 13, 1995
under the name Video Calling Card, Inc. and on June 2, 1998 acquired all of the
outstanding capital stock of
4
Netgateway, a Nevada corporation (formerly, eClassroom.com) in exchange for
5,900,000 shares of our common stock. Simultaneously with this acquisition, we
acquired the assets of Infobahn, LLC d/b/a Digital Genesis, an eCommerce
applications developer, in exchange for 400,000 shares of common stock. As of
January 15, 1999, through our subsidiary StoresOnline.com, Ltd., an Alberta,
Canada corporation, we acquired Spartan Multimedia, Inc., an Internet storefront
developer and storefront service provider, in exchange for 371,429 shares of
Class B common stock of StoresOnline.com, which shares are exchangeable for an
aggregate of 371,429 shares of our common stock. We were reincorporated under
the laws of the State of Delaware prior to the date of this prospectus.
------------------------
UNLESS OTHERWISE STATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE
EFFECT TO
- THE REPRESENTATIVE'S WARRANTS OR THEIR EXERCISE,
- THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR ITS EXERCISE,
- UP TO 6,000,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE
EXERCISE OF OPTIONS WHICH MAY BE GRANTED PURSUANT TO OUR EXISTING STOCK
OPTION PLANS, OF WHICH, OPTIONS EXERCISABLE FOR AN AGGREGATE OF 3,771,921
SHARES OF COMMON STOCK HAVE BEEN GRANTED PRIOR TO THE DATE OF THIS
PROSPECTUS AND
- UP TO AN AGGREGATE OF 2,663,779 SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF OUTSTANDING WARRANTS OR UPON THE CONVERSION OF CONVERTIBLE
SECURITIES OR UPON THE EXCHANGE OF EXCHANGEABLE SECURITIES.
UNLESS OTHERWISE STATED, THE INFORMATION IN THIS PROSPECTUS REFLECTS
- ANY STOCK SPLITS TO DATE, AND
- OUR SPRING 1999 PRIVATE PLACEMENTS OF SECURITIES. PLEASE SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES."
5
THE OFFERING
Common stock offered............ 2,500,000 shares
Common stock outstanding
immediately prior to this
offering...................... 9,843,404 shares(1)
Common stock outstanding
immediately following this
offering...................... 12,343,404 shares(1)
Use of proceeds................. We intend to use the net proceeds of this offering to
repay indebtedness, to increase marketing and research and
development, to acquire additional capital equipment, and
for general corporate and working capital purposes,
including possible acquisitions of, and investment in,
businesses and technologies. See "Use of Proceeds."
Proposed Nasdaq National Market
trading symbol................ NGWY
OTC Bulletin Board trading
symbol........................ NGWY
Risk factors.................... An investment in our common stock is highly speculative
and involves a high degree of risk. You should read the
"Risk Factors" section beginning on page 10.
- ------------------------
(1) Does not reflect the representative's warrants or their exercise, the
underwriters' over-allotment option or its exercise, up to 6,000,000 shares
of common stock reserved for issuance upon the exercise of options which may
be granted pursuant to our existing stock option plans, of which, options
exercisable for an aggregate of 3,771,921 shares of common stock have been
granted prior to the date of this prospectus, up to an aggregate of
2,207,350 shares of common stock issuable upon the exercise of outstanding
warrants, and up to 456,429 shares of common stock issuable upon the
conversion of convertible securities or upon the exchange of exchangeable
securities.
6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following selected statements of operations data for the period from our
inception on March 4, 1998 through June 30, 1998 and the selected balance sheet
data as of June 30, 1998 are derived from our consolidated financial statements
and related notes included elsewhere in this prospectus audited by KPMG LLP, our
independent auditors. The statement of operations data for the nine months ended
March 31, 1999 and the selected balance sheet data at March 31, 1999 are derived
from the unaudited consolidated financial statements included elsewhere in this
prospectus, and in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
our financial position and results of operation. The results of operations for
any interim period are not necessarily to be expected for the entire year. The
selected statement of operations data for the period from our inception on March
4, 1998 through June 30, 1998 includes the results of operations of Digital
Genesis from June 2, 1998, its date of acquisition, and the pro forma selected
statement of operations data for such period includes the operations of Digital
Genesis and Spartan Multimedia, Inc. as if they were acquired by us on March 4,
1998. The selected statement of operations data for the nine months ended March
31, 1999 includes the results of operations of Spartan Multimedia, Inc. from
January 15, 1999, its date of acquisition, and the pro forma selected statement
of operations data for such period includes the operations of Spartan
Multimedia, Inc. as if it was acquired by us on July 1, 1998. The pro forma
balance sheet data as of March 31, 1999 is adjusted to reflect the net proceeds
of $2,779,000 from our spring 1999 private placements of securities, and the pro
forma, as adjusted balance sheet data as of March 31, 1999 is adjusted to
reflect the following:
- the net proceeds of $2,779,000 from our spring 1999 private placements of
securities, and
- the receipt of estimated net proceeds of approximately $32.0 million from
the sale of our common stock at the assumed public offering price of
$14.625 per share and the initial application of these proceeds as
described under "Use of Proceeds."
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes appearing elsewhere
in this prospectus.
7
PERIOD FROM MARCH 4, 1998 CUMULATIVE PERIOD
(INCEPTION) THROUGH NINE MONTHS ENDED FROM MARCH 4, 1998
JUNE 30, 1998 MARCH 31, 1999 (INCEPTION)
---------------------------- ---------------------------- THROUGH MARCH 31,
ACTUAL PRO FORMA ACTUAL PRO FORMA 1999
------------- ------------- ------------- ------------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 2,800 $ 90,993 $ 198,759 $ 202,200 $ 201,559
Total operating expenses........ 4,555,459 4,690,167 6,983,543 7,152,164 11,539,002
Interest expense................ 19,277 19,277 313,744 313,744 333,021
Net loss before extraordinary
item.......................... (4,571,936) (4,618,451) (7,153,257 (1) (7,318,437 (1) (11,725,193)(1)
Loss before extraordinary item
per weighted average common
share outstanding (basic and
diluted)...................... (0.84) (0.81) (0.83 (1) (0.85 (1) (1.54)(1)
Weighted average common shares
outstanding (basic and
diluted)...................... 5,416,242 5,721,327 8,659,851 8,659,851 7,628,895
MARCH 31, 1999
---------------------------------------
ACTUAL PRO FORMA PRO FORMA,
JUNE 30, 1998 ------------ ----------- AS ADJUSTED
------------- (UNAUDITED) (UNAUDITED) ------------
(UNAUDITED)
BALANCE SHEET DATA:
Current assets........................................... $ 371,467 $ 325,928 2,579,730 32,510,355
Total assets............................................. 871,552 1,731,497 4,139,146 33,915,925
Working capital (deficit)................................ (1,959,776) (972,516) 2,824 31,471,911
Long-term debt........................................... 367,892 -- -- --
Stockholders' equity (deficit)........................... (1,827,583) 433,053 1,562,240 32,877,481
- ------------------------
(1) Before extraordinary gain of $1,853,232 relating to extinguishment of
indebtedness of $.21, $.21, and $.24 per weighted-average common shares
outstanding during the nine months ended March 31, 1999 actual, pro forma
and the cumulative period from March 4, 1998 (inception) through March 31,
1999, respectively.
8
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements and information relating
to Netgateway. We intend to identify forward-looking statements in this
prospectus by using words such as "believes," "intends," "expects," "may,"
"will," "should," "plan," "projected," "contemplates," "anticipates,"
"estimates," "predicts," "potential," "continue," or similar terminology. These
statements are based on our beliefs as well as assumptions we made using
information currently available to us. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. Because these statements reflect our
current views concerning future events, these statements involve risks,
uncertainties, and assumptions. Actual future results may differ significantly
from the results discussed in the forward-looking statements. Some, but not all,
of the factors that may cause such a difference include those which we discuss
in the Risk Factors section of this prospectus beginning on page 10.
9
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A HIGH
DEGREE OF RISK, AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD A COMPLETE
LOSS. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH
THE OTHER INFORMATION IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND
THE RELATED NOTES, BEFORE YOU DECIDE TO BUY OUR COMMON STOCK.
RISKS SPECIFIC TO NETGATEWAY
WE HAVE HAD A DEFICIT IN STOCKHOLDERS' EQUITY AND WE ANTICIPATE FUTURE
LOSSES
We have incurred substantial losses since our inception and we anticipate
continuing to incur substantial losses for the foreseeable future. As of June
30, 1998 and as of March 31, 1999, we had a working capital (deficit) of
$(1,959,776), and $(972,516), respectively, and stockholders' equity (deficit)
of $(1,827,583) at June 30, 1998. See our financial statements and the related
notes. We generated revenues of $2,800 during the period from our inception on
March 4, 1998 through June 30, 1998, and $198,759 for the nine months ended
March 31, 1999. For the period from our inception on March 4, 1998 through June
30, 1998 and the nine months ended March 31, 1999, we incurred net losses of
$(4,571,936), and $(5,300,025), respectively. We may never achieve
profitability. In addition, during the period from our inception on March 4,
1998 through June 30, 1998 and during the nine months ended March 31, 1999, we
recorded negative cash flows from operations of $(253,119) and $(2,982,683),
respectively. To succeed, we must leverage our existing relationships and
develop new relationships to substantially increase our revenue derived from
more comprehensive eCommerce services. We have expended and will continue to
expend significant resources to build our internal systems, to grow our
infrastructure, to add additional participating companies and employees, and to
establish access to the ICC platform for participating companies, directly and
as resellers. These development expenses must be incurred well in advance of the
recognition of revenue. Under generally accepted accounting principles we
recognize revenue only upon completion of a customer transaction through the
ICC. This requires the realization of expenses in advance of associated related
revenue. Our performance will depend in large part upon our ability to estimate
accurately these resource requirements and the revenues generated by customers
engaging in the transactions through the ICC. To date, the volume of our
transactions has been limited, and, accordingly, the revenue recognized has been
minimal. We intend to continue to invest heavily in acquisitions,
infrastructure, development, and marketing. As result, we may not be able to
achieve or sustain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--In General."
BECAUSE WE HAVE BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME, THERE IS
LIMITED INFORMATION UPON WHICH INVESTORS CAN EVALUATE OUR BUSINESS
We began our operations in March 1998 and are currently a development stage
company. Although we have recently entered into agreements with eCommerce
resellers providing us with access to more than eight million potential clients,
we are currently providing eCommerce transaction processing services to only
approximately 550 clients. Consequently, we have a very limited operating
history upon which you may base an evaluation of us and determine our prospects
for achieving our intended business objectives. We are prone to all of the risks
inherent to the establishment of any new business venture. You should consider
the likelihood of our future success to be highly speculative in light of our
limited operating history, as well as the limited resources, problems, expenses,
risks, and complications frequently encountered by similarly situated companies
in the early stages of development, particularly companies in new and rapidly
evolving markets, such as eCommerce. To address these risks, we must, among
other things:
- maintain and increase our client base;
- implement and successfully execute our business and marketing strategy;
10
- continue to develop and upgrade our technology and transaction processing
systems;
- continually update and improve our service offerings and features;
- provide superior customer service;
- respond to industry and competitive developments; and
- attract, retain, and motivate qualified personnel.
We may not be successful in addressing these risks. If we are unable to do
so, our business prospects, financial condition, and results of operations would
be materially and adversely affected.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY AFFECT OUR STOCK PRICE
As a result of our limited operating history and the emerging nature of the
markets in which we compete, we believe that quarter-to-quarter comparisons of
results of operations for preceding quarters are not necessarily meaningful. You
should not rely on the results of any interim as an indication of our future
performance. Additionally, quarterly results of operations may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside our control.
If in some future quarter, whether as a result of such a fluctuation or
otherwise, our results of operations fall below the expectations of securities
analysts and investors, the trading price of our common stock would likely be
materially and adversely affected. Factors that may cause our quarterly results
to fluctuate include, among others:
- our ability to retain existing clients and eCommerce resellers, to attract
new clients and eCommerce resellers at a steady rate, and to maintain
client satisfaction;
- the announcement or introduction of new services and products by us and
our competitors;
- price competition or higher prices in the industry;
- pricing of hardware and software required for the transaction of
eCommerce;
- the level of use of the Internet and online services and the rate of
market acceptance of the Internet and other online services for
transacting commerce;
- our ability to upgrade and develop our systems and infrastructure in a
timely and effective manner;
- our ability to attract, train, and retain skilled management, strategic,
technical, and creative professionals;
- technical difficulties, system downtime, or Internet brownouts;
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations, and infrastructure;
- unanticipated technical, legal, and regulatory difficulties with respect
to use of the Internet; and
- general economic conditions and economic conditions specific to Internet
technology usage and eCommerce.
OUR MARKETING STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT IN SUCCESS
To date, we have conducted limited marketing efforts directly and have
relied substantially upon the marketing efforts of the eCommerce resellers with
which we have contracts or strategic relationships. All of our marketing
efforts, including our marketing through these resellers, have been largely
untested in the marketplace, and may not result in sales of our products and
services. To
11
penetrate our market, we will have to exert significant efforts to create
awareness of, and demand for, our products and services. With respect to our
marketing efforts conducted directly, we intend to begin to do the following
after this offering:
- advertise on the Internet;
- advertise on television in selected markets;
- direct mail;
- targeted e-mail campaigns;
- advertise in technology, financial, and business publications having wide
readership; and
- expand our sales staff.
With respect to our marketing efforts conducted through resellers, we intend to
do the following after this offering:
- create a group within our sales staff trained to assist resellers in
marketing our products and services to their customers, members,
employees, and relationships;
- create branded promotional brochures and other marketing materials to
inform resellers and their constituencies as to our products and services,
and
- advertise in trade publications in strategic industries.
Our failure to further develop our marketing capabilities and successfully
market our products and services could have a material adverse effect on our
business, prospects, financial condition, and results of operations. See "Use of
Proceeds," "Business--Business Strategy," "Business--Clients and Strategic
Relationships," and "Business--Sales and Marketing."
IF WE ARE UNABLE TO UPGRADE OUR INFRASTRUCTURE, WE MAY BE UNABLE TO PROCESS
AN INCREASED VOLUME OF TRANSACTIONS
A key element of our strategy is to provide on a cost-effective basis the
means by which our clients can generate a high volume of eCommerce transactions
through the use of our hardware and software infrastructure. If the volume of
transactions through our infrastructure substantially increases, we will have to
expand and further upgrade our technology, transaction processing systems, and
hardware and software infrastructure to accommodate these increases or our
systems may suffer from unanticipated system disruptions, slower response times,
degradation in levels of customer service, impaired quality and speed of
transaction processing, and delays in reporting accurate financial information.
We may be unable to effectively upgrade and expand our hardware and software
infrastructure or to integrate smoothly any newly developed or purchased
software modules with our existing systems, which could have a material adverse
effect on our business, prospects, financial condition, and results of
operations. See "Business--Business Strategy."
WE RELY ON INTERNALLY DEVELOPED SYSTEMS WHICH ARE INEFFICIENT, WHICH MAY PUT
US AT A COMPETITIVE DISADVANTAGE
We use an internally developed system for a portion of our transaction
processing software, as well as the software required to interconnect our
clients' systems with our own. As we developed these systems primarily to
support the rapid growth of transaction submission volume and customer service
and less on traditional accounts, control, and reporting, these systems are
inefficient and require a significant amount of manual effort to prepare
information for financial and accounting reporting. Such manual effort is
time-consuming and costly and may place us at a competitive disadvantage when
compared to competitors with more efficient systems. We intend to upgrade and
expand our claims
12
processing systems and to integrate newly-developed and purchased modules with
our existing systems in order to improve the efficiency of our reporting methods
and support increased transaction volume, although we are unable to predict
whether these upgrades will improve our competitive position when compared to
our competitors.
BECAUSE OUR MANAGEMENT WILL CONTINUE TO OWN A SUBSTANTIAL PORTION OF OUR
COMMON STOCK FOLLOWING THIS OFFERING, INVESTORS MAY HAVE DIFFICULTY
OBTAINING THE NECESSARY STOCKHOLDER VOTE FOR CORPORATE ACTIONS CONTRARY TO
THE WISHES OF MANAGEMENT
Upon the completion of this offering, our current directors and executive
officers will together beneficially own approximately 3,085,000, or 24.6%, of
the outstanding shares of common stock, or approximately 23.9% of the
outstanding shares of our common stock if the underwriters' over-allotment
option is exercised in full. As a result of their stock ownership:
- our current officers and directors will have the ability to substantially
influence the outcome of all matters on which stockholders are entitled to
vote, including the elections of our directors and the approval of
significant corporate transactions; and
- investors in this offering may have difficulty obtaining the necessary
stockholder vote required for corporate actions contrary to the wishes of
management.
See "Principal Stockholders."
INVESTORS WILL NOT HAVE THE OPPORTUNITY TO REVIEW THE SPECIFIC ALLOCATION OF
THE NET PROCEEDS OF THIS OFFERING IN DECIDING WHETHER TO PURCHASE OUR
COMMON STOCK
Management has allocated approximately $27.2 million, or 85.0%, of the
estimated net proceeds of this offering for marketing, research and development,
and general corporate and working capital purposes. Accordingly, our management
will have broad discretion in how to use the net proceeds of this offering, and
investors will not have the opportunity to review the specific allocation of our
net proceeds in deciding whether to purchase our common stock. The failure of
management to apply these proceeds effectively could have a material adverse
affect on our business, prospects, financial condition, and results of
operation. See "Use of Proceeds."
OUR MANAGEMENT TEAM IS RELATIVELY NEW, WE HAVE LIMITED SENIOR MANAGEMENT
RESOURCES, AND WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL; WE
MAY BE UNABLE TO EFFECTIVELY MANAGE GROWTH WITH OUR LIMITED RESOURCES
From our inception on March 4, 1998 to June 30, 1998, and during the nine
months ended March 31, 1999, we expanded from seven to 16 employees and from 16
to 47 employees, respectively. Some of our officers have no prior senior
management experience in public companies. Our new employees include a number of
key managerial, technical, financial, marketing, and operations personnel who
have not yet been fully integrated into our operations and we expect to add
additional key personnel in the near future. We expect the expansion of our
business to place a significant strain on our limited managerial, operational,
and financial resources. We will be required to expand our operational and
financial systems significantly and to expand, train, and manage our work force
in order to manage the expansion of our operations. Our failure to fully
integrate our new employees into our operations could have a material adverse
effect on our business, prospects, financial condition, and results of
operations. Our future success will depend in large part on our ability to
attract, train, and retain additional highly skilled executive level,
management, creative, technical, and sales personnel. Competition is intense for
these types of personnel from other technology companies and more established
organizations, many of which have significantly larger operations and greater
financial, marketing, human, and other resources than we have. We may not be
successful in attracting and retaining qualified personnel on a timely basis, on
competitive terms, or at all. If we are not successful
13
in attracting and retaining these personnel, our business, prospects, financial
condition, and results of operations will be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Business Strategy," and "Business-- Employees."
WE DEPEND UPON OUR SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY COULD
PUT US AT A COMPETITIVE DISADVANTAGE AS OUR CHAIRMAN AND CHIEF EXECUTIVE
OFFICER HAS PLEDGED HIS STOCK, WE MAY EXPERIENCE A CHANGE OF CONTROL
Our success depends largely on the skills of certain key management and
technical personnel. The loss or unavailability of any of these individuals for
any significant period of time could have a material adverse effect on our
business, prospects, financial condition, and results of operations. We have
obtained, own, and are the sole beneficiary of, key-person life insurance in the
amount of $1,000,000 on the life each of Keith D. Freadhoff, our Chairman of the
Board of Directors and Chief Executive Officer, Donald M. Corliss, Jr., our
President and a Director, and David Bassett-Parkins, our Chief Operating
Officer, Chief Financial Officer, and a Director. We cannot guarantee that we
will be able to replace any of these key individuals in the event their services
are unavailable. See "Management-- Employment Agreements."
Mr. Freadhoff has pledged 825,000 shares of common stock held by him as
security for his personal financial obligations. At the date of this prospectus,
these obligations are approximately $1,100,000. If Mr. Freadhoff defaults on
these obligations, Mr. Freadhoff may lose beneficial ownership of these shares,
which could result in a change of control of Netgateway and would have a
material adverse effect on our business, prospects, financial condition, and
results of operations. See "Principal Stockholders."
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Our ability to compete effectively will depend on our ability to maintain
the proprietary nature of our services and technologies, including our
proprietary software and the proprietary software of others with which we have
entered into software licensing agreements. We hold no patents and rely on a
combination of trade secrets and copyright laws, nondisclosure, and other
contractual agreements and technical measures to protect our rights in our
technological know-how and proprietary services. We depend upon confidentiality
agreements with our officers, directors, employees, consultants, and
subcontractors to maintain the proprietary nature of our technology. These
measures may not afford us sufficient or complete protection, and others may
independently develop know-how and services similar to ours, otherwise avoid our
confidentiality agreements, or produce patents and copyrights that would
materially and adversely affect our business, prospects, financial condition,
and results of operations. We believe that our services are not subject to any
infringement actions based upon the patents or copyrights of any third parties;
however, our know-how and technology may in the future be found to infringe upon
the rights of others. Others may assert infringement claims against us, and if
we should be found to infringe upon their patents or copyrights, or otherwise
impermissibly utilize their intellectual property, our ability to continue to
use our technology could be materially restricted or prohibited. If this event
occurs, we may be required to obtain licenses from the holders of this
intellectual property, enter into royalty agreements, or redesign our products
and services so as not to utilize this intellectual property, each of which may
prove to be uneconomical or otherwise impossible. Licenses or royalty agreements
required in order for us to use this technology may not be available on terms
acceptable to us, or at all. These claims could result in litigation, which
could materially adversely affect our business, prospects, financial condition,
and results of operations. See "Business-- Intellectual Property."
14
WE MAY BE HELD LIABLE FOR ONLINE CONTENT PROVIDED BY THIRD PARTIES
We may face potential liability for defamation, negligence, copyright,
patent, or trademark infringement and other claims based on the nature and
content of the materials that appear on storefronts and Web pages that utilize
our services. Claims of this type have been brought, and sometimes successfully
pursued, against online services. Although we carry general liability insurance,
our insurance may not cover all claims or may not be adequate to indemnify us
for any liability that may be imposed. Any imposition of liability, particularly
liability that is not covered by insurance or is in excess of our insurance
coverage, could have a material adverse effect on our reputation, business,
prospects, financial condition, and results of operations.
WE INTEND TO USE FUNDS WHICH WE WOULD OTHERWISE USE FOR GROWTH TO REPAY
INDEBTEDNESS TO INVESTORS IN OUR MAY 1999 PRIVATE PLACEMENT, WHICH COULD
LIMIT OUR ABILITY TO EXPAND
We intend to use approximately $2,080,000, or 6.5%, of the net proceeds of
this offering to repay the promissory notes issued in our private placement
which closed in May 1999. As a result, we will be unable to utilize these funds
for growth, which could limit our ability to implement our current plans for
expansion. See "Use of Proceeds" "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING
We believe that the net proceeds from this offering, together with
anticipated revenues from operations, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 18 months. Our belief is based on our operating plan which in turn is
based on assumptions, which may prove to be incorrect. As a result, our
financial resources may not be sufficient to satisfy our capital requirements
for this period. In addition, we may need to raise significant additional funds
sooner in order to support our growth, develop new or enhanced services and
products, respond to competitive pressures, acquire or invest in complementary
or competitive businesses or technologies, or take advantage of unanticipated
opportunities. If our financial resources are insufficient and, in any case,
after this 18-month period, we will require additional financing in order to
meet our plans for expansion. We cannot be sure that this additional financing,
if needed, will be available on acceptable terms or at all. Furthermore, any
additional debt financing, if available, may involve restrictive covenants,
which may limit our operating flexibility with respect to business matters. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our existing stockholders will be reduced, our
stockholders may experience additional dilution in net book value per share, and
such equity securities may have rights, preferences, or privileges senior to
those of our existing stockholders. If adequate funds are not available on
acceptable terms, we may be unable to develop or enhance our services and
products, take advantage of future opportunities, repay debt obligations as they
become due, or respond to competitive pressures, any of which would have a
material adverse effect on our business, prospects, financial condition, and
results of operations. See "Use of Proceeds," "Dilution," and
"Business--Business Strategy."
WE COULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR
MATERIAL THIRD PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT
Many currently installed computer systems and software products are coded to
accept only two-digit entries to identify a year in the date code field.
Consequently, on January 1, 2000, many of these systems could fail or
malfunction because they may not be able to distinguish between 20th century
dates and 21st century dates. Accordingly, in the coming year, many companies,
including our customers, potential customers, vendors, and strategic partners,
may need to upgrade their systems to comply with applicable "Year 2000"
requirements.
15
Because we and our clients are dependent, to a very substantial degree, upon
the proper functioning of our and their computer systems, a failure of our or
their systems to correctly recognize dates beyond December 31, 1999 could
materially disrupt our operations, which could materially and adversely affect
our business, prospects, financial condition, and results of operations.
Additionally, our failure to provide Year 2000 compliant products and services
to our clients could result in financial loss, harm to our reputation, and legal
liability. Likewise, the failure of the computer systems and products of the
third parties with which we transact business to be Year 2000 compliant could
materially disrupt their and our operations, which could materially and
adversely affect our business, prospects, financial condition, and results of
operations. We have already completed an internal review, and we are conducting
a formal assessment to determine the Year 2000 readiness of our proprietary
software. We are also in the process of contacting third party vendors,
licensors of hardware, software, and services and clients regarding their Year
2000 readiness. Following our assessment and after contacting these third
parties, we will be able to make an evaluation of our state of readiness, risks,
and costs, and determine whether a contingency plan is necessary. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
BECAUSE WE WILL NOT PAY CASH DIVIDENDS, INVESTORS MAY HAVE TO SELL THEIR
SHARES IN ORDER TO REALIZE THEIR INVESTMENT
We have not paid any cash dividends on our common stock and do not intend to
pay cash dividends in the foreseeable future. We intend to retain future
earnings, if any, for reinvestment in the development and expansion of our
business. Any credit agreements into which we may enter with institutional
lenders may restrict our ability to pay dividends. Whether we pay cash dividends
in the future will be at the discretion of our board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, and any other factors that the board of directors decides is
relevant. See "Dividend Policy" and "Description of Securities--Common Stock."
BECAUSE WE DEPEND UPON A SINGLE SITE FOR OUR COMPUTER AND COMMUNICATIONS
SYSTEMS WE ARE MORE VULNERABLE TO THE EFFECTS OF NATURAL DISASTERS,
COMPUTER VIRUSES, AND SIMILAR DISRUPTIONS
Our ability to successfully process transactions and provide high-quality
customer service largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and software systems. Our proprietary
and licensed software resides solely on our servers, all of which, as well as
all of our communications hardware, are located in a monitored server facility
in Irvine, California. Our systems and operations are in a secured facility with
hospital-grade electrical power, redundant telecommunications connections to the
Internet backbone, uninterruptible power supplies, and generator back-up power
facilities. In addition, we maintain redundant systems for backup and disaster
recovery. Despite these safeguards, we remain vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake, and similar events. In addition, we do not, and may not
in the future, carry sufficient business interruption insurance to compensate us
for losses that may occur. Despite our implementation of Internet security
measures, our servers are vulnerable to computer viruses, physical or electronic
break-ins, and similar disruptions, which could lead to interruptions, delays,
loss of data, or the inability to process client transactions. The occurrence of
any of these events could have a material adverse effect on our business,
prospects, financial condition, and results of operations. See
"Business--Facilities."
USERS MAY CONFUSE OTHER COMPANIES' DOMAIN NAMES WITH OUR OWN
We have registered with the InterNIC registration service the Internet
domain names: www.netgateway.net, www.netgateway.org, www.federalbuyersmall.com,
www.storesonlinemall.com, www.solint.net, www.solint.netwww.Clevelandstores.com,
www.Clevelande-mall.com, www.Clevelandemall.com, www.E-Cart.com,
www.golfmate.com, www.openemail.net,
16
www.opentrade.net, www.eknowledge.net, www.dgenesis.com, www.paulrodriguez.com,
www.communicationsgroup.com, www.quickgrill.com, www.flashgrill.com,
www.afisteaks.com, and www.storesonline.com. We have registered with
Internic.com the Internet domain names: www.millenniumemall.com, AND
www.millenniumemall.net. However, there are other substantially similar domain
names which are registered by companies which may compete with us. In addition,
new domains may be added in the future, allowing combinations and similar domain
names that may be confusingly similar to our own. There can be no assurance that
17
potential users and advertisers will not confuse our domain name with other
similar domain names. If that confusion occurs,
- we may inadvertently lose business to a competitor,
- we may have to adjust our advertising rates and service fees accordingly,
or
- some users of our services may have negative experiences with other
companies on their Web sites that those users erroneously associate with
us. See "Business--Intellectual Property."
SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER
TAKEOVER ATTEMPTS
Some of the provisions of our certificate of incorporation and our by-laws
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. See "Description of Securities."
RISKS SPECIFIC TO OUR INDUSTRY
INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS
The processing of eCommerce transactions by means of our hardware and
software infrastructure involves the transmission and analysis of confidential
and proprietary information of the consumer, the merchant, or both, as well as
our own confidential and proprietary information. The compromise of our security
or misappropriation of proprietary information could have a material adverse
effect on our business, prospects, financial condition, and results of
operations. We rely on encryption and authentication technology licensed from
other companies to provide the security and authentication necessary to effect
secure Internet transmission of confidential information, such as credit
information and proprietary consumer information. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the technology used by us
to protect client transaction data. Anyone who is able to circumvent our
security measures could misappropriate proprietary information or cause
interruptions in our operations, as well as the operations of the merchant. We
may be required to expend significant capital and other resources to protect
against security breaches or to minimize problems caused by security breaches.
Concerns over the security of the Internet and other electronic transactions and
the privacy of consumers and merchants may also inhibit the growth of the
Internet and other online services generally, especially as a means of
conducting commercial transactions. To the extent that our activities or the
activities of others involve the storage and transmission of proprietary
information, security breaches could damage our reputation and expose us to a
risk of loss or litigation and possible liability. Our security measures may not
prevent security breaches. Our failure to prevent these security breaches may
have a material adverse effect on our business, prospects, financial condition,
and results of operations.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF ECOMMERCE CONTINUES TO
GROW
Our future revenues and any future profits are substantially dependent upon
the widespread acceptance and use of the Internet and other online services as
an effective medium of commerce by merchants and consumers. Rapid growth in the
use of, and interest in, the Internet, the Web, and online services is a recent
phenomenon, and may not continue on a lasting basis. In addition, customers may
not adopt, and continue to use, the Internet and other online services as a
medium of commerce. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and few services and products have generated profits. For us to be
successful, consumers of both retail and business to business services must be
willing to accept and use novel and cost efficient ways of conducting business
and exchanging information.
18
In addition, the public in general may not accept the Internet and other
online services as a viable commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies and performance
improvements. To the extent that the Internet and other online retail and
business to business services continue to experience significant growth in the
number of users, their frequency of use, or in their bandwidth requirements, the
infrastructure for the Internet and online services may be unable to support the
demands placed upon them. In addition, the Internet or other online services
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Significant issues
concerning the commercial use of the Internet and online services technologies,
including security, reliability, cost, ease of use, and quality of service,
remain unresolved and may inhibit the growth of Internet business solutions that
utilize these technologies. Changes in, or insufficient availability of,
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online services generally and our product and services in
particular. If use of the Internet and other online services does not continue
to grow or grows more slowly than we expect, if the infrastructure for the
Internet and other online services does not effectively support the growth that
may occur, or if the Internet and other online services do not become a viable
commercial marketplace, our business, prospects, financial condition, and
results of operations could be materially adversely affected.
WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ECOMMERCE, THE ECOMMERCE
SERVICES INDUSTRY, AND CUSTOMER DEMANDS CONTINUE TO EVOLVE
The Internet, the eCommerce, and the eCommerce services industry are
characterized by:
- rapid technological change;
- changes in user and customer requirements and preferences;
- frequent new product and service introductions embodying new technologies;
and
- the emergence of new industry standards and practices that could render
proprietary technology and hardware and software infrastructure obsolete.
Our success will depend, in part, on our ability to:
- enhance and improve the responsiveness and functionality of our online
transaction processing services;
- license or develop technologies useful in our business on a timely basis,
enhance our existing services, develop new services and technology that
address the increasingly sophisticated and varied needs of our prospective
or current customers; and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of additional proprietary technology and the development of
additional services will involve significant technical and business risks. We
may not be able to successfully adapt to these demands. Our failure to respond
in a timely manner to changing market conditions or client requirements would
have a material adverse effect on our business, prospects, financial condition,
and results of operations. See "Business--Business Strategy."
19
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY
While the market for eCommerce services is relatively new, it is already
highly competitive and characterized by an increasing number of entrants that
have introduced or developed products and services similar to those offered by
us. We believe that competition will intensify and increase in the future. Our
target market is rapidly evolving and is subject to continuous technological
change. As a result, our competitors may be better positioned to address these
developments or may react more favorably to these changes, which could have a
material adverse effect on our business, prospects, financial condition, and
results of operations. We compete on the basis of a number of factors, including
the attractiveness of the eCommerce services offered, the breadth and quality of
these services, creative design and systems engineering expertise, pricing,
technological innovation, and understanding clients' strategies and needs. Many
of these factors are beyond our control. Existing or future competitors may
develop or offer eCommerce services that provide significant technological,
creative, performance, price, or other advantages over the services offered by
us.
Our competitors can be divided into several groups:
- large systems integrators;
- Internet service providers and portals;
- large information technology consulting services providers;
- computer hardware and service vendors; and
- strategic consulting firms.
We also may compete with telecommunications companies. Although most of
these types of competitors to date have not offered a full range of Internet
professional services, many are currently offering these services or have
announced their intention to do so. These competitors at any time could elect to
focus additional resources in our target markets, which could materially
adversely affect our business, prospects, financial condition, and results of
operations. Many of our current and potential competitors have longer operating
histories, larger customer bases, longer relationships with clients, and
significantly greater financial, technical, marketing, and public relations
resources than we do. Competitors that have established relationships with large
companies, but have limited expertise in providing Internet solutions, may
nonetheless be able to successfully use their client relationships to enter our
target market or prevent our penetration into their client accounts. We believe
that our primary competitors currently include, without limitation, Broadvision,
Open Market, Commerce One, Intel, Microsoft, AT&T, Intershop, MCI, Yahoo!
Stores, ICAT, GE Information Services, IBM, and smaller Internet services
providers.
Additionally, in pursuing acquisition opportunities we may compete with
other companies with similar growth strategies, certain of which may be larger
and have greater financial and other resources than we have. Competition for
these acquisition targets likely could also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition.
There are relatively low barriers to entry into our business. We have no
patented, and only a limited amount of other proprietary technology that would
preclude or inhibit competitors from entering the eCommerce services market.
Therefore, we must rely on the skill of our personnel and the quality of our
client service. The costs to develop and provide eCommerce services are
relatively low. Therefore, we expect that we will continually face additional
competition from new entrants into the market in the future, and we are subject
to the risk that our employees may leave us and may start competing businesses.
The emergence of these enterprises could have a material adverse effect on our
business, prospects, financial condition, and results of operations. See
"Business--Industry Background--ECommerce Services Industry" and
"Business--Competition."
19
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS
We are not currently subject to direct regulation by any government agency
other than laws or regulations applicable generally to eCommerce, but we process
information which must, of necessity, remain confidential. Due to the increasing
popularity and use of the Internet and other online services, federal, state,
and local governments may adopt laws and regulations, or amend existing laws and
regulations, with respect to the Internet or other online services covering
issues such as user privacy, pricing, content, copyrights, distribution, and
characteristics and quality of products and services. Furthermore, the growth
and development of the market for eCommerce may prompt calls for more stringent
consumer protection laws to impose additional burdens on companies conducting
business online. The adoption of any additional laws or regulations may decrease
the growth of the Internet or other online services, which could, in turn,
decrease the demand for our services and increase our cost of doing business, or
otherwise have a material adverse effect on our business, prospects, financial
condition, and results of operations. Moreover, the relevant governmental
authorities have not resolved the applicability to the Internet and other online
services of existing laws in various jurisdictions governing issues such as
property ownership and personal privacy and it may take time to resolve these
issues definitively. Any new legislation or regulation, the application of laws
and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services, could have a material adverse effect on our business,
prospects, financial condition, and results of operations.
RISKS SPECIFIC TO THIS OFFERING
OUR COMMON STOCK TRADES SPORADICALLY, THE OFFERING PRICE OF OUR COMMON STOCK
IS ARBITRARY, THE MARKET PRICE OF OUR SECURITIES MAY BE VOLATILE, AND WE
MUST SATISFY THE APPLICABLE REQUIREMENTS FOR OUR COMMON STOCK TO TRADE ON
THE NASDAQ NATIONAL MARKET.
Our common stock currently trades sporadically on the OTC Bulletin Board. We
have applied to have our common stock quoted on the Nasdaq National Market
commencing on the date of this prospectus. Even if our common stock were quoted
on the Nasdaq National Market, the market for our common stock may not be an
active market. Accordingly, unless and until an active public market develops,
you may have difficulty selling your shares of common stock at a price that is
attractive to you.
The initial public offering price of the shares was arbitrarily determined
by negotiations between the underwriters and us principally on the basis of the
market price for our common stock prior to the date of this prospectus. See
"Underwriting." From time to time after this offering, the market price of our
common stock may experience significant volatility. Our quarterly results,
failure to meet analysts expectations, announcements by us or our competitors
regarding acquisitions or dispositions, new procedures or technology, changes in
general conditions in the economy, and general market conditions could cause the
market price of the common stock to fluctuate substantially. In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the trading prices of equity securities of many technology
companies. These price and volume fluctuations often have been unrelated to the
operating performance of the affected companies. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. This type of
litigation, regardless of the outcome, could result in substantial costs and a
diversion of management's attention and resources, which could materially
adversely affect our business, prospects, financial condition, and results of
operations.
Under the currently effective criteria for initial listing of securities on
the Nasdaq National Market, a company must have at least $75 million in market
capitalization, a minimum bid price of $5.00 per share, and securities in the
hands of the public with a market value of at least $20 million. For
20
continued listing, a company must maintain $50 million in market value, a
minimum bid price of $5.00, and a public float of at least $15 million. If we
cannot maintain the standards for continued listing, our common stock could be
subject to delisting from the Nasdaq National Market. Trading, if any, in our
common stock would then be conducted in either the Nasdaq SmallCap Market or in
the over-the-counter market on the OTC Bulletin Board established for securities
that do not meet the Nasdaq SmallCap Market listing requirements or in what are
commonly referred to as the "pink sheets." As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, our shares.
YOU MAY HAVE DIFFICULTY SELLING YOUR SHARES OF COMMON STOCK AND THE MARKET
PRICE OF THE COMMON STOCK MAY DECLINE IF CRUTTENDEN ROTH DISCONTINUES
MAKING A MARKET FOR ANY REASON
A significant number of the shares sold in this offering may be sold to
customers of the underwriters. These customers may engage in transactions for
the sale or purchase of the shares through or with the underwriters. Although it
has no obligation to do so, Cruttenden Roth intends to make a market in the
shares and may otherwise effect transactions in the common stock. If Cruttenden
Roth participates in the market, it may influence the market, if one develops,
for our common stock. Cruttenden Roth may discontinue making a market in the
common stock at any time. Moreover, if Cruttenden Roth sells the shares of
common stock issuable upon exercise of the representatives' warrants, it may be
required under the Exchange Act to temporarily suspend its market-making
activities. The price and liquidity of the common stock may be significantly
affected by the degree, if any, of its direct or indirect participation in the
market.
INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share exceeds the net tangible book
value per share of the outstanding common stock immediately after the offering.
Accordingly, if you purchase shares in this offering, you will
- pay a price per share which substantially exceeds the value of our assets
after subtracting our intangible assets and liabilities and
- contribute 76% of the total amount invested to date to fund us, but will
only own 20.2% of the shares of common stock outstanding.
We also have outstanding a large number of stock options and warrants to
purchase common stock with exercise prices significantly below the estimated
public offering price of the common stock. To the extent such options or
warrants are exercised, there will be further dilution. In addition, in the
event that any future financing should be in the form of, be convertible into,
or exchangeable for, equity securities, and upon the exercise of options and
warrants, investors may experience additional dilution. See "Dilution."
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY
AFFECT OUR STOCK PRICE
The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market after this offering, or
the perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. After this offering, we will have outstanding
12,343,404 shares of common stock. Of these shares, an aggregate of 2,950,000
shares, including the 2,500,000 shares being offered in this offering, will be
freely tradeable. Our directors and officers and a number of our stockholders
who hold shares in the aggregate have entered into lock-up
agreements by which they have agreed that they will not sell, directly or
indirectly, any shares of common stock without the prior written consent of the
underwriters for a period of six months from
21
the date of this prospectus. The number of shares of common stock and the dates
when these shares will become freely tradeable in the market is as follows:
NUMBER OF SHARES DATE
- ----------------- -----------------------------------------------------------------------------------------------
7,230,204 Six months from the date of this prospectus
1,713,200 Between six and twelve months from the date of this prospectus
As of the date of this prospectus, we have reserved an aggregate of
2,113,779 shares of common stock issuable upon the exercise of outstanding
warrants and convertible securities. Following this offering, we intend to file
a registration statement to register for issuance and resale the 6,000,000
shares of common stock reserved for issuance under our existing stock option
plans described in "Management--Stock Option Plans." We expect that registration
statement to become effective immediately upon filing. Shares issued upon the
exercise of stock options granted under the our stock option plans will be
eligible for resale in the public market from time to time subject to vesting
and, in the case of some options, the expiration of the lock-up agreements
referred to in the preceding paragraph.
Some of our stockholders, holding approximately 1,731,400 shares of common
stock or holding securities convertible into or exercisable or exchangeable for
shares of common stock, have the right, subject to a number of conditions and
limitations, to include their shares in registration statements relating to our
securities. By exercising their registration rights and causing a large number
of shares to be registered and sold in the public market, these holders may
cause the market price of the common stock to fall. In addition, any demand to
include these shares in our registration statements could have an adverse effect
on our ability to raise needed capital.
22
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $32.0 million
from the sale of the common stock offered by us in this offering, assuming a
public offering price of $14.625 per share. If the underwriters exercise their
over-allotment option in full, we will receive net proceeds of approximately
$36.9 million. These estimates are after deducting estimated underwriting
discounts and commissions and other fees and expenses payable by us.
We intend to use approximately $2,080,000, or 6.5%, of the net proceeds of
this offering to repay indebtedness incurred in connection with our May 1999
private placement of $2,000,000 principal amount of Series A 12% Senior Notes
due 2000 and 200,000 shares of common stock. The notes are due on the earlier of
April 30, 2000 or completion of this offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
We intend to use approximately $9.6 million, or 30.0%, of the estimated net
proceeds of this offering to expand our marketing efforts. See "Risk Factors --
Our Marketing Strategy Has Not Been Tested and May Not Result in Success."
We intend to use approximately $9.6 million, or 30.0%, of the estimated net
proceeds of this offering for research and development and for the continued
enhancement of our ICC eCommerce transaction processing system.
We intend to use approximately $4.8 million, or 15.0%, of the estimated net
proceeds of this offering for the acquisition of capital equipment to purchase
or otherwise acquire computers, servers, communication hardware and software,
and networking equipment.
The balance of the net proceeds, estimated to be approximately $6.0 million,
or 18.5%, of the estimated net proceeds of this offering will be used for
general corporate and working capital purposes to fund the ongoing cash flow and
capital requirements associated with our growth, including the retention and
training of additional personnel. We may also use a portion of the net proceeds
allocated for general corporate and working capital purposes to acquire, or
invest in, businesses and technologies. From time to time we evaluate such
potential acquisitions and we anticipate continuing to make such evaluations. In
this regard, we are currently evaluating certain acquisition and investment
opportunities; however, we cannot assure you that we will identify suitable
acquisition or investment candidates or that we will, in fact, complete any
acquisition or investment.
We believe that the net proceeds from this offering, together with
anticipated revenues from operations, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 18 months. Our belief is based on our operating plan which in turn is
based on assumptions, which may prove to be incorrect. As a result, our
financial resources may not be sufficient to satisfy our capital requirements
for this period. In addition, we may need to raise significant additional funds
sooner in order to support our growth, develop new or enhanced services and
products, respond to competitive pressures, acquire or invest in complementary
or competitive businesses or technologies, or take advantage of unanticipated
opportunities. If our financial resources are insufficient and, in any case,
after this 18-month period, we will require additional financing in order to
meet our plans for expansion. We cannot be sure that this additional financing,
if needed, will be available on acceptable terms or at all. Furthermore, any
additional debt financing, if available, may involve restrictive covenants,
which may limit our operating flexibility with respect to business matters. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our existing stockholders will be reduced, our
stockholders may experience additional dilution in net tangible book value per
share, and such equity securities may have rights, preferences, or privileges
senior to those of our existing stockholders. If adequate funds are not
available on acceptable terms, we may be unable to develop or enhance our
services and products, take advantage of future opportunities, repay debt
obligations as they become due, or respond to competitive pressures, any of
23
which would have a material adverse effect on our business, prospects, financial
condition, and results of operations. See "Risk Factors--We Cannot Predict Our
Future Capital Needs And May Not Be Able to Secure Additional Financing," "Use
of Proceeds," "Dilution," and "Business--Business Strategy."
Although, based upon our contemplated operations, business plan, and current
economic and industry conditions, the above is our best estimate of the amount,
timing, and allocation of the expenditures of the net proceeds of this offering,
such estimated amounts are subject to reallocation within the listed categories
or to new categories in response to a number of unanticipated events. These may
include changes in our business plans, new government regulations, changing
industry conditions, and future revenues and expenditures.
DIVIDEND POLICY
We have never paid or declared any cash dividends. We currently expect to
retain future earnings, if any, to finance the growth and development of our
business. Therefore, we do not anticipate paying any cash dividends on our
shares in the foreseeable future.
24
CAPITALIZATION
The following table sets forth, as of March 31, 1999:
- our actual short-term debt and capitalization,
- our as adjusted capitalization, giving effect to our receipt of net
proceeds of approximately $2,779,000 from our spring 1999 private
placements, and
- our as further adjusted capitalization, adjusted to give effect to our
receipt of proceeds of approximately $2,779,000 from our spring 1999
private placements and our receipt of net proceeds of approximately $32.0
million from the sale of the shares in this offering at the assumed public
offering price of $14.625 per share and the initial application of the net
proceeds of this offering as described under the heading "Use of
Proceeds."
The data below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes and other financial information included elsewhere
in this prospectus.
MARCH 31, 1999
---------------------------------------------------------
AS FURTHER ADJUSTED
AS ADJUSTED AFTER
AFTER SPRING 1999 SPRING 1999 PRIVATE
PRIVATE PLACEMENTS AND INITIAL
ACTUAL PLACEMENTS PUBLIC OFFERING
------------- ----------------- -----------------------
Short-term debt...................................... $ 497,500 $ 1,775,962 $ 287,500
Long-term debt....................................... --
Stockholders' equity
Common stock--$0.001 par value,
authorized--40,000,000 shares; issued and
outstanding--9,357,900 shares, actual; 9,795,834
shares as adjusted; and 12,295,834 shares, as
further adjusted................................. 9,358 9,796 12,296
Additional paid-in capital........................... 10,308,156 11,436,905 43,445,030
Deferred compensation................................ (12,500) (12,500) (12,500)
Accumulated deficit.................................. (9,871,961) (9,871,961) (10,567,345)
------------- ----------------- ------------
Total stockholders' equity........................... 433,053 1,562,240 32,877,481
------------- ----------------- ------------
Total capitalization................................. $ 930,553 $ 3,338,201 $ 33,114,981
------------- ----------------- ------------
------------- ----------------- ------------
25
DILUTION
As of March 31, 1999, our tangible net book value (deficit) was ($768,203)
or approximately $(0.08) per share of common stock based on 9,357,900 shares of
common stock outstanding. Our pro forma net tangible book value, was $207,137,
or approximately $.02 per share of common stock based on 9,795,834 shares of
common stock outstanding, giving effect to our spring 1999 private placements of
securities of $2,779,000. The pro forma net tangible book value per share
represents the amount of our total assets less the amount of our intangible
assets and our liabilities, divided by the number of shares of common stock
outstanding at March 31, 1999, giving effect to these private placements.
After giving effect to our receipt of net proceeds of approximately
$2,779,000 from our spring 1999 private placements and to the estimated net
proceeds from our sale of 2,500,000 shares of common stock offered in this
offering at the assumed public offering price per share of $14.625 and the
initial application of those proceeds as described under the heading "Use of
Proceeds," our pro forma as adjusted net tangible book value at March 31, 1999
would have been $31,676,224, or approximately $2.58 per share of common stock.
This represents an increase in the pro forma as adjusted net tangible book value
of $2.56 per share to existing stockholders and an immediate dilution in the pro
forma as adjusted net tangible book value of $12.05 per share, or 82%, to
investors in this offering. The following table illustrates the per share
dilution:
PER SHARE OF
COMMON
STOCK
--------------------
Assumed public offering price.................................................................. $ 14.63
Actual tangible book value at March 31, 1999................................................. $ (0.08)
Increase in net tangible book value, giving effect to our spring 1999 private placements..... .10
---------
Pro forma net tangible book value at March 31, 1999, giving effect to our spring 1999 private
placements................................................................................. .02
Increase in net tangible book value.......................................................... 2.56
---------
Pro forma as adjusted net tangible book value after this offering.............................. 2.58
---------
Dilution of net tangible book value to new investors........................................... $ 12.05
---------
---------
The following table sets forth, as of the date of this prospectus:
- the number of shares of common stock purchased,
- the percentage of total shares of common stock purchased,
- the total consideration paid,
- the percentage of total consideration paid, and
- the average price per share of common stock paid by the investors in this
offering and our current stockholders.
SHARES OF COMMON
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
------------- ----------- ------------- ----------- ---------
Existing stockholders........................... 9,843,404 79.8% $ 11,576,701 24% $ 1.18
New investors................................... 2,500,000 20.2 36,562,500 76 14.625
------------- ----------- ------------- ----- ---------
Total........................................... 12,343,404 100.0% $ 48,142,201 100.0% $ 3.90
------------- ----------- ------------- ----- ---------
------------- ----------- ------------- ----- ---------
26
SELECTED FINANCIAL DATA
The following selected statements of operations data for the period from our
inception on March 4, 1998 through June 30, 1998 and the selected balance sheet
data as of June 30, 1998 are derived from our consolidated financial statements
and related notes included elsewhere in this prospectus audited by KPMG LLP, our
independent auditors. The statement of operations data for the nine months ended
March 31, 1999 and the selected balance sheet data at March 31, 1999 are derived
from the unaudited consolidated financial statements included elsewhere in this
prospectus, and in the opinion of management, include all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
our financial position and results of operation. The results of operations for
any interim period are not necessarily to be expected for the entire year. The
selected statement of operations data for the period from our inception on March
4, 1998 through June 30, 1998 includes the results of operations of Digital
Genesis from June 2, 1998, its date of acquisition, and the pro forma selected
statement of operations data for such period includes the operations of Digital
Genesis and Spartan Multimedia, Inc. as if they were acquired by us on March 4,
1998. The selected statement of operations data for the nine months ended March
31, 1999 includes the results of operations of Spartan Multimedia, Inc. from
January 15, 1999, its date of acquisition, and the pro forma selected statement
of operations data for such period includes the operations of Spartan
Multimedia, Inc. as if it was acquired by us on July 1, 1998. The pro forma
balance sheet data as of March 31, 1999 is adjusted to reflect the net proceeds
of $2,779,000 from our spring 1999 private placements of securities, and the pro
forma, as adjusted balance sheet data as of March 31, 1999 is adjusted to
reflect the following:
- the net proceeds of $2,779,000 from our spring 1999 private placements of
securities, and
- the receipt of estimated net proceeds of approximately $32.0 million from
the sale of our common stock at the assumed public offering price of
$14.625 per share and the initial application of these proceeds as
described under "Use of Proceeds."
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes appearing elsewhere
in this prospectus.
PERIOD FROM
MARCH 4, 1998 CUMULATIVE PERIOD
(INCEPTION) THROUGH NINE MONTHS ENDED FROM MARCH 4, 1998
JUNE 30, 1998 MARCH 31, 1999 (INCEPTION)
---------------------- ---------------------- THROUGH MARCH 31,
ACTUAL PRO FORMA ACTUAL PRO FORMA 1999
---------- ---------- ---------- ---------- ------------------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 2,800 $ 90,993 $ 198,759 $ 202,200 $ 201,559
Total operating expenses.................. 4,555,459 4,690,167 6,983,543 7,152,164 11,539,002
Interest expense.......................... 19,277 19,277 313,744 313,744 333,021
Net loss before extraordinary item........ (4,571,936) (4,618,451) (7,153,257 (1) (7,318,437 (1) (11,725,193)(1)
Loss before extraordinary item per
weighted average common share
outstanding (basic and diluted)......... (0.84) (0.81) (0.83 (1) (0.85 (1) (1.54)(1)
Weighted average common shares outstanding
(basic and diluted)..................... 5,416,242 5,721,327 8,659,851 8,659,851 7,628,895
MARCH 31, 1999
-------------------------------------
ACTUAL PRO FORMA PRO FORMA,
JUNE 30, 1998 ----------- ----------- AS ADJUSTED
------------- (UNAUDITED) (UNAUDITED) -----------
(UNAUDITED)
BALANCE SHEET DATA:
Current assets............................................. $ 371,467 $ 325,928 2,579,730 32,510,355
Total assets............................................... 871,552 1,731,497 4,139,146 33,915,925
Working capital (deficit).................................. (1,959,776) (972,516) 2,824 31,471,911
Long-term debt............................................. 367,892 -- -- --
Stockholders' equity (deficit)............................. (1,827,583) 433,053 1,562,240 32,877,481
- ------------------------
(1) Before extraordinary gain of $1,853,232 relating to extinguishment of
indebtedness of $.21, $.21, and $.24 per weighted-average common shares
outstanding during the nine months ended March 31, 1999 actual, pro forma
and the cumulative period from March 4, 1998 (inception) through March 31,
1999, respectively.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THIS FORWARD-LOOKING INFORMATION.
FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
IN GENERAL
We provide turn-key eCommerce services designed to enable clients to extend
their business to the Internet for a wide variety of purposes, including the
advertising and sale of products or services by retailers and the conduct of
commercial transactions between business enterprises.
As at March 31, 1999, we had a working capital deficiency of $(972,516) and
stockholders' equity of $433,053. We generated revenues of $2,800 during the
period from our inception on March 4, 1998 through June 30, 1998, and revenues
of $198,759 for the nine months ended March 31, 1999. We have incurred net
losses since inception and expect to continue to generate operating losses for
the foreseeable future. There can be no assurance that we will ever achieve
profitability. In addition, during the period from our inception on March 4,
1998 through June 30, 1998, and the nine months ended March 31, 1999, we
incurred negative cash flows from operations of $(253,119) and $(2,982,683),
respectively.
We are in the early stage of operations and, as a result, the relationships
between revenue, cost of revenue, and operating expenses reflected in the
financial information included in this prospectus do not represent future
expected financial relationships. Much of the cost of revenue and operating
expenses reflected in our financial statements are relatively fixed costs. We
expect that these expenses will increase with the escalation of sales and
marketing activities and transaction volumes, but at a much slower rate of
growth than the corresponding revenue increase. Accordingly, we believe that, at
our current stage of operations period to period comparisons of results of
operations are not meaningful.
Our strategic focus is on the business-to-business Internet commerce market,
and we believe that our success will depend in large part on our ability
- to develop products and technologies that can enable businesses to
transact business-to-business Internet commerce efficiently and
effectively, and
- to identify and position ourselves as a significant player in the
business-to-business Internet commerce market.
Accordingly, we intend to continue to invest in product, technology, and
operating infrastructure development, as well as in the acquisition of companies
that offer development or technological resources.
Because we have a limited operating history, given planned investment
levels, our achieving profitability depends upon our ability to obtain
sufficient numbers of new customers and sufficient numbers of Internet commerce
transactions using our services. This can be accomplished by signing up
sufficient numbers of customers for services through our ICC and/or attaining a
significant volume of transactions through our ICC. Our revenues will also be
dependent on determining and obtaining sufficient levels of fees for the
services offered. In the event that we are unable to attain one or more of these
goals, we may continue to incur substantial operating losses for the foreseeable
future.
28
FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY
In view of the rapidly evolving nature of our business and its limited
operating history, we believe that period-to-period comparisons of our operating
results, including our gross profit and operating expenses as a percentage of
net sales, are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Risk Factors--Fluctuations In Our
Operating Results May Affect Our Stock Price."
We cannot predict the degree to which we will experience seasonality in our
business because of our limited operating history, and the fact that we cannot
identify which companies, if any, we will acquire in the foreseeable future.
RESULTS OF OPERATIONS
We have had no meaningful operating results to date, as we have focused on
the development of our ICC services.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses consist of payroll and related
expenses for executive, sales, marketing accounting, and administrative
personnel, recruiting, professional fees, research and development and other
general corporate expenses. We expect selling, general, and administrative
expenses to increase in absolute dollars as we expand our staff and incur
additional costs related to the growth of our business.
INTEREST EXPENSE
Interest expense of $313,744 was incurred during the nine months ended March
31, 1999, primarily related to amortization of debt issuance costs.
INCOME TAXES
We have not generated any taxable income to date and therefore have not paid
any federal income taxes since our inception. Utilization of our net operating
loss carry forwards, which begin to expire in 2013, may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 our cash was $137,233. Net cash used by operating
activities was $(2,982,683) for the nine months ended March 31, 1999.
MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
Net cash used in operations was $(253,119) from March 4, 1998 (inception)
through June 30, 1998, which resulted from net losses of $(4,571,936) from
inception reduced principally by $3,822,000 in amortization and write-off of
license fees and $371,680 of stock based compensation. See "Related Party
Transactions."
Net cash used in investing activities from March 4, 1998 (inception) through
June 30, 1998, was related to the purchase of $(102,034) of fixed assets and
$(75,000) of loans to customers. Net cash provided by financing activities March
4, 1998 (inception) through June 30, 1998 of $681,429 resulted from $649,000 of
private placements of common stock, $132,429 from the issuance of notes payable,
and the repayment of notes payable in the amount of $100,000.
NINE MONTHS ENDED MARCH 31, 1999
Net cash used in operations was $(2,982,683) for the nine months ended March
31, 1999, which resulted principally from net losses of $(5,300,025) for such
period and gain on extinguishment of
29
indebtedness of $(1,853,232) reduced principally by common stock issued for
services in the amount of $901,800, compensation expense for contributed capital
of $400,000, interest expense on warrants issued as debt issue $303,374, options
and warrants issued for services in the amount of $1,604,560, and accounts
payable and accrued liabilities of $644,007.
Net cash provided by investing activities for the nine months ended March
31, 1999 was related to the purchase of equity securities in the amount of
$(100,733) and the purchase of $(91,303) of fixed assets. Net cash provided by
financing activities during the nine months ended March 31, 1999 of $2,956,571
resulted from $2,164,800 of private placements of common stock, $264,200 from
the exercise of warrants, $1,160,000 from the issuance of notes payable and
convertible debentures, $100,000 from the issuance of notes payable to related
parties, and the repayment of notes payable in the amount of $(732,429).
By June 30, 1998, $126,000 had been received for our June 1998 private
placement of common stock at $2.00 per share, which closed on July 10, 1998. We
later commenced an offering of 1,022,800 units, each consisting of one share of
common stock at $2 per share and one warrant, expiring on October 9, 1998, to
purchase one additional share of common stock at $4.00 per share. As of
September 30, 1998, 1,022,800 units had been issued, and $2,045,600 had been
received. In March 1999, we received $1,000,000 from the sale of convertible
debentures at a conversion price of $2.50 per share. During March 1999 through
May 1999, we sold 326,334 shares in a private placement for $3.00 per share and
received gross proceeds of $979,000.
In May 1999, we sold in a private placement a total of $2,000,000 of our 12%
notes due on the earlier of April 30, 2000, or completion of this offering. As
part of such transaction, we issued to the investors a total of 200,000 shares
of our common stock.
In connection with the ProSoft licenses, we assumed notes issued by the
previous holders of those licenses in the amount of $3,300,000. In December
1998, the remaining balance of $1.8 million was cancelled.
As of March 31, 1999, our principal sources of liquidity consisted of
$137,233 of cash. As of that date, our principal commitments consisted of
operating leases, and commitments for advertising and promotional arrangements.
Although we have no material commitments for capital expenditures, we anticipate
a substantial increase in our capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and personnel.
We were established as eClassroom and, shortly thereafter, acquired two
exclusive sublicenses to sell proprietary ProSoft I-Net Solutions courseware to
the federal government and educational markets, respectively. To date, we have
not been successful at generating any revenue from these sublicenses. These
licenses have since been terminated and we believe that we have no further
obligations to make additional payments under such licenses. We wrote off
$3,822,000 in the period ended June 30, 1998, representing the carrying cost of
such licenses. In May 1999, the sublicensors paid an additional $200,000 to
ProSoft to terminate these license agreements and to settle all obligations
relating to them. See "Related Party Transactions."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are unable
to distinguish between 20th century dates and 21st century dates. As a result,
many companies' software and computer systems may need to be upgraded or
replaced to comply with these "Year 2000" requirements. Our business is
dependent on the operation of numerous systems that could potentially be
impacted by Year 2000 related problems. Those systems include, among others:
- hardware and software systems used by us to process transactions and
deliver other services to our clients, including our proprietary software
systems, as well as hardware and software supplied by third parties;
30
- communications networks, such as the Internet and private intranets, on
which we depend to permit eCommerce electronic transactions by our
clients;
- the internal systems of our clients and suppliers;
- the hardware and software systems used internally by us in the management
of our business; and
- non-information technology systems and services used by us in our
business, such as telephone systems and building systems.
We have internally reviewed the proprietary software systems we use to
process transactions and deliver other services to our clients. Although we
believe that our internally developed applications and systems are designed to
be Year 2000 compliant, we utilize third-party equipment and software that may
not be Year 2000 compliant. Failure of third-party or currently owned equipment
or software to operate properly with regard to the Year 2000 could require us to
incur unanticipated expenses to remedy any problems, which could have a material
adverse effect on our business, prospects, financial condition, and results of
operations. We do not believe that our expenditures to upgrade our internal
systems and applications will be material to our business, prospects, financial
condition, and results of operations.
Furthermore, the success of our efforts may depend on the success of our
clients in dealing with their Year 2000 issues. Many of these organizations are
not Year 2000 compliant, and the impact of widespread client failure on our
systems is difficult to determine. Customer difficulties due to year 2000 issues
could interfere with eCommerce transactions or information, which might expose
us to significant potential liability. If client failures result in the failure
of our systems, our business, prospects, financial condition, and results of
operations would be materially adversely affected. Furthermore, the purchasing
patterns of these customers or potential customers may be affected by Year 2000
issues as companies expend significant resources to become Year 2000 compliant.
The costs of becoming Year 2000 compliant for current or potential customers may
result in reduced funds being available to purchase and implement our
applications and services.
We are conducting a formal assessment of our Year 2000 exposure in order to
determine what steps beyond those identified by our internal review may be
advisable. We do not presently have a contingency plan for handling Year 2000
problems that are not detected and corrected prior to this occurrence. Our
failure to address any unforeseen Year 2000 issue could materially adversely
affect our business, prospects, financial condition, and results of operations.
31
BUSINESS
IN GENERAL
We provide turn-key eCommerce services designed to enable clients to extend
their business to the Internet to conduct commercial transactions between
business enterprises. The HUB of our eCommerce solution is our proprietary ICC,
which consists of the hardware, proprietary and licensed software, and the
related technical services necessary for our clients to transact eCommerce. We
also design and build custom interfaces, or SPOKES, to connect business clients
to the ICC. Our ICC is a scalable solution which allows clients to select
services 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.
INDUSTRY BACKGROUND
THE INTERNET
The Internet has grown rapidly in recent years, spurred by developments such
as
- inexpensive, readily available, and user-friendly Web browsers,
- a large and growing installed base of advanced personal computers,
- the adoption of faster and more cost efficient networks,
- the emergence of compelling Web-based content and commerce applications,
and
- the growing sophistication of the user base.
According to International Data Corp. ("IDC"), a leading research firm, the
number of Internet users was 98 million worldwide at the end of 1998 and will
continue to grow to 320 million by the end of 2002.
The broad acceptance of the Internet has led to the emergence of secure Web
sites accessible only within a given company, known as INTRANETS, and
specialized intranets also available to select outsiders, such as clients,
suppliers, or vendors, known as EXTRANETS, as new global communications and
commerce environments, representing a significant opportunity for enterprises to
interact in new, different, and highly efficient ways with customers, employees,
suppliers, and partners.
ECOMMERCE
The Internet presents opportunities to transform businesses and entire
industries as organizations exploit their potential to extend and enhance their
business activities and gain competitive advantage. Companies are using the
Internet to communicate and transact business on a one-to-one basis with
existing customers and to target and acquire new customers. At the same time,
companies are using the Internet to collaborate with their supply-chain partners
and manage distribution and other strategic relationships. The Internet has also
allowed businesses to identify new product and service offerings which extend
and complement their core markets.
A number of organizations have projected that the volume of business
transacted by means of eCommerce will grow substantially from present levels.
The United States Department of Commerce has estimated that business-to-business
commerce by means of the Internet will be a $300 billion dollar marketplace by
the year 2002. IDC has estimated that the total value of goods and services
purchased over the Internet grew from $318 million in 1995 to an annualized
amount of $5.4 billion in December 1996, and that sales are projected to
increase to $95 billion in 2000 and to $400 billion by 2002. This firm has also
projected that by the year 2002, 78% of all Internet commerce will occur in
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the business-to-business sector. Currently, KPMG LLP estimates that business to
business Internet commerce doubles approximately every 90 days.
ECOMMERCE SERVICES MARKET
IDC forecasts that the market for Internet and eCommerce services worldwide
will grow from $4.6 billion in 1997 to $43.7 billion by 2002. Forrester
Research, another technology industry research firm, estimates that the market
for Internet and eCommerce services will grow from $5.4 billion in 1998 to $32.7
billion by 2002. These projections represent a compound annual growth rate of
more than 55% over these periods.
As a result of the recent growth of eCommerce and its acceptance as a
mainstream medium for commercial transactions, businesses are investing in the
strategic use of Internet solutions to transform their core business and
technology strategies. This, in turn, has created a significant and growing
demand for third-party Internet professional services and has resulted in a
proliferation of companies offering specialized solutions, such as connectivity,
transaction reporting, security, and Web site design to business customers. This
specialization has resulted in a fragmented market that often requires the
business customer to seek solutions from a number of different providers using
differing, or even contradictory, strategies, models, and designs.
The successful adoption of, and adaptation to, the Internet by companies and
the conduct of commerce by means of the Internet pose significant challenges,
including systems engineering, technical, commercial, strategic, and creative
design challenges and an understanding of how the Internet transforms
relationships between businesses and their internal organizations, customers,
and business partners. Companies facing technology investment decisions often
need outside technical expertise to recognize viable Internet tools, develop
feasible architectures, and implement strategies. Companies must also be able to
integrate new Internet applications with their existing systems. Finally, a
successful solution requires that the Internet application, particularly the
user interface, be engaging and easy to use.
We believe that few of the existing 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 eCommerce solutions, including integrated strategy,
technology and creative design, connectivity, transaction processing, data
warehousing, transaction reporting, help desk, and consulting and training.
Furthermore, we believe that organizations will increasingly look to Internet
solutions providers that can leverage industry and client practices, increase
predictability of success for Internet solutions, and decrease risks associated
with implementation by providing low-cost, scalable solutions with minimal
lead-time.
THE NETGATEWAY SOLUTION
IN GENERAL
We have structured the ICC to provide scalable, fully integrated, turn-key
solutions. We develop customized interfaces to connect our clients' Web sites,
whether created and maintained by us or others on behalf of the clients, with
the ICC and our eCommerce servers. As a result of our HUB and SPOKE structure,
we can offer rapidly deployed, low cost eCommerce services, which incorporate
the sales and other practices of our clients and their industries, as well as
maintain our clients' prior investment in creating and maintaining a Web
presence.
33
[GRAPHIC DEPICTION OF HUB AND SPOKE STRUCTURE WITH CORRESPONDING LABELS]
THE ICC HUB
The ICC consists of hardware and proprietary and licensed software, as well
as related technical services, which are necessary in order to transact
eCommerce. We have developed the ICC based upon an object-oriented, modular
strategy. As a result, we are able to reuse functional software components of
the ICC across different clients and industries, as well as allow introduction
of new capabilities and services without adversely effecting existing systems.
The following features are designed to provide more complete eCommerce
services by overcoming limitations in external systems.
- - INVENTORY MANAGEMENT
- - ORDER STATUS AND HISTORY
- - CUSTOMER SUPPORT FORUMS
- - PURCHASE ACTIVITY REPORTING
- - SECURE, WEB BROWSER BASED SYSTEM
ADMINISTRATION
- - REPORTING
- - UNIVERSAL CLIENT DIRECTORY MANAGEMENT
- - SALES AUTOMATION
- - CUSTOMER SURVEY SYSTEM
- - BUDGET REPORTING
- - CUSTOMER SELF-ADMINISTRATION
- - ORDER MANAGEMENT
- - SYSTEM STATUS MONITORING
- - PRODUCT CATALOG MANAGEMENT
THE INTERFACE SPOKE
We have the capability to rapidly design and deploy proprietary software
interfaces which permit client Web sites, networks, and enterprise resource
planning systems to connect with, receive relevant information from, and provide
relevant information to, the ICC. Data integration between the ICC and the buyer
or seller is managed in the SPOKE. Product catalogs, order information, order
status, customer data, etc. can be transferred between the HUB and the
buyer/seller by means of the SPOKE. Each interface or SPOKE is specific to a
client and industry and contains knowledge about specific products and services
as well as processes and business rules, including
- - CUSTOM PRICING
- - PURCHASING WORKFLOW
- - UNIQUE ORDER HEADER FOR EACH CUSTOMER
- - PRODUCT CONFIGURATION
- - GRAPHICAL INTERFACE
- - SPECIAL REPORTING NEEDS
- - PRODUCT VARIATION RULES
- - WORKFLOW WITH ROUTING AND APPROVALS
All spokes are developed according to a common methodology so that, as
clients in similar industries are added to the ICC, the cost and time of
development is reduced by duplicating previously created modules. We have
developed a substantial library of SPOKES which are available for future use.
Customization, or SPOKE development, for clients can include:
- - WEB SITE INTEGRATION
- - THIRD PARTY AND CUSTOMER DEVELOPED SYSTEMS
- - ORDER MANAGEMENT
- - ACCOUNTING
- - SHIPPING
- - ENTERPRISE RESOURCE PLANNING SYSTEMS
34
ADVANTAGES
We believe that the following are significant advantages of our eCommerce
solution over other currently available alternatives:
- Our customers do not invest in hardware, software, and staffing, but
rather connect to our existing Netgateway infrastructure, which we believe
is a highly economic method to obtain and maintain an eCommerce presence.
- Clients with existing Web sites can maintain their investment in the
creation of that presence while seamlessly adding eCommerce capabilities.
- Because our infrastructure permits scalable eCommerce solutions, we can
offer incremental services to our clients through the activation of
additional proprietary software modules in response to client growth or
commercial requirements quickly and cost-effectively.
- Because our proprietary and other software resides only on our servers, we
can offer clients easy access to additional functionality on a test or
temporary basis in order to permit our clients to try new or additional
services with their respective customers on their Web sites, and can
provide real time "best of breed" updates, patches, and fixes to software
with no additional effort by the client.
BUSINESS STRATEGY
Key elements of our strategy are described below.
- IMPLEMENT COST EFFECTIVE SERVICES WITH BROAD APPEAL. We have designed our
operations and business model to focus upon the eCommerce services of
highest value to our clients. These are services which require high levels
of investment of resources or technical expertise by clients in the event
that these clients were to decide to provide these services themselves. By
offering these services to a number of clients simultaneously and by
creating and utilizing reusable software modules, we are able to spread
the relatively fixed costs associated with the creation, purchase, or
customization of the software, processes, procedures, or computer hardware
over a larger volume of eCommerce transactions, permitting us to offer
these services to our clients on a highly cost effective basis.
- LEVERAGE RELATIONSHIPS WITH RESELLERS TO MAXIMIZE GROWTH. We have embraced
a channel strategy for distribution of our Internet storefront services.
We have found that this particular service offering matches well with any
organization that has existing business relationships whereby adding an
eCommerce solution will strengthen the relationship. Examples of our
resellers include Internet portal companies, telecommunications companies,
Internet service providers, cable companies, overnight delivery companies,
banks, and computer hardware manufactures. See "Business--Clients and
Strategic Relationships."
- PROVIDE EASY ACCESS TO SCALABLE ECOMMERCE FUNCTIONALITY. We have designed
the ICC and our hardware and software infrastructure to permit scalable
eCommerce solutions and can offer incremental services to our clients
through the activation of additional proprietary software modules which
provide additional services and added functionality in response to client
growth or commercial requirements quickly.
- OFFER ADDITIONAL FUNCTIONALITY OF ICC SERVICES. Our HUB and SPOKE approach
constantly generates new features for our ICC clients. For example, as the
SPOKE features become dominant in a particular industry, that feature is
integrated into the HUB to become a new standard feature of the ICC,
benefitting all ICC users in that industry.
35
- USE OF TECHNOLOGY TO CREATE ECOMMERCE HUBS. We have improved the
attractiveness of our services by creating eCommerce HUBS in the form of
(1) private label Internet malls, where eCommerce sites sponsored by a
common reseller or of similar product offerings are grouped together for
convenient retail use by the public, or (2) secure client extranets.
- INCORPORATE CLIENT AND INDUSTRY PRACTICES AND MAINTAIN CLIENTS' PRIOR
INVESTMENT. We have structured the ICC and our hardware and software
infrastructure, and have developed proprietary software, to permit the
easy interconnection of client Web sites, whether prepared and maintained
by us or others on behalf of our clients, with our eCommerce servers. As a
result, we can offer eCommerce services which incorporate the sales and
other practices of our clients and their industries, as well as maintain
the clients' prior investment in creating and maintaining a Web presence.
- SEEK STRATEGIC ACQUISITIONS AND INVESTMENTS. We intend to seek strategic
acquisitions of, and investments in, businesses and technologies which we
believe will enhance the functionality of our services, operations, and
competitive position. We have entered into a letter of intent providing
for the acquisition of the technology of ShoppingPlanet, an eCommerce
applications developer, which we believe will enhance our functionality.
See "Risk Factors" and "Use of Proceeds."
SERVICES OFFERED
We offer our eCommerce services which range, in general, from simple
Internet storefronts to highly complex systems. We currently offer the following
specific services to our clients:
- WEB SITE DEVELOPMENT AND DESIGN; DEVELOPMENT OF ELECTRONIC STOREFRONTS. We
believe that a professionally designed Web site is critical to the success
of business customers desiring to transact eCommerce. We offer Web site
development, design, and maintenance solutions to our business customers,
including the development and design of the graphical interfaces and
applications necessary to fully integrate each customer's Web site with
its order and payment processing, order confirmation, and fulfillment
centers. Our proprietary software for Web site and electronic storefront
development features its own template system, multiple product search
engines, multiple price sets and catalogues, and support for multiple
currencies. Following this offering, we intend to further develop and
enhance this solution and to aggressively market these services through
our channel marketing strategy.
- INTERNET MALL DEVELOPMENT AND DESIGN. We believe that the use of "INTERNET
MALLS" is critical to create an effective eCommerce marketplace. Through
the creation and use of private labelled Internet malls, users of our
services can take advantage of both the pre-existing relationships and
marketing efforts of the reseller sponsoring this private labeled mall,
thereby increasing traffic to, and exposure of, their site. In addition,
we have developed and feature a proprietary eCommerce search engine that
searches within each Internet mall, as well as across all Internet malls
served by our ICC. We believe the use of malls and the availability of our
robust eCommerce search engine adds substantial value to individual stores
and resellers alike. For our customers not otherwise affiliated with any
mall, we provide access to our own mall as a value-added service.
- TRANSACTION PROCESSING. We offer solutions which capture and transact
customer orders according to the business rules and specific "back office"
needs of the particular client. Our eCommerce system solution allows us to
receive and process orders and payments, provide order confirmation and
reporting, and organize order fulfillment. We also have the ability to
provide support for eCommerce transactions using checks, credit cards,
electronic funds transfers, purchase orders, and other forms of payment.
We are currently providing this capability in conjunction with certain
third-party vendors, including Payment Net in San Jose, California,
36
Authorized Net in Salt Lake City, Utah, Clear Commerce in Austin, Texas,
eCommerce Exchange in Laguna Hills, California and Card Services
International in Agoura Hills, California. Following this offering,
Netgateway plans to pursue its own secured transaction clearing solutions
as well as a strategic alliance or acquisition of a secured
transaction-processing center.
- DATA WAREHOUSING AND TRANSACTION REPORTING. 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.
Following this offering, we plan to further develop these capabilities.
- CUSTOMER SUPPORT SERVICES. We provide our clients with 24 X 7 customer
service and support through our customer support staff of 17 individuals.
- ADVERTISING. We have signed an agreement with 24/7, Inc. to manage
national banner advertising in our Internet malls. We share advertising
revenues with the respective mall owner on whose Web site the
advertisement resides.
- CONNECTIVITY SOLUTIONS. In order for business customers to effectively
engage in eCommerce, they must be connected to the Internet. We assist our
business customers in structuring and obtaining high-speed Internet
connectivity solutions to improve their business-to-business communication
by means of the Internet. We provide these connectivity solutions to our
business customers in conjunction with third party Internet access
providers. Our connectivity solutions also include the ability to host
clients' Web sites and provide clients with security measures necessary
for secure transmissions over the Internet. We support our hosted Web
sites by a connectivity enhancing, high-performance, high-bandwidth server
system.
SALES AND MARKETING
IN GENERAL
We sell and market our services by means of a combination of direct sales
and authorized resellers. We maintain a direct sales force of six full-time
employees. We anticipate increasing our sales force substantially following this
offering, including creating a group within our sales force trained to assist
resellers in marketing our products and services. If a client requiring these
more sophisticated services is provided by a Netgateway reseller, we ordinarily
pay a finders fee to the reseller.
For entry level ICC services, such as simple Internet storefronts, we have
developed, and are continuing to develop, a series of channel partners to
distribute these services. Potential resellers include telecommunication
companies, value-added resellers, cable companies, Internet portals, and
Internet service providers. Reseller pricing has generally been dependent upon
volume and commitments from the reseller. We will "private label" the Internet
storefront service and establish private branded Internet malls for resellers in
order to provide the resellers with the means to drive traffic to these
storefronts. The storefronts and mall will have a customized "look and feel" of
the reseller. For purposes of branded equity, such as XOOM.com's Internet mall
located at WWW.XOOMMEMBERSTORES.COM, all sites will have the "STORESONLINE.COM"
logo as well as "POWERED BY NETGATEWAY" designation. We will establish and
maintain the mall for the reseller as long as the reseller drives traffic to the
mall by means of their marketing and advertising efforts.
37
PACKAGED SERVICES
While clients can select ICC services and particular features individually,
we generally market our services through the use of packaged services. Below is
a table which summarizes the features of each of our service packages followed
by a detailed description of each package.
FEATURES PACKAGE ONE PACKAGE TWO PACKAGE THREE
- -------------------------------------------------- --------------- --------------- -----------------
- ---------------------------------------------------------------------------
Web Account Access - - -
Static Webpages................................... - - -
- ---------------------------------------------------------------------------
24/7 E-Mail support - - -
Custom Templates.................................. - - -
- ---------------------------------------------------------------------------
WYSIWYG - - n/a
24/7 Phone Technical Support...................... - -
- ---------------------------------------------------------------------------
Shopping Cart - -
Real-Time Credit Card Transactions................ - -
- ---------------------------------------------------------------------------
Multiple Price-Sets - -
Custom Shipping Rules............................. - -
- ---------------------------------------------------------------------------
Order Status and Tracking - -
Store Statistical Reporting....................... - -
- ---------------------------------------------------------------------------
Unique Domain Name/Virtual Hosting - -
Custom Forms...................................... - -
- ---------------------------------------------------------------------------
Import and Export Data - -
Search and Browse Functionality................... - -
- ---------------------------------------------------------------------------
E-Mail Confirmation to Customers - -
Featured Products and Sale Items.................. - -
- ---------------------------------------------------------------------------
Printable Coupons - -
Unlimited Products and Categories................. - -
- ---------------------------------------------------------------------------
Inventory Tracking - -
Integration with Existing Web Site................ - -
- ---------------------------------------------------------------------------
Custom Price Discount Methods - -
Multimedia Support................................ -
- ---------------------------------------------------------------------------
Unique Catalog Per Customer -
Assigned Access Rights............................ -
- ---------------------------------------------------------------------------
Multiple Order Methods -
Integration with External System.................. -
SERVICE PACKAGE ONE
Clients can design a professional three page Web site, choosing from a
selection of over 25 templates. This entry level service is available through
our resellers as an introduction to eCommerce, and the sites are static in
nature. While we do not offer free help desk support or credit card processing
with this package, e-mail based customer support is available.
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SERVICE PACKAGE TWO--STORESONLINE.COM PACKAGE
This package is sold by means of authorized Netgateway resellers and permits
clients to have a fully functional Internet commerce store quickly and easily.
This service requires no investment in hardware or software and clients can
quickly and dynamically generate sales.
SERVICE PACKAGE THREE--BUSINESS TO BUSINESS ECOMMERCE
For businesses that need more robust eCommerce services for business to
business applications, the Netgateway ICC offers additional highly customized
features, including those described under the heading "Business--The Netgateway
Solution--The ICC Hub," designed to meet the requirements of our clients in an
extranet setting. These features are sold directly by our sales professionals as
each business to business opportunity involves different uses of these features.
CLIENTS AND STRATEGIC RELATIONSHIPS
We view our clients as both the sponsor or owner of the eCommerce site in
question and our resellers. We are currently processing eCommerce transactions
for over 550 clients. The clients are geographically dispersed and represent a
mix of businesses.
We require each client using our services to enter into a standard
subscription agreement. Each subscription agreement provides that the client
pays us both monthly subscription fees for the services requested and specified
fees per transaction. These contracts are terminable by the client upon 30 days
prior written notice. In addition, we enter into agreements with its resellers.
These agreements vary significantly by reseller based on the levels of service
the reseller will distribute and other factors.
The following are descriptions of a number of the contracts into which we
have recently entered:
XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS:
XMCM), an eCommerce Web portal with over 7.8 million members. Under the terms of
the agreement:
- we are the sole provider of a private labeled version of XOOM.com's Web
storefront building and hosting products and services;
- we developed XOOM.com's Internet mall located at WWW.XOOMMEMBERSTORES.COM;
- we are the sole provider of eCommerce processing services to XOOM.com's
eCommerce customers; and
- we will utilize XOOM.com as a Netgateway reseller to provide eCommerce
solutions and services to its member companies.
CB RICHARD ELLIS. In March 1999, we entered into an electronic commerce
services agreement with CB Richard Ellis (NYSE: CBG), one of the world's largest
building management and real estate services companies with over 12,000
properties under management and over $1 billion in revenue during 1998. Under
this agreement, we have been engaged to develop, manage, and service CB Richard
Ellis' eCommerce mall and client extranet. This Web site is designed to permit
CB Richard Ellis personnel to conduct all of their corporate materials
purchasing, including computers and building and maintenance supplies, and all
global facilities management by means of the Internet. In addition, CB Richard
Ellis will offer to the tenants in the buildings they manage volume purchasing
services on the Internet for a variety of office products and supplies. In
connection with this agreement, we issued to CB Richard Ellis warrants
exercisable for up to 550,000 shares of our common stock at an exercise price of
$11.00 per share, which warrants are earned and vest upon the achievement by CB
Richard Ellis of designated eCommerce volume milestones through our ICC. These
warrants expire on June 30, 2001.
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GATEWAY. In March 1999, we entered into an agreement with Gateway Inc.
(NYSE: GTW), a manufacturer of personal and business computers and service
provider. Under the terms of this agreement, we will offer our Internet
storefront services package, including Web site design, hosting, and transaction
processing services, to Gateway customers.
OTHER RESELLERS. We have also recently entered into reseller agreements,
pursuant to which the reseller offers our services to their customers, with
FedPage (WWW.FEDPAGE.COM), a division of Federal Business Council, Inc., the
industry leader in the production of on site federal technology shows, Ayrix
Technologies, OKC Webshopper, Country Wide Net, Hill Country Network, Encom
Industries, Epicycle Business Solutions, Integrated Systems Solutions, and Looks
Creative Designing Arts.
Initial customer service and support for our customers will be provided
through our customer support staff of 17 individuals that provides telephone
customer service and support 24 hours a day, 365 days a year. We can also
provide customers with access to information and customer support services by
means of the Internet.
COMPETITION
The eCommerce services market is intensely competitive and characterized by
rapidly evolving technologies. We currently face substantial competition in all
of our product and service lines. We expect such competition to continue and to
increase in the future, as new competitors enter the Internet market and
existing competitors expand their product and service offerings. Our target
market is rapidly evolving and is subject to continuous technological change. As
a result, our competitors may be better positioned to address these developments
or may react more favorably to these changes, which could have a material
adverse effect on our business, prospects, financial condition, and results of
operations. We compete on the basis of a number of factors, including the
attractiveness of the eCommerce services offered, the breadth and quality of
these services, creative design, engineering expertise, pricing, technological
innovation, and understanding clients' strategies and needs.
Many of these factors are beyond our control. Existing or future competitors
may develop or offer eCommerce services that provide significant technological,
creative, performance, price, or other advantages over the services offered by
us.
Our current and potential competitors include (1) Internet integrators and
Web presence providers, such as IBM, iXL, Organic Online, Proxicom, and USW; (2)
large information technology consulting service providers, such as Andersen
Consulting, Cambridge Technology Partners, and EDS; (3) Internet commerce
providers, such as Yahoo! Stores; (4) software development companies, such as
Microsoft, Broadvision, Open Market, and InterShop; (5) telecommunications
companies, such as AT&T and MCI; (6) application service providers, such as US
Internetworking and the recently announced EDS/SAP relationship, and (7)
Internet and online service providers, such as America Online, Lycos, and
Earthlink.
Although most of these types of competitors to date have not offered a full
range of Internet professional services, many are currently offering these
services or have announced their intention to do so. These competitors at any
time could elect to focus additional resources in our target markets, which
could materially adversely affect our business, prospects, financial condition,
and results of operations. Many of our current and potential competitors have
longer operating histories, larger customer bases, longer relationships with
clients, and significantly greater financial, technical, marketing, and public
relations resources than we do. Competitors that have established relationships
with large companies, but have limited expertise in providing Internet
solutions, may nonetheless be able to successfully use their client
relationships to enter our target market or prevent our penetration into their
client accounts.
40
Additionally, in pursuing acquisition opportunities, we may compete with
other companies with similar growth strategies, certain of which competitors may
be larger and have greater financial and other resources than we have.
Competition for these acquisition targets likely could also result in increased
prices of acquisition targets and a diminished pool of companies available for
acquisition.
There are relatively low barriers to entry into our business. We have
limited proprietary technology that would preclude or inhibit competitors from
entering the eCommerce services market. Therefore, we must rely on the skill of
our personnel and the quality of our client service. The costs to develop and
provide eCommerce services are low. Therefore, we expect that we will
continually face additional competition from new entrants into the market in the
future, and we are subject to the risk that our employees may leave us and start
competing businesses. The emergence of these enterprises could have a material
adverse effect on our business, prospects, financial condition, and results of
operations.
INTELLECTUAL PROPERTY
Our success is dependent upon our proprietary technology and other
intellectual property and on our ability to protect our proprietary technology
and other intellectual property rights. In addition, we must conduct our
operations without infringing on the proprietary rights of third parties. We
also intend to rely upon unpatented trade secrets and the know-how and expertise
of our employees. To protect our proprietary technology and other intellectual
property, we rely primarily on a combination of the protections provided by
applicable copyright, trademark, and trade secret laws as well as on
confidentiality procedures and licensing arrangements. We have applications
pending with the United States Patent and Trademark Office for NETGATEWAY,
NETGATEWAY ICC, NETGATEWAY INTERNET COMMERCE CENTER, NETGATEWAY "WHERE BUSINESS
DOES BUSINESS ON THE INTERNET," STORESONLINE, STORESONLINE.COM, NETGATEWAY
KNOWLEDGE AND COMMERCE OF THE DIGITAL AGE, NETGATEWAY, THE POWER OF ORGANIZED
INTERNET COMMERCE, and two NETGATEWAY logos. Although we believe that we have
taken appropriate steps to protect our unpatented proprietary rights, including
requiring that our employees and third parties who are granted access to our
proprietary technology enter into confidentiality agreements with us, there can
be no assurance that these measures will be sufficient to protect our rights
against third parties. Others may independently develop or otherwise acquire
unpatented technologies or products similar or superior to ours.
We license from third parties certain software and Internet tools that we
include in our services and products. If any of these licenses were terminated,
we could be required to seek licenses for similar software and Internet tools
from other third parties or develop these tools internally. We may not be able
to obtain such licenses or develop such tools in a timely fashion, on acceptable
terms, or at all. Companies participating in the software and Internet
technology industries are frequently involved in disputes relating to
intellectual property. We may in the future be required to defend our
intellectual property rights against infringement, duplication, discovery, and
misappropriation by third parties or to defend against third-party claims of
infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
costs to, and a diversion of effort by us. An adverse determination could
subject us to significant liabilities to third parties, require us to seek
licenses from, or pay royalties to, third parties, or require us to develop
appropriate alternative technology. Some or all of these licenses may not be
available to us on acceptable terms or at all, and we may be unable to develop
alternate technology at an acceptable price or at all. Any of these events could
have a material adverse effect on our business, prospects, financial condition,
and results of operations.
41
EMPLOYEES
As of the date of this prospectus, we had 63 full-time employees: 13 engaged
in sales and marketing, 22 engaged in the development of our eCommerce
solutions, 17 in customer support, and 11 in general administration and finance.
We intend to hire additional key personnel in the near future.
FACILITIES
Our headquarters are located at 300 Oceangate, Suite 500, Long Beach,
California 90802. These premises, which occupy 9,100 square feet, are subject to
a lease between Netgateway and an unaffiliated third party. The lease expires on
July 9, 2001 and our monthly payments under this lease are currently
approximately $10,000. We believe that, in the event alternative or larger
offices are required, such space is available at competitive rates.
To house and support the ICC, Netgateway maintains its equipment in Exodus'
state-of-the-art data center, which provides a 24x7 environment with multiple
redundant high-speed connections to the Internet backbone. This data center
features raised floors, HVAC temperature control systems, and seismically braced
racks. All systems are connected to high capacity uninterruptable power
supplies, which are in turn backed by a high output diesel generator. Main power
is provided to the facility through connectivity to two separate power grids.
Non-stop connectivity is provided through multiple fiber egresses using
different bandwidth providers. Facility security includes 24x7 keycard access,
video monitors, motion sensors, and staff members on-site.
GOVERNMENTAL REGULATION
We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to, or commence
on, the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing, and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for our products or services, our cost of doing business or
otherwise have an adverse effect on our business, prospects, financial
condition, or results of operations. Moreover, the applicability to the Internet
of existing laws governing issues, such as property ownership, libel, and
personal privacy is uncertain. Future federal or state legislation or regulation
could have a material adverse effect on our business, prospects, financial
condition, and results of operations.
LEGAL MATTERS
We are not a party to any material litigation or legal proceeding relating
to our products and services or otherwise. We are not aware of any material
legal proceedings threatened against us.
42
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Netgateway, their ages, and their
positions held with Netgateway are as follows:
NAME AGE POSITION
- --------------------------------------- --- ----------------------------------------------
Keith D. Freadhoff..................... 40 Chairman of the Board and Chief Executive
Officer
Donald M. Corliss, Jr. ................ 49 President and Director
David Bassett-Parkins.................. 38 Chief Financial Officer, Chief Operating
Officer, and Director
Hanh Ngo............................... 28 Executive Vice President--Operations
Craig Gatarz........................... 37 General Counsel
Scott Beebe............................ 47 Director
Ronald Spire........................... 49 Director
The following is certain summary information with respect to the directors,
director-nominee, and executive officers of Netgateway.
KEITH D. FREADHOFF, has served as Chairman of the Board of Directors and the
Chief Executive Officer of Netgateway since our inception. From November 1994 to
November 1997, Mr. Freadhoff was the co-founder, Chairman of the Board of
Directors, and Chief Executive Officer of Prosoft I-Net Solutions, a public
company. From November 1993 to November 1994, Mr. Freadhoff has served as the
Executive Director of Career Planning Center, a community based organization
serving disadvantage populations with job training and social services. From
1993 to 1994, he also served as President of the Focus Institute, a California
based Microsoft Authorized Training and Education Center. From 1991 to 1992, Mr.
Freadhoff served as a Vice President of Frojen Advertising, an advertising and
marketing firm. From 1987 to 1991, Mr. Freadhoff founded and served as President
of Oasis Corporate Education and Training, a customized training company that
developed courseware for manufacturing, financial, service, and public
organizations. Mr. Freadhoff completed graduate level work at the University of
Southern California and earned his undergraduate degree at the University of
Nebraska.
DONALD M. CORLISS, JR., has served as the President and a Director of
Netgateway since March 1998. From 1993 to June 1998, Mr. Corliss was an
independent investor and owned, developed, and served in senior management
positions with several business and development ventures. As co-founder in many
of these projects, responsibilities included the operation, management,
structuring, and implementation of business strategies and plans, as well as the
development and implementation of the general business and accounting systems
necessary for such business operations. From 1977 to 1993, Mr. Corliss was
engaged in private law practice. Mr. Corliss earned a LLM in Taxation from New
York University, his Juris Doctorate degree from the University of Santa Clara,
and a Bachelor of Arts degree from the University of California at Santa
Barbara. Of the ventures of Mr. Corliss, two real estate development ventures,
Westover Hills Development, Inc. and Inglehame Farms Ltd., sought protection
from creditors pursuant to Chapter 11 of the United States Bankruptcy Code in
1997 and 1998, respectively. Mr. Corliss has served as a director and executive
officer of Westover, and a director and executive officer of one of the general
partners of Inglehame, until mid 1998 when he resigned. Westover has since
emerged from Chapter 11 and has commenced operations.
DAVID BASSETT-PARKINS, has served as Chief Financial Officer, Chief
Operating Officer, and a Director of Netgateway since our inception in March
1998. From February 1992 to May 1998, Mr. Bassett-Parkins held various senior
management positions at Wedbush Morgan Securities, a privately held regional
securities firm, including Vice President of Management Information Systems,
Vice President of Customer Services, and Vice President of Client Banking
Services. From 1988 to
43
February 1992, Mr. Bassett-Parkins served as a Director of Automation for ISD, a
privately held Interior Architecture firm based in Chicago. From 1985 to 1988,
Mr. Bassett-Parkins was managing partner for Architectural CADD Systems, a
privately held software developer and reseller. Mr. Bassett-Parkins holds a B.S.
in Management from California State Polytechnic University, Pomona and an
Executive Education Certificate from University of California at Los Angeles.
HANH NGO, has served as Executive Vice President--Operations of Netgateway
since June 1998. Prior to joining Netgateway, Ms. Ngo held the position in
Financial Planning and Analysis as a Financial Analyst for Nissan Motor
Corporation from June 1997 to June 1998. From March 1992 to June 1997, Ms. Ngo
worked in various capacities at Wedbush Morgan Securities, a privately held
regional securities firm, including as a business analyst for the vice president
and as a client banking officer and licensed stockbroker. Ms. Ngo holds a M.B.A.
in Finance from California State University, Northridge, and a B.A. in Economics
from University of California, Irvine.
CRAIG GATARZ, has served as General Counsel of Netgateway since April 1999.
From 1987 until April 1999, Mr. Gatarz was an attorney at Jones, Day, Reavis &
Pogue, a law firm, and specialized in corporate law, particularly corporate
restructurings and asset-based lending transactions. Mr. Gatarz received his law
degree in 1987 from the University of Virginia School of Law and is admitted to
practice in New York, New Jersey, and California. Mr. Gatarz serves on the board
of directors of BBMG Entertainment, Inc., a California-based film production
company.
SCOTT BEEBE, has served as a Director of Netgateway since June 1998. From
April 1987 through June 1998, Mr. Beebe served as the managing partner of Steps,
an investment and consulting firm specializing in high tech growth companies.
Mr. Beebe was a registered representative in the securities industry from 1982
through 1998. Mr. Beebe graduated from the University of California at Berkeley
in 1973.
RONALD SPIRE has served as a Director of Netgateway from September 1998 to
December 1998 and since April 1999. Since September 1989 Mr. Spire has been
retired. From June 1984 to September 1989, Mr. Spire was the co-founder and an
executive of PCI Group, Inc., a subcontractor for aerospace manufacturers. From
December 1981 to June 1984 Mr. Spire was a partner with Wolfgang Puck in Chinois
on Main, Inc. and other restaurants in the Los Angeles area. Mr. Spire earned
his Juris Doctorate degree from Southwestern University School of Law, and his
Bachelor or Arts degree from the University of California at Los Angeles.
ELECTION OF OFFICERS
Officers are elected annually by the board of directors and hold office at
the discretion of the board of directors. There are no family relationships
among our directors and executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
In September 1998, the board of directors created a compensation committee,
which will, upon the closing of the offering, be comprised of Messrs. Freadhoff,
Beebe, and Spire. The compensation committee has (1) full power and authority to
interpret the provisions of, and supervise the administration of, our stock
option plans and (2) the authority to review all of our compensation matters.
In April 1999, the board of directors created an audit committee, which is
currently comprised of Messrs. Corliss, Beebe, and Spire. The audit committee is
responsible for reviewing the results of the audit engagement with the
independent auditors; reviewing the adequacy, scope, and results of the internal
accounting controls and procedures; reviewing the degree of independence of the
auditors; reviewing the auditors' fees; and recommending the engagement of
auditors to the full board of directors.
44
EXECUTIVE COMPENSATION
None of our executive officers received cash compensation during the period
from our inception on March 4, 1998 to June 30, 1998 or for the six months ended
December 31, 1998. In December 1998, Messrs. Freadhoff, Corliss, and
Bassett-Parkins and Ms. Ngo were granted stock options exercisable for 400,000
shares, 400,000 shares, 400,000 shares, and 266,667 shares of common stock,
respectively, under our 1998 stock option plan for senior executives.
For a description of the current compensation arrangements for our executive
officers, please see "Management--Employment Agreements."
DIRECTOR COMPENSATION
To date, directors have received no compensation for their services other
than reimbursement of expenses relating to attending meetings of the board of
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee during the period from our
inception on March 4, 1998 through September 29, 1998. On December 15, 1998 the
compensation committee determined to accrue salary retroactively for the
executive officers of Netgateway commencing July 1, 1998. The executive officers
of Netgateway have since waived this salary. There were no interlocking
relationships between us and other entities that might affect the determination
of the compensation of our directors and executive officers.
EMPLOYMENT AGREEMENTS
The table below is a summary of the provisions of the employment agreements
of our executive officers.
CONTRACT
COMMENCEMENT CONTRACT
NAME DATE TERMINATION DATE PER ANNUM SALARY BONUS ARRANGEMENTS
- --------------------------- -------------- ----------------- ------------------ ---------------------------
Keith D. Freadhoff, January 1, December 31, 2001 $185,000 through $57,500 payable in July
Chairman of the Board of 1999 June 30, 1999 1999
Directors and Chief $201,500 Eligible for bonus of up to
Executive Officer thereafter $28,750 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors
Donald M. Corliss, Jr., January 1, December 31, 2001 $185,000 through $55,000 payable in July
President and Director 1999 June 30, 1999 1999
$192,500 Eligible for bonus for each
thereafter of the three month periods
ended September 30, 1999
and December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors
45
CONTRACT
COMMENCEMENT CONTRACT
NAME DATE TERMINATION DATE PER ANNUM SALARY BONUS ARRANGEMENTS
- --------------------------- -------------- ----------------- ------------------ ---------------------------
David Bassett-Parkins, January 1, December 31, 2001 $175,000 $50,000 payable in July
Chief Operating Officer, 1999 1999
Chief Financial Officer, Eligible for bonus of up to
and Director $25,000 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors
Hanh Ngo, January 1, December 31, 2001 $135,000 $25,000 payable in July
Executive Vice President-- 1999 1999
Operations Eligible for bonus of up to
$12,500 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors
Craig Gatarz, April 5, 1999 April 5, 2002 $120,000 through As determined by the board
General Counsel December 31, 1999 of directors.
$150,000
thereafter
In the event of a change in control of Netgateway, as defined in each of
these employment agreements, all options previously granted to these individuals
which remain unvested will automatically vest immediately. Upon a termination of
the employment of any of these individuals following a change in control for any
reason other than the relevant officer's death or disability or for cause (as
defined in the respective employment agreement), we are required to pay to such
individual in the case of Messrs. Freadhoff, Corliss, and Bassett-Parkins, a
lump sum severance payment equal to three times the sum of (1) his then current
annual salary and (2) his highest bonus in the three year period preceding the
change in control, and in the case of Ms. Ngo or Mr. Gatarz, a lump sum
severance payment equal to two times the sum of (1) her or his then current
annual salary and (2) her or his highest bonus in the two year period preceding
the change in control. If this severance payment results in the imposition of an
excise tax on the relevant individual, we are required to gross up this
individual for such excess tax and any income taxes arising as a result of the
gross up payment. In addition, if the relevant individual's employment is
terminated by us without cause (as defined in the relevant employment agreement)
or by the relevant individual with good reason (as defined in the relevant
employment agreement), 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 (as defined in the relevant employment
agreement). The relevant individual may terminate his or her employment at any
time upon at least 30 days written notice to us. Upon the termination of such
agreement, the relevant individual is subject to non-compete, non-disclosure,
and non-solicitation provisions for one year.
STOCK OPTION PLANS
1998 STOCK OPTION PLAN FOR SENIOR EXECUTIVES
In December 1998, the board of directors adopted, subject to approval by our
stockholders, the 1998 stock option plan for senior executives. This plan
provides for the grant of options to purchase up
46
to 5,000,000 shares of common stock to senior executives of Netgateway. Options
may be either "incentive stock options" or non-qualified stock options under
Federal tax laws.
This plan will be administered by the compensation committee of the board of
directors, a majority of the members of which consist of "non-employee
directors" of the board of directors. The committee will determine, among other
things, the individuals who shall receive options, the time period during which
the options may be partially or fully vested and exercisable, the number of
shares of common stock issuable upon the exercise of each option, and the option
exercise price.
The exercise price per share of common stock subject to an incentive option
may not be less than the fair market value per share of common stock on the date
the option is granted. The per share exercise price of the common stock subject
to a non-qualified option may be established by the committee, but shall not be
less than 50% of the fair market value per share of common stock on the date the
option is granted. The aggregate fair market value of common stock for which any
person may be granted incentive stock options which first become exercisable in
any calendar year may not exceed $100,000 on the date of grant.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution or, if permitted, pursuant to a qualified
domestic relations order and, during the lifetime of the optionee, the option
will be exercisable only by the optionee. In the event of termination of
employment by reason of death, disability, or by us for cause (as defined in
each optionee's employment agreement), the optionee will have no more than 365
days after such termination during which the optionee shall be entitled to
exercise the vested options, unless otherwise determined by the board of
directors. Upon termination of employment by us without cause or by the optionee
for good reason (as defined in the optionee's employment agreement), the
optionee's options remain exercisable to the extent the options were exercisable
on the date of such termination until the expiration date of the options
pursuant to the option agreement.
We may grant options under this plan within ten years from the effective
date of the plan. The effective date of this plan is December 31, 1998. Holders
of incentive stock options granted under this plan cannot exercise these options
more than ten years from the date of grant. Options granted under this plan
generally provide for the payment of the exercise price in cash and may provide
for the payment of the exercise price by delivery to us of shares of common
stock already owned by the optionee having a fair market value equal to the
exercise price of the options being exercised, or by a combination of these
methods. Therefore, if it is provided in an optionee's option agreement, the
optionee may be able to tender shares of common stock to purchase additional
shares of common stock and may theoretically exercise all of his stock options
with no additional investment other than the purchase of his original shares.
Any unexercised options that expire or that terminate upon an optionee's
ceasing to be employed by us become available again for issuance under this
plan.
On the date of this prospectus, options exercisable for an aggregate of
2,596,667 shares of common stock have been granted pursuant to this plan at a
weighted average exercise price of $4.14 per share.
1998 STOCK COMPENSATION PROGRAM
In July 1998, the board of directors adopted the 1998 stock compensation
program. This program provides for the grant of options to purchase up to
1,000,000 shares of common stock to officers, employees, directors, and
independent contractors and agents of Netgateway. Options may be either
"incentive stock options" or non-qualified stock options under Federal tax laws.
This program will be administered by the board of directors, or, if options
are being granted to one or more of our executive officers by a committee of the
board a majority of the members of which shall consist of "non-employee
directors" of the board of directors. The board of directors or the
47
committee, as the case may be, will determine, among other things, the
individuals who shall receive options, the time period during which the options
may be partially or fully vested and exercisable, the number of shares of common
stock issuable upon the exercise of each option, and the option exercise price.
The exercise price per share of common stock subject to an option may not be
less than the fair market value per share of common stock on the date the option
is granted. The aggregate fair market value of common stock for which any person
may be granted incentive stock options which first become exercisable in any
calendar year may not exceed $100,000 on the date of grant.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution or, if permitted, pursuant to a qualified
domestic relations order and, during the lifetime of the optionee, the option
will be exercisable only by the optionee. In the event of termination of
employment for reasons other than the death or disability of the optionee, the
option shall terminate immediately, provided, however, that the board of
directors may, in its sole discretion, allow the option to be exercised, to the
extent exercisable on the date of termination of employment or service, at any
time within 60 days from the date of termination of employment or service. In
the event of termination of employment by reason of the death or disability of
the optionee, the option may be exercised, to the extent exercisable on the date
of death or disability, within one year from such date.
We may grant options under this program within ten years from the effective
date of the plan. The effective date of this program is July 31, 1998. Holders
of incentive stock options granted under this program cannot exercise these
options more than ten years from the date of grant. Options granted under
program generally provide for the payment of the exercise price in cash and may
provide for the payment of the exercise price by delivery to us of shares of
common stock already owned by the optionee having a fair market value equal to
the exercise price of the options being exercised, or by a combination of these
methods. Therefore, if that is provided in an optionee's option agreement, the
optionee may be able to tender shares of common stock to purchase additional
shares of common stock and may theoretically exercise all of his stock options
with no additional investment other than the purchase of his original shares.
Any unexercised options that expire or that terminate upon an optionee's
ceasing to be employed by us become available again for issuance under this
program.
Although this program permits us to grant, in addition to incentive stock
options and non-qualified stock options, (1) rights to purchase shares of our
common stock to employees, (2) restricted shares of our common stock, (3) stock
appreciation rights, and (4) performance shares of common stock, we have not
issued any other type of compensation under this program other than
non-qualified stock options and have agreed not to do so in the future.
On date of this prospectus, options exercisable for an aggregate of 981,030
shares of common stock have been granted pursuant to this plan at a weighted
average exercise price of $1.69 per share.
DIRECTORS' LIMITATION OF LIABILITY
Our certificate of incorporation and/or by-laws include provisions to (1)
indemnify the directors and officers to the fullest extent permitted by the
Delaware General Corporation Law including circumstances under which
indemnification is otherwise discretionary and (2) eliminate the personal
liability of directors and officers for monetary damages resulting from breaches
of their fiduciary duty, except for liability for breaches of the duty of
loyalty, acts, or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware General Corporation Law or for any transaction from which the director
derived an improper personal benefit. We believe that these provisions are
necessary to attract and retain qualified persons as directors and officers.
48
We have applied for directors and officers liability insurance in an amount
of not less than $2 million.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to our directors, officers, and controlling persons pursuant to
the foregoing provisions or otherwise, we have been advised that, in the opinion
of the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
49
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of this prospectus,
- each person who is known by us to be the owner of record or beneficial
owner of more than 5% of the outstanding common stock,
- each of our directors and executive officers, and
- all of our directors and executive officers as a group,
the number of shares of common stock beneficially owned by each such person and
such group and the percentage of the outstanding shares owned by each such
person and such group.
Except as otherwise noted below, the address of each of the persons in the
table is c/o Netgateway, Inc., 300 Oceangate, 5(th) Floor, Long Beach,
California 90802.
OPTIONS
GRANTED
UNDER OUR
PERCENT PRIOR PERCENT AFTER STOCK OPTION
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES TO OFFERING OFFERING PLANS
- ------------------------------------------------- ----------------- --------------- --------------- ------------
Keith D. Freadhoff............................... 1,725,000(1) 17.7% 14.1% 338,000
Donald M. Corliss, Jr............................ 150,000 1.5 1.2 332,000
David Bassett-Parkins............................ 185,000 1.9 1.5 320,000
Hanh Ngo......................................... 100,000 1.0 * 233,333
Craig Gatarz..................................... 0 0 0 161,821
Scott Beebe...................................... 900,000(2) 9.1 7.3 0
Ronald Spire..................................... 100,000(3) 1.0 * 0
Michael Khaled................................... 700,000(4) 7.0 5.6 0
Donald Danks..................................... 699,999(5) 7.0 5.6 0
Michael Vanderhoff............................... 602,500(6) 6.1 4.8 0
All directors and executive officers of
Netgateway as a group (six persons)............ 3,085,000(1) (3) 30.7 24.6 1,385,154
- ------------------------
* Less than one percent.
(1) Includes 750,000 shares of common stock currently held by the Individual
Trusts, of which Mr. Freadhoff is trustee and over which Mr. Freadhoff has
beneficial ownership and warrants exercisable for an aggregate of 50,000
shares of common stock. Of the 925,000 shares of common stock owned directly
by Mr. Freadhoff, 825,000 have been pledged to secure personal financial
obligations of Mr. Freadhoff. If Mr. Freadhoff defaults on these
obligations, Mr. Freadhoff may lose beneficial ownership of these shares,
which could result in a change of control of Netgateway. See "Risk
Factors--We Depend On Our Senior Management And Their Loss or Unavailability
Could Put Us At A Competitive Disadvantage; As Our Chairman and Chief
Executive Has Pledged His Stock, We May Experience A Change Of Control" and
"Related Party Transactions."
(2) Includes warrants exercisable for an aggregate of 50,000 shares of common
stock.
(3) Includes warrants exercisable for an aggregate of 100,000 shares of common
stock.
(4) Includes warrants exercisable for an aggregate of 100,000 shares of common
stock.
(5) Includes warrants exercisable for an aggregate of 100,000 shares of common
stock.
50
(6) Includes warrants exercisable for an aggregate of 50,000 shares of common
stock.
As used in the table above and elsewhere in this prospectus, the term
BENEFICIAL OWNERSHip with respect to a security consists of sole or shared
voting power, including the power to vote or direct the vote, and/or sole or
shared investment power, including the power to dispose or direct the
disposition, with respect to the security through any contract, arrangement,
understanding, relationship, or otherwise, including a right to acquire such
power(s) during the next 60 days following the date of this prospectus. Except
as otherwise indicated, the stockholders listed in the table have sole voting
and investment powers with respect to the shares indicated. Because the table
above provides information with respect to the securities of Netgateway
beneficially owned by the persons indicated, we have segregated from this
information the information relating to securities of Netgateway owned, but not
beneficially owned, by the persons indicated according to this definition. At
the date of this prospectus, these securities consist of shares of common stock
issuable upon the exercise of options granted under our stock option plans
described in "Management--Stock Option Plans." None of these stock options is
exercisable within 60 days following the date of this prospectus. In addition,
we have excluded from the beneficial ownership of Messrs. Corliss and
Bassett-Parkins and Ms. Ngo the shares of common stock currently in the
Individual Trusts, as described under "Related Party Transactions."
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.
51
RELATED PARTY TRANSACTIONS
In July 1998 and August 1998, we loaned $600,000 and an additional $200,000,
respectively, to Admor Memory Corp., a California-based computer memory maker,
during our then pending acquisition of Admor, which acquisition was not
consummated. This loan is due and payable on December 31, 1999 and accrues
interest at the rate of 9.5% per annum until October, 1999 and 10% thereafter
per annum. In August, 1998, we agreed to subordinate this obligation to a credit
facility obtained by Admor and to receive payment of this obligation from the
net income and the proceeds of equity sales of Admor. Subsequently, Admor
defaulted on this credit facility and entered receivership. We have reduced the
value of this loan in our financial statements to $0 effective December 31,
1998. Keith D. Freadhoff, our Chairman of the Board of Directors and Chief
Executive Officer, and Scott Beebe, one of our Directors, beneficially own less
than 1% and 2.89%, respectively, of the outstanding capital stock of Admor.
Donald Danks, the beneficial owner of 699,000 shares of our common stock, was
also a stockholder of Admor. Such individuals did not directly or indirectly
receive any of the proceeds of these loans.
We have entered into sublicensing agreements related to proprietary
courseware of ProSoft, an Internet training solutions provider based in Austin,
Texas. ProSoft entered into a courseware reproduction and licensing agreement
with Steps granting this firm the exclusive right to sell courseware to the
Federal government. This licensing obligation was personally guaranteed by Scott
Beebe. ProSoft also entered into a courseware reproduction and licensing
agreement with Training Resources International, granting an exclusive right to
sell courseware in the education market. This licensing obligation was
personally guaranteed by Michael Khaled. We, with the consent of ProSoft,
entered into exclusive sublicense agreements with each of Steps and Training
Resources. In consideration of the sublicense from Training Resources, we agreed
to assume the minimum royalty payments required under their master license,
totally $1,600,000. In consideration of the sublicense from Steps, we (1)
assumed the minimum royalty payments required under their master license,
totally $1,500,000, (2) assumed Steps' $200,000 obligation to Vision Holdings,
Inc., which had advanced funds to Steps in connection with its master license,
and (3) issued 1,000,000 shares of common stock to Steps. Of this aggregate
obligation of $3,300,000, we paid approximately $1,500,000. Due to a lack of
revenue derived from these licenses, we terminated the licenses and, in December
1998, entered into a settlement agreement with such corporation pursuant to
which we have been released from all further obligation with respect to the
remaining amounts payable. Steps is substantially owned by Scott Beebe, one of
our Directors and significant stockholders. Training Resources is owned by
Michael Khaled, another significant stockholder of Netgateway. Mr. Freadhoff was
a founder of ProSoft and ProSoft's Chief Executive Officer and a director until
his resignation in November 1997. Mr. Freadhoff beneficially owns approximately
3.32% of the outstanding common stock of ProSoft. Donald M. Corliss, Jr., our
President and a Director, and Scott Beebe, one of our Directors' each
beneficially owns less than 1%, of the outstanding common stock of ProSoft.
Donald Danks, the beneficial owner of 699,000 shares of our common stock, was an
officer, director, and significant stockholder of ProSoft until early 1998.
During the period from March 4, 1998 through June 30, 1998, Mr. Freadhoff
loaned us $132,429, $100,000 of which was converted into a capital contribution
in June 1998. The remaining balance of $32,429 is not interest bearing and is
repayable upon demand.
During the period from March 4, 1998 through June 30, 1998, Michael Khaled,
Donald Danks and Lynn Turnbow, stockholders of Netgateway, paid on our behalf to
ProSoft pursuant to its master licenses $200,000, $100,000 and $100,000,
respectively, in exchange for 600,000 shares of common stock.
In March 1999, Mr. Freadhoff loaned us $100,000, which loan is non-interest
bearing. This loan was repaid with a portion of the proceeds of our May 1999
private offering.
52
In November 1998, we issued warrants exercisable for an aggregate of 300,000
shares of common stock, 50,000 shares of common stock to each of Messrs.
Freadhoff, Beebe, Danks, and Vanderhoff, and 100,000 shares of common stock to
Michael Khaled, a significant stockholder of Netgateway. The warrants were
issued in order to reimburse Messrs. Freadhoff, Beebe, Danks, and Vanderhoff for
voluntarily transferring to Mr. Khaled an equal number shares of common stock in
order to settle a dispute among Netgateway and Mr. Khaled. These warrants are
exercisable at $1.00 per share and expire in November 2000.
In December 1998, Messrs. Freadhoff, Beebe, Danks, and Vanderhoff,
contributed to a trust (the "Master Trust") 450,000, 100,000, 100,000, and
100,000 shares of common stock, respectively. The trustee of the Master Trust is
Mr. Freadhoff and these individuals are the beneficiaries of this trust. This
trust sold 350,000 of these shares to each of two trusts the trustee of which is
Mr. Freadhoff and the beneficiary of one of which is Donald M. Corliss, Jr., our
President and one of our Directors and the beneficiary of one of which is David
Bassett-Parkins, our Chief Financial Officer and Chief Operating Officer, and
one of our Directors, in exchange for a promissory note from each of these
trusts in the principal amount of $350,000. Each of these individuals has
delivered to their respective trust a promissory note in the principal amount of
$350,000. The Master Trust sold the remaining 50,000 of these shares to a trust
the trustee of which is Mr. Freadhoff and the beneficiary of which is Hanh Ngo,
our Executive Vice President--Operations, in exchange for a promissory note from
this trust in the principal amount of $50,000. Ms. Ngo has delivered to this
trust a promissory note in the principal amount of $350,000. The trusts (the
"Individual Trusts") of which Messrs. Corliss and Bassett-Parkins and Ms. Ngo
are beneficiaries are, by their terms, permitted to deliver the shares of common
stock to their beneficiaries in three equal installments for a purchase price of
$1.00 per share on or after January 1, 2000, 2001, and 2002 (subject to
acceleration in the event of a change of control), provided that the individual
beneficiary of the Individual Trust in question has not voluntarily terminated
their employment with us prior to these dates. These individuals will satisfy
the purchase price for their shares by means of the repayment of their
respective promissory note to the respective Individual Trust. In the event that
any of these beneficiaries should so terminate their employment with us prior to
these dates, the trustee of the respective Individual Trust will return these
shares in such Individual Trust to the Master Trust in satisfaction of the
promissory note from this Individual Trust to the Master Trust. The Master Trust
will then deliver these shares to its beneficiaries in proportion to their
contributions of shares of common stock to the Master Trust.
During April and May 1999, Netgateway conducted its May 1999 private
offering. Cruttenden Roth acted as one of the placement agents of that offering
and received compensation for their services in the form of $ in cash and
warrants exercisable for an aggregate of shares of common stock for a
period of four years commencing one year after the initial closing of that
offering at the exercise price of $10.00 per share.
We have amended our bylaws and agreed with Cruttenden Roth Incorporated, as
representative of the several underwriters, that all future transactions between
us and any of our officers, directors, and 5% stockholders will be on terms no
less favorable to us than can be obtained from unaffiliated third parties and
will be approved by a majority of our independent and disinterested directors.
53
DESCRIPTION OF SECURITIES
The following description of our capital stock and certain provisions of our
certificate of incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of our certificate of incorporation and bylaws, which
have been filed as exhibits to our registration statement of which this
prospectus is a part.
IN GENERAL
We are authorized by our certificate of incorporation to issue an aggregate
of 40,000,000 shares of common stock, par value $.001 per share, and 5,000,000
shares of preferred stock, par value $.001 per share. As of March 31, 1999,
giving effect to our spring 1999 private placements, 9,795,834 shares of common
stock were outstanding and held of record by approximately 240 stockholders and
no shares of preferred stock were outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half outstanding shares of common stock, subject to the rights of the
holders of preferred stock, can elect all of our directors, if they choose to do
so. In this event, the holders of the remaining shares of common stock would not
be able to elect any directors. Subject to the prior rights of any class or
series of preferred stock which may from time to time be outstanding, if any,
holders of common stock are entitled to receive ratably, dividends when, as, and
if declared by the board of directors out of funds legally available for that
purpose and, upon our liquidation, dissolution, or winding up, are entitled to
share ratably in all assets remaining after payment of liabilities and payment
of accrued dividends and liquidation preferences on the preferred stock, if any.
Holders of common stock have no preemptive rights and have no rights to convert
their common stock into any other securities. The outstanding common stock is
validly authorized and issued, fully-paid, and nonassessable. In the event we
were to elect to sell additional shares of common stock following this offering,
investors in this offering would have no right to purchase additional shares. As
a result, their percentage equity interest in us would be diluted.
The shares of our common stock offered in this offering will be, when issued
and paid for, fully paid and not liable for further call and assessment. Except
as otherwise directed by Delaware law, and subject to the rights of the holders
of preferred stock, all stockholder action is taken by the vote of a majority of
the outstanding shares of common stock voted as a single class present at a
meeting of stockholders at which a quorum consisting of a majority of the
outstanding shares of common stock is present in person or proxy.
PREFERRED STOCK
We may issue preferred stock in one or more series and having the rights,
privileges, and limitations, including voting rights, conversion privileges, and
redemption rights, as may, from time to time, be determined by the board of
directors. Preferred stock may be issued in the future in connection with
acquisitions, financings, or other matters as the board of directors deems
appropriate. In the event that we determine to issue any shares of preferred
stock, a certificate of designation containing the rights, privileges, and
limitations of this series of preferred stock shall be filed with the Secretary
of the State of the State of Delaware. The effect of this preferred stock is
that our board of directors alone, and subject to Federal securities laws and
Delaware law, may be able to authorize the issuance of preferred stock which
could have the effect of delaying, deferring, or preventing a change in control
of Netgateway without further action by the stockholders, and may adversely
affect the voting and other rights of the holders of the common stock. The
issuance of preferred stock with voting and
54
conversion rights may also adversely affect the voting power of the holders of
common stock, including the loss of voting control to others.
REGULATION OF THE INTRODUCTION OF BUSINESS AT ANNUAL MEETINGS OF STOCKHOLDERS
Our by-laws include provisions which regulate the submission by persons
other than the board of directors of matters to a vote of stockholders.
Generally, at an annual meeting of the stockholders, the only business conducted
must be brought before the annual meeting either by, or at the direction of, the
board of directors or by any of our stockholders who is a stockholder of record
at the time of giving of notice for such meeting, who shall be entitled to vote
at such annual meeting, and who complies with the notice procedures set forth in
the by-laws. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must be given timely notice thereof in writing to
our Secretary. To be timely, a stockholder's notice must be delivered or mailed
to, and received at, our principal executive offices not less than 60 days nor
more than 90 days prior to the annual meeting, regardless of any postponement,
deferrals, or adjournments of that meeting to a later date; provided, however,
that in the event that less than 70 days' notice or prior public disclosure of
the date of the annual meeting is given or made to stockholders, notice by the
stockholder to be timely must be received no later than the close of business on
the 10(th) day following the day on which notice of the date of the annual
meeting was mailed or public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting the following:
- a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting this business at the
annual meeting,
- the name and address, as they appear on our books, of the stockholder
proposing this business,
- the class and number of our shares which are beneficially owned by the
stockholder, and
- any material interest of the stockholder in the business he wishes to
bring before the annual meeting.
Notwithstanding anything in the by-laws to the contrary, no business shall
be conducted at the stockholder meeting, except in accordance with the
procedures set forth in the by-laws. The chairman of the meeting, as determined
in accordance with the by-laws, shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and, in accordance with the provisions of these by-laws, and if he should so
determine, he shall so declare to the meeting and any business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing, a stockholder shall also comply with all applicable requirements of
the Exchange Act with respect to the above.
QUOTATION ON NASDAQ NATIONAL MARKET
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol "NGWY." Our common stock currently trades on the OTC
Bulletin Board under this symbol.
TRANSFER AGENT
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, New York 10004.
55
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 12,343,404 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option, and no exercise of outstanding options or warrants, no conversion of any
outstanding convertible securities, and no exchange of any outstanding
exchangeable securities. Of these shares, 2,950,000 shares, including the
2,500,000 shares offered in this offering, will be freely tradeable without
further registration under the Securities Act. All of our officers and directors
and certain of our current stockholders holding an aggregate of
shares of our common stock have agreed not to sell, or otherwise dispose of, any
of our securities for a period of at least six months from the date of this
offering without the underwriters' prior written consent.
Of the presently outstanding 9,893,404 shares of common stock, 9,443,404 are
"restricted securities" within the meaning of Rule 144 under the Securities Act
and, if held for at least one year, would be eligible for sale in the public
market in reliance upon, and in accordance with, the provisions of Rule 144
following the expiration of such one-year period. In general, under Rule 144 as
currently in effect, a person or persons whose shares are aggregated, including
a person who may be deemed to be an "affiliate" of ours as that term is defined
under the Securities Act, would be entitled to sell within any three month
period a number of shares beneficially owned for at least one year that does not
exceed the greater of (1) 1% of the then outstanding shares of common stock, or
(2) the average weekly trading volume in the common stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice, and the availability of
current public information about us. However, a person who is not deemed to have
been an affiliate of us during the 90 days preceding a sale by such person and
who has beneficially owned such shares of common stock for at least two years
may sell such shares without regard to the volume, manner of sale, or notice
requirements of Rule 144.
Following this offering, we cannot predict the effect, if any, that sales of
shares of common stock pursuant to Rule 144 or otherwise, or the availability of
such shares for sale, will have on the market price prevailing from time to
time. Nevertheless, sales by the current stockholders of a substantial number of
shares of common stock in the public market could materially adversely affect
prevailing market prices for the common stock. In addition, the availability for
sale of a substantial number of shares of common stock acquired through the
exercise of the representative's warrants or the outstanding options under our
existing stock option plans or outstanding warrants or convertible securities
could materially adversely affect prevailing market prices for our common stock.
See "Risk Factors--Future Sales of Common Stock By Our Existing Stockholders
Could Adversely Affect Our Stock Price."
Some of our stockholders, holding in the aggregate approximately 1,731,400
shares of common stock or holding securities convertible into or exercisable or
exchangeable for shares of common stock, have the right, subject to a number of
conditions and limitations, to include their shares in registration statements
relating to our securities. Stockholders holding an aggregate of of these
shares of common stock have waived these rights with respect to this offering.
By exercising their registration rights and causing a large number of shares to
be registered and sold in the public market, these holders may cause the market
price of the common stock to fall.
Up to 250,000 additional shares of common stock may be purchased by the
underwriters during the period commencing on the first anniversary of the date
of this prospectus and terminating on the fifth anniversary of the date of this
prospectus through the exercise of the representative's warrants. Any and all
securities purchased upon the exercise of the representative's warrants may be
freely tradeable, provided that we satisfy certain securities registration and
qualification requirements in accordance with the terms of the representative's
warrants. See "Underwriting."
56
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement,
we have agreed to sell to each of the underwriters named below, and each of the
underwriters, for which Cruttenden Roth is acting as representative, has
severally, and not jointly, agreed to purchase the number of shares offered
hereby set forth opposite their respective names below.
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
Cruttenden Roth Incorporated.....................................................
Total............................................................................ 2,500,000
A copy of the underwriting agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part. The underwriting
agreement provides that the obligation of the underwriters to purchase the
shares is subject to some conditions. The underwriters shall be obligated to
purchase all of the shares (other than those covered by the underwriters'
over-allotment option described below), if any are purchased.
The representative has advised us that the underwriters propose initially to
offer the shares of common stock to the public at the public offering price set
forth on the cover page of this prospectus and that they may allow certain
dealers who are members of the NASD, and some foreign dealers, concessions not
in excess of $ per share, of which amount a sum not in excess of
$ per share may in turn be reallowed by such dealers to other
dealers who are members of the NASD and to some foreign dealers. After the
commencement of this offering, the offering price, the concession to selected
dealers, and the reallowance to other dealers may be changed by the
representative.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the underwriters may be required to make in respect.
We have agreed to pay to the representative an expense allowance, on a
non-accountable basis, equal to % of the gross proceeds derived from the sale
of 2,500,000 shares offered in this offering, or 2,875,000 shares if the
underwriters' over-allotment option is exercised in full. We paid an advance on
this allowance in the amount of $25,000. We have also agreed to pay some of the
representative's expenses in connection with this offering, including expenses
in connection with qualifying the shares offered hereby for sale under the laws
of such states as the representative may designate and the placement of
tombstone advertisements.
In connection with this offering, we have granted the representative the
right, for the three-year period commencing on the closing date of this
offering, to appoint an observer to attend all meetings of our board of
directors. This designee has the right to notice of all meetings of the board of
directors and to receive reimbursement for all out-of-pocket expenses incurred
in attending these meetings. In addition, such designee will be entitled to
indemnification to the same extent as our directors.
The representative has advised us that the underwriters do not intend to
confirm sales of the shares of common stock offered hereby to any account over
which they exercise discretionary authority.
We and our officers, directors, and certain of our current stockholders,
have agreed not to offer, assign, issue, sell, hypothecate, or otherwise dispose
of any shares of our common stock, our securities convertible into, or
exercisable or exchangeable for, shares of our common stock, or shares of our
common stock received upon conversion, exercise, or exchange of such securities,
to the public without the prior written consent of Cruttenden Roth for a period
of at least six months after the date of this prospectus.
57
Prior to this offering, the common stock traded on the OTC Bulletin Board.
We have applied to have the common stock quoted on the Nasdaq National Market.
The public offering price for the shares has been determined by arms-length
negotiations between us and the representative principally on the basis of the
market price for our common stock prior to the date of this prospectus. The
factors considered in such negotiations were prevailing market conditions, our
history and prospects, and the history and prospects of the industry in which we
compete, an assessment of our management, our capital structure, and such other
factors deemed relevant.
We have also granted to the underwriters an option, exercisable during the
45-day period commencing on the date of this prospectus, to purchase at the
public offering price per share, less underwriting discounts and commissions, up
to an aggregate of 375,000 shares of common stock. To the extent this option is
exercised, the underwriters will become obligated, subject to some conditions,
to purchase additional shares of common stock. The underwriters may exercise
such right of purchase only for the purpose of covering over-allotments, if any,
made in connection with the sale of shares. Purchases of shares of common stock
upon exercise of the over-allotment option will result in the realization of
additional compensation by the underwriters.
In connection with this offering, we have agreed to sell to the
representative, individually and not as representative of the several
underwriters, at the price of $.001 per warrant, the representative's warrants
to purchase an aggregate of 250,000 shares of common stock. The representative's
warrants are exercisable for a period of four years commencing one year after
the date of this prospectus at an exercise price per share equal to $ . The
representative's warrants may not be sold, transferred, assigned, pledged, or
hypothecated for a period of 12 months from the date of the prospectus, except
to members of the selling group and to officers and partners of the
representative and members of the selling group. The representative's warrants
contain anti-dilution provisions providing for adjustments of the exercise price
and number of shares issuable on exercise of the representatives' warrants, upon
the occurrence of specified events, including stock dividends, stock splits, and
recapitalizations. The holders of the representative's warrants have no voting,
dividend, or other rights as stockholders of Netgateway with respect to shares
of common stock underlying the representative's warrants, unless the
representative's warrants shall have been exercised.
A new registration statement or post-effective amendment to the registration
statement will be required to be filed and declared effective under the
Securities Act before distribution to the public of the representative's
warrants and the underlying shares. We have agreed, on one occasion during the
period beginning one year after the date of this prospectus and ending five
years after the date of this prospectus, if requested by the holders of a
majority of the representative's warrants or shares of common stock issued upon
their exercise, to make all necessary filings to permit a public offering of the
representative's warrants and underlying shares and to use our best efforts to
cause such filing to become effective under the Securities Act and to remain
effective for at least 12 months, at our sole expense. In addition, we have
agreed to give advance notice to holders of the representative's warrants and
the underlying shares of common stock of our intention to file a registration
statement, and in such case, holders of the representative's warrants and the
underlying shares shall have the right to require us to include such shares of
common stock in such registration statement at our expense (subject to specified
limitations).
During and after this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with this offering. The underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the common stock sold in this
offering for their account may be reclaimed by the syndicate if such shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain, or otherwise affect the market price of the
common stock, which may be higher than the price that might otherwise prevail in
the open market. Neither we nor
58
the underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the common stock. In addition, neither we nor the underwriters make any
representation that the underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of common stock offered hereby will be passed upon for us by Brock
Silverstein LLC, New York, New York. Certain legal matters in connection with
the offering will be passed upon for the underwriters by Greenberg Traurig, New
York, New York. Brock Silverstein LLC renders legal services to Cruttenden Roth
in connection with matters other than this offering. Robert Steven Brown, a
member of Brock Silverstein LLC, owns beneficially and of record an aggregate of
5,000 shares of common stock.
EXPERTS
The consolidated financial statements of Netgateway, Inc. and subsidiaries
as of June 30, 1998 and for the period from March 4, 1998 (inception) to June
30, 1998 have been included herein and in the Form S-1 in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Infobahn Technologies LLC dba
Digital Genesis as of December 31, 1997 and 1996 and for the years ended
December 31, 1997 and 1996 have been included herein and in the Form S-1 in
reliance upon the report of Wright Ford Young & Co., independent certified
public accountants, appearing elsewhere herein upon the authority of said firm
as experts in accounting and auditing.
The consolidated financial statements of Spartan Multimedia, Inc. as of
August 31, 1998 and for the year ended August 31, 1998 have been included herein
and in the Form S-1 in reliance upon the report of Allan Hogenson, Chartered
Accountant, appearing elsewhere herein upon the authority of said individual as
expert in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including the exhibits, schedules, and amendments to this
registration statement, under the Securities Act with respect to the shares of
common stock to be sold in this offering. This prospectus does not contain all
the information set forth in the registration statement. For further information
with respect to us and the shares of our common stock to be sold in this
offering, we make reference to the registration statement. Although this
prospectus contains all material information regarding us, statements contained
in this prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete, and in each instance we make
reference to the copy of such contract, agreement, or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference.
You may read and copy all or any portion of the registration statement or
any other information which we file at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our Securities and Exchange Commission filings,
including the registration statement, are also available to you on the
Securities and Exchange Commission's Web site (http://www.sec.gov).
59
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance with this Act,
will file periodic reports, proxy and information statements, and other
information with the Securities and Exchange Commission. Such reports, proxy and
information statements, and other information may also be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
60
INDEX TO FINANCIAL STATEMENTS
NETGATEWAY, INC. AND SUBSIDIARIES PRO FORMA STATEMENTS
Unaudited Pro Forma Consolidated Statement of Operations for the period March 4,
1998 (Inception) through June 30, 1998........................................... F-3
Unaudited Pro Forma Consolidated Statement of Operations for the nine months ended
March 31, 1999................................................................... F-4
Notes to Unaudited Pro Forma Consolidated Statement of Operations.................. F-5
NETGATEWAY, INC. AND SUBSIDIARIES
Independent Auditor's Report for Netgateway, Inc................................... F-6
Consolidated Balance Sheet as of June 30, 1998..................................... F-7
Consolidated Statement of Operations for the period March 4, 1998 (Inception)
through June 30, 1998............................................................ F-8
Consolidated Statement of Changes in Shareholders' Deficit for the period March 4,
1998 (Inception) through June 30, 1998........................................... F-9
Consolidated Statement of Cash Flows for the period March 4, 1998 (Inception)
through June 30, 1998............................................................ F-10
Notes to Consolidated Financial Statements......................................... F-11
Unaudited Consolidated Balance Sheet as of March 31, 1999.......................... F-22
Consolidated Statements of Operations for the nine months ended March 31, 1999 and
for the cumulative period from March 4, 1998 (Inception) through March 31, 1999
(Unaudited)...................................................................... F-23
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the period
March 4, 1998 (Inception) through June 30, 1998 and the nine months ended March
31, 1999 (Unaudited)............................................................. F-24
Consolidated Statements of Cash Flows for the nine months ended March 31, 1999 and
for the cumulative period from March 4, 1998 (Inception) through March 31, 1999
(Unaudited)...................................................................... F-25
Notes to Unaudited Consolidated Financial Statements............................... F-26
INFOBAHN TECHNOLOGIES, LLC DBA DIGITAL GENESIS
Independent Auditor's Report for Infobahn Technologies, LLC dba Digital Genesis.... F-32
Balance Sheets as of December 31, 1997 and 1996.................................... F-33
Statements of Operations for the Years Ended December 31, 1997 and 1996............ F-34
Statements of Members' Equity for the Years Ended December 31, 1997 and 1996....... F-35
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996............ F-36
Notes to Financial Statements...................................................... F-37
SPARTAN MULTIMEDIA, INC.
Auditor's Report for Spartan Multimedia, Inc....................................... F-38
Balance Sheet as of August 31, 1998................................................ F-39
Statement of Earnings and Retained Earnings for the Year Ended August 31, 1998..... F-40
Statement of Changes in Financial Position for the Year Ended August 31, 1998...... F-41
Notes to Financial Statements...................................................... F-42
F-1
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated data present the Unaudited
Pro Forma Consolidated Statement of Operations of the Company for the nine
months ended March 31, 1999, and period since inception (March 4, 1998) to June
30, 1998 after giving effect to the acquisitions of Spartan Multimedia and
Infobahn Technologies (dba Digital Genesis) as if they had been consummated at
the beginning of the respective periods presented. The Company's fiscal year
ends on June 30.
The pro forma data are based on the historical consolidated statements of
the Company, Spartan Multimedia and Infobahn Technologies, giving effect to the
acquisitions using the purchase method of accounting and the assumptions and
adjustments outlined in the accompanying Notes to Unaudited Pro Forma
Consolidated Financial Statements. The pro forma adjustments set forth in the
following unaudited pro forma consolidated financial data are preliminary
estimates and may differ from the actual adjustments when they become known.
However, management believes such adjustments, if any, will not be material.
The following unaudited pro forma consolidated financial data do not give
effect to anticipated expenses related to the acquisition and do not reflect
certain cost savings that management of the Company believes may be realized
following the acquisition. These savings are expected to be realized primarily
through integration of operations.
The pro forma data are provided for comparative purposes only. They do not
purport to be indicative of the results that actually would have occurred if the
acquisitions had been consummated on the dates indicated or that may be obtained
in the future. The unaudited pro forma consolidated financial data should be
read in conjunction with the Notes thereto, the audited Consolidated Financial
Statements of the Company and the Notes thereto and the audited Financial
Statements of Infobahn Technologies and Spartan Multimedia, and the Notes
thereto, all included in this registration statement.
F-2
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
HISTORICAL
------------------------------------- PRO FORMA
DIGITAL SPARTAN -------------------------------------
NETGATEWAY GENESIS MULTIMEDIA ADJUSTMENTS REFS. TOTAL
------------- --------- ----------- ----------- ----- -----------
Service revenue......................... $ 2,800 82,319 5,874 90,993
Operating expenses:
License fees.......................... 3,822,000 -- -- 3,822,000
Depreciation and amortization......... 12,249 228 -- 53,090 1,2 65,567
Selling, general and administrative... 721,210 62,030 19,360 -- 802,600
--
------------- --------- ----------- ----------- -----------
Total operating expenses.......... 4,555,459 62,258 19,360 53,090 4,690,167
--
------------- --------- ----------- ----------- -----------
Income (loss) from operations..... (4,552,659) 20,061 (13,486) 53,090 4,599,174
Interest expense........................ 19,277 -- -- -- 19,277
--
------------- --------- ----------- ----------- -----------
Net income (loss)................. $ (4,571,936) 20,061 (13,486) 53,090 4,618,451
--
--
------------- --------- ----------- ----------- -----------
------------- --------- ----------- ----------- -----------
Basic and diluted loss per share........ $ (0.84) -- -- -- (0.81)
--
--
------------- --------- ----------- ----------- -----------
------------- --------- ----------- ----------- -----------
Weighted average common shares
outstanding -- basic and diluted...... 5,416,242 -- -- 400,000 3 5,721,327
--
--
------------- --------- ----------- ----------- -----------
------------- --------- ----------- ----------- -----------
F-3
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
HISTORICAL
-------------------------- PRO FORMA
SPARTAN -------------------------------------
NETGATEWAY MULTIMEDIA ADJUSTMENTS REFS TOTAL
------------- ----------- ----------- --- -----------
Service revenue..................................... $ 198,759 3,441 202,200
Operating expenses:
Depreciation and amortization..................... 120,577 -- 92,626 1 213,203
Selling, general and administrative............... 6,862,966 75,995 6,938,961
------------- ----------- ----------- -----------
Total operating expenses.................... 6,983,543 75,995 92,626 7,152,164
------------- ----------- ----------- -----------
Loss from operations........................ (6,784,784) (72,554) (92,626) (6,949,964)
Loss on sale of equity securities................... 54,729 -- -- 54,729
Interest expense.................................... 313,744 -- -- 313,744
------------- ----------- ----------- -----------
Loss before extraordinary item.............. (7,153,257) (72,554) (92,626) (7,318,437)
Extraordinary gain on extinguishment
of debt........................................... 1,853,232 -- -- 1,853,232
------------- ----------- ----------- -----------
Net loss.................................... $ (5,300,025) (72,554) (92,626) (5,465,205)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Basic and diluted extraordinary gain
per share......................................... .21 -- -- .21
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Basic and diluted loss per share.................... $ (0.61) -- -- (0.63)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Weighted average common shares outstanding - basic
and diluted....................................... 8,659,851 -- -- 8,659,851
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
F-4
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998 AND
FOR THE NINE MONTHS ENDED MARCH 31, 1999
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated statements of operations have been
prepared to reflect the acquisition of substantially all of the assets and
liabilities of Infobahn Technologies (d/b/a Digital Genesis) and all outstanding
capital stock of Spartan Multimedia in exchange for 400,000 shares of the
Company's Common Stock and 371,429 shares of common stock of Storesonline.com, a
wholly-owned subsidiary of the Company, which was convertible into the Company's
common stock on a one-to-one basis, respectively, as if the transactions were
effective at the beginning of the respective periods. The transactions are
accounted for under the purchase method. To give effect to this assumption, the
following adjustments were made:
1. The acquisition of Spartan Multimedia resulted in acquired technology and
trade secrets of $926,262. Additional amortization of $46,313 for the period
from March 4, 1998 (inception) to June 30, 1998 and $92,626 for the period
from July 1, 1998 until the actual acquisition date of January 15, 1999 are
shown.
2. The acquisition of Infobahn Technologies resulted in an intangible asset
representing the value of acquired technology of $120,000, and goodwill
valued at $235,193. Additional amortization of $6,777 for the period since
March 4, 1998 (inception) to the acquisition date of June 2, 1998 is shown.
The impact on income taxes would be minor due to historical losses of
NetGateway.
3. The Company issued 400,000 shares of common stock to acquire Infobahn
Technologies.
F-5
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Netgateway, Inc.:
We have audited the accompanying consolidated balance sheet of Netgateway,
Inc. and subsidiary (a development stage enterprise) as of June 30, 1998 and the
related consolidated statements of operations, changes in shareholders' deficit
and cash flows for the period March 4, 1998 (inception) through June 30, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 subsidiary as of June 30, 1998 and the results of its operations and
its cash flows for the period March 4, 1998 (inception) through June 30, 1998 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company's planned principal operations have not
commenced and minimal revenues have been generated while the Company develops
its technology. Additionally, the Company has a total shareholders' deficit and
has continuing financial needs. These matters raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
KPMG LLP
October 23, 1998, except note 11 which is
as of April 30, 1999
F-6
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
Current assets:
Cash........................................................................ $ 254,597
Accounts receivable......................................................... 21,305
Notes receivable............................................................ 50,000
Other current assets........................................................ 45,565
----------
Total current assets.................................................... 371,467
Property and equipment, net (note 3)............................................ 143,384
Intangible assets, net (note 4)................................................. 351,804
Other assets.................................................................... 4,897
----------
$ 871,552
----------
----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................ $ 106,242
Accrued liabilities......................................................... 172,842
Current portion of notes payable to related parties (note 5)................ 2,052,159
----------
Total current liabilities............................................... 2,331,243
Notes payable to related parties, less current portion (note 5)................. 367,892
----------
Total liabilities....................................................... 2,699,135
----------
Shareholders' deficit (notes 7 and 8):
Common stock, par value $.001 per share. Authorized 25,000,000 shares;
issued and outstanding 7,510,000 shares at June 30, 1998.................. 7,510
Additional paid-in capital.................................................. 2,849,163
Deferred compensation....................................................... (112,320)
Deficit accumulated during development stage................................ (4,571,936)
----------
Total shareholders' deficit............................................. (1,827,583)
Commitments and subsequent events (notes 10 and 11).............................
----------
Total liabilities and shareholders' deficit............................. $ 871,552
----------
----------
See accompanying notes to consolidated financial statements.
F-7
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
Service revenue................................................................. $ 2,800
Operating expenses:
License fees (note 6)....................................................... 3,822,000
Depreciation and amortization............................................... 12,249
Selling, general and administrative......................................... 721,210
----------
Total operating expenses................................................ 4,555,459
----------
Loss from operations.................................................... (4,552,659)
Interest expense................................................................ 19,277
----------
Net loss................................................................ $(4,571,936)
----------
----------
Basic and diluted loss per share................................................ $ (0.84)
----------
----------
Weighted average common shares outstanding--basic and diluted................... 5,416,242
----------
----------
See accompanying notes to consolidated financial statements.
F-8
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING
PRICE ---------------------- PAID-IN DEFERRED DEVELOPMENT
DATE PER SHARE SHARES AMOUNT CAPITAL COMPENSATION STAGE
----------- ---------- --------- ----------- ----------- ------------- -----------
Sale of common stock for
cash.......................... 3/98 $.07 - .33 754,545 $ 755 199,245 -- --
Common stock issued for
services...................... 3/98 0.22 1,445,455 1,445 316,555 -- --
Common stock issued in exchange
for shareholder's payment of
Company debt.................. 3/98 0.50 400,000 400 199,600 -- --
Common stock issued to acquire
license....................... 3/98 0.22 1,000,000 1,000 219,000 -- --
Common stock issued for
services...................... 4/98 0.22 100,000 100 21,900 -- --
Deferred compensation on stock
issued for services........... 4/98 -- -- (14,080) (14,080) --
Amortization of deferred
compensation.................. 4/98 - 6/98 -- -- 1,760 1,760 --
Common stock issued to acquire
license....................... 4/98 0.22 1,900,000 1,900 416,100 -- --
Common stock issued for
services...................... 5/98 .22 200,000 200 43,800 -- --
Common stock issued in exchange
for shareholder's payment of
Company debt.................. 5/98 1.00 200,000 200 199,800 -- --
Sale of common stock for
cash.......................... 5/98 - 6/98 1.00 303,000 303 302,697 -- --
Conversion of debt to capital
contribution.................. 6/98 -- -- 100,000 -- --
Adjustment resulting from
reverse acquisition........... 6/98 450,000 450 (310) -- --
Shares issued in business
acquisition................... 6/98 1.00 400,000 400 399,600 -- --
Conversion of debt to common
stock, including interest..... 6/98 1.00 184,000 184 185,349 -- --
Stock issued for deferred
compensation.................. 6/98 1.00 100,000 100 (100) (100,000) --
Sale of common stock for
cash.......................... 6/98 2.00 73,000 73 145,927 -- --
Net loss....................... -- -- -- -- (4,571,936)
--------- ----------- ----------- ------------- -----------
Balance at June 30, 1998....... 7,510,000 $ 7,510 2,849,163 (112,320) (4,571,936)
--------- ----------- ----------- ------------- -----------
--------- ----------- ----------- ------------- -----------
TOTAL
SHAREHOLDERS'
DEFICIT
------------
Sale of common stock for
cash.......................... 200,000
Common stock issued for
services...................... 318,000
Common stock issued in exchange
for shareholder's payment of
Company debt.................. 200,000
Common stock issued to acquire
license....................... 220,000
Common stock issued for
services...................... 22,000
Deferred compensation on stock
issued for services........... (14,080)
Amortization of deferred
compensation.................. 1,760
Common stock issued to acquire
license....................... 418,000
Common stock issued for
services...................... 44,000
Common stock issued in exchange
for shareholder's payment of
Company debt.................. 200,000
Sale of common stock for
cash.......................... 303,000
Conversion of debt to capital
contribution.................. 100,000
Adjustment resulting from
reverse acquisition........... 140
Shares issued in business
acquisition................... 400,000
Conversion of debt to common
stock, including interest..... 185,533
Stock issued for deferred
compensation.................. --
Sale of common stock for
cash.......................... 146,000
Net loss....................... (4,571,936)
------------
Balance at June 30, 1998....... (1,827,583)
------------
------------
See accompanying notes to consolidated financial statements.
F-9
NET GATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
Cash flows from operating activities:
Net loss..................................................................... $(4,571,936)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 12,249
Common stock issued for services........................................... 371,680
Amortization and write-off of license fees................................. 3,822,000
Interest expense for debt converted to equity.............................. 19,277
Provision for doubtful accounts............................................ 25,000
Changes in assets and liabilities:
Accounts receivable...................................................... (2,000)
Other assets............................................................. (45,422)
Accounts payable and accrued liabilities................................. 116,033
-----------
Net cash used in operating activities.................................. (253,119)
-----------
Cash flows from investing activities:
Cash assumed in business acquisition......................................... 3,321
Loans to customers........................................................... (75,000)
Purchase of property and equipment........................................... (102,034)
-----------
Net cash used in investing activities.................................. (173,713)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock....................................... 649,000
Proceeds from issuance of notes payable to related parties................... 132,429
Repayment of notes payable to related parties................................ (100,000)
-----------
Net cash provided by financing activities.............................. 681,429
-----------
Net increase in cash................................................... 254,597
Cash at beginning of period.................................................... --
-----------
Cash at end of period.......................................................... $ 254,597
-----------
-----------
Supplemental schedule of noncash activities:
Issuance of common stock for business acquisition............................ $ 400,000
Accrued asset purchases...................................................... 27,743
Conversion of notes payable to equity........................................ 284,000
Common stock issued in exchange for shareholders' payment of Company debt.... 400,000
-----------
-----------
See accompanying notes to consolidated financial statements.
F-10
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Netgateway, Inc. and subsidiary ("Netgateway" or the "Company"), was formed
on March 4, 1998 as a Nevada corporation. Netgateway is an internet commerce and
connectivity company which is developing technology to enable businesses and
other organizations to conduct commerce over the internet. The Company plans to
assist such businesses and organizations with internet connectivity, web site
design and development, database support, training and information, commerce
server solutions and transaction clearing-house functions.
The Company is a development stage enterprise as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7. The Company is devoting
substantially all of its present efforts to developing technology. Planned
principal operations have not commenced, and accordingly, no revenues have been
derived therefrom. Only minimal consulting revenues were generated through June
30, 1998.
On June 2, 1998, the Company acquired 100% of the outstanding stock of Video
Calling Card, Inc. ("VCC"), a Nevada public shell corporation, in exchange for
450,000 shares of common stock. The transaction was recorded as a reverse
acquisition under the purchase method of accounting whereby the accounting
acquiror is Netgateway. Accordingly, the common stock account of the Company has
been adjusted retroactively to reflect the outstanding common stock of VCC as of
the date of the acquisition and for all prior periods. 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 statement of
operations of the Company from June 2, 1998 through June 30, 1998. Unaudited pro
forma consolidated results of operations are summarized below to reflect the
acquisition of Digital Genesis as if it had occurred on March 4, 1998
(inception):
Revenue................................................. $ 85,119
----------
----------
Net loss................................................ (4,551,875)
----------
----------
Loss per share.......................................... (.81)
----------
----------
(2) LIQUIDITY
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. As
of the date of this report, the Company's planned principal operations have not
commenced and minimal revenues have been generated as the Company continues to
develop its technology. 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.
F-11
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany balances and transactions have
been eliminated in consolidation.
(B) REVENUE RECOGNITION
Revenue generated from consulting services is recognized as services are
performed.
(C) INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their
estimated useful lives as follows:
Acquired technology....................................... 7 years
Goodwill.................................................. 10 years
(D) PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of computer and office
equipment. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets ranging from 3 to 5 years.
(E) RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development costs are expensed as incurred.
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(G) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted operating cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
F-12
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) FINANCIAL INSTRUMENTS
The carrying values of cash, accounts receivable, notes receivable, accounts
payable and accrued liabilities at June 30, 1998 approximated fair value due to
the short maturity of those instruments. The fair value of the notes payable to
related parties could not be estimated due to the nature of the borrowings. All
financial instruments are held for purposes other than trading.
(I) ACCOUNTING FOR STOCK OPTIONS
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for its
fixed plan employee stock options. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. Compensation expense related to stock options
granted to non-employees is accounted for under Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
whereby compensation expense is recognized over the vesting period based on the
fair value of the options on the date of grant.
(J) COMPREHENSIVE INCOME
SFAS 130, "Reporting Comprehensive Income" (SFAS No. 130) establishes
standards for reporting and displaying comprehensive income (loss) and its
components in a full set of general-purpose financial statements. This statement
requires that an enterprise classify items of other comprehensive income (loss)
by their nature in a financial statement and display the accumulated balance of
other comprehensive income (loss) separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. The Company does not have any components of other comprehensive income
(loss), therefore, comprehensive loss is the same as net loss for the period
March 4, 1998 (inception) through June 30, 1998.
(K) BUSINESS SEGMENTS AND RELATED INFORMATION
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131) establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires enterprises to report selected information
about operating segments in interim financial reports issued to shareholders. Is
also establishes standards for related disclosure about products and services,
geographic areas and major customers. It replaces the "industry segment" concept
of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise,"
with a "management approach" concept as the basis for identifying reportable
segments. The Company has only one operating segment and has no foreign
operations. Therefore, the adoption of SFAS No. 131 had no impact on the
Company.
(L) LOSS PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
F-13
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 200,000 options and 73,000 warrants to purchase shares of common stock that
were outstanding during the period March 4, 1998 (inception) through June 30,
1998 which were not included in the computation of diluted loss per share
because the impact would have been antidilutive.
(M) 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.
(N) 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.
(3) PROPERTY AND EQUIPMENT
Property and equipment balances at June 30, 1998 are summarized as follows:
Computers and office equipment............................ $ 152,244
Less accumulated depreciation............................. (8,860)
---------
$ 143,384
---------
---------
(4) INTANGIBLE ASSETS
Intangible assets balances at June 30, 1998 are summarized as follows:
Acquired technology....................................... $ 120,000
Goodwill.................................................. 235,193
---------
355,193
Less accumulated amortization............................. (3,389)
---------
$ 351,804
---------
---------
(5) 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). TRI entered into the original license
agreement with ProSoft in January 1998.
F-14
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LICENSE AGREEMENTS (CONTINUED)
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. 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 is included as license fees
expense in the accompanying consolidated statement of operations.
(6) NOTES PAYABLE
Notes payable at June 30, 1998 consists of the following:
Non-interest bearing note payable to ProSoft I-Net Solutions,
Inc. under license agreements, maturing through October 15,
1998.......................................................... $1,100,000
Non-interest bearing note payable payable to ProSoft I-Net
Solutions, Inc. under license agreements, payable in quarterly
principal and interest installments of $200,000 and maturing
through December 31, 1999..................................... 1,287,622
Non-interest bearing note payable to an officer and shareholder,
due on demand................................................. 32,429
----------
2,420,051
Less current portion............................................ (2,052,159)
----------
$ 367,892
----------
----------
F-15
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) NOTES PAYABLE (CONTINUED)
At June 30, 1998, aggregate maturities of notes payable are as follows:
TOTAL
------------
Year ending June 30:
1999................................................................ $ 2,052,159
2000................................................................ 367,892
------------
Total maturities.................................................. 2,420,051
------------
------------
The non-interest bearing note payable payable to ProSoft I-Net Solutions,
Inc. under license agreements due December 31, 1999, is net of imputed interest
of $112,378 as of June 30, 1998.
During the period from March 4, 1998 (inception) through June 30, 1998, an
officer and shareholder loaned the Company $132,429 of which $100,000 was
converted into a capital contribution in June 1998. The remaining balance of
$32,429 is due on demand.
In August 1998, the notes payable agreements to ProSoft I-Net Solutions,
Inc. 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.
(7) STOCKHOLDERS' EQUITY
During the period March 4, 1998 (inception) through June 30, 1998, the
Company issued 1,645,455 shares of common stock valued at $362,000 to certain
officers and employees in exchange for compensation. The shares vested
immediately upon grant. In April 1998, the Company granted 100,000 shares of
common stock under a consulting agreement in exchange for services valued at
$22,000. Compensation expense of $7,920 was recognized for the value of the
shares which vested immediately upon grant. Under the agreement, the Company may
repurchase up to 64,000 shares of the common stock issued to the consultant. The
shares eligible for repurchase vest ratably over a 24 month period upon
performance of services under the consulting agreement. Deferred compensation of
$14,080 was recorded in the accompanying consolidated statement of changes in
shareholders' deficit to reflect the unearned compensation. During the period
March 4, 1998 (inception) through June 30, 1998, 8,000 of the shares eligible
for repurchase vested. As a result, $1,760 of compensation was recorded in the
accompanying consolidated statement of operations. 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 period March 4, 1998 (inception) through June 30, 1998, Mike
Khaled, Don Danks, and Lynn Turnbow, shareholders of the Company, paid, on
behalf of the Company, $400,000 of the scheduled payments under the $3,000,000
notes payable to ProSoft in exchange for 600,000 shares of common stock valued
at $400,000.
In March 1998, an officer and shareholder of the Company loaned the Company
$100,000. In June 1998, the note was converted into a capital contribution.
F-16
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
In June 1998, $184,000 of notes payable to third parties were converted into
184,000 shares of common stock valued at $185,333, including $1,533 of accrued
interest.
During the period March 4, 1998 (inception) through June 30, 1998, the
Company sold 1,057,545 shares of common stock for $503,000 in cash.
Additionally, in June 1998, the Company sold 73,000 units in exchange for
$146,000. Each unit consisted of one share of common stock and one warrant to
purchase an equivalent number of shares of common stock at an exercise price of
$4.00. The warrants were exercisable at any time prior to September 1, 1998. The
fair value of the warrants on the date of the grant was estimated to be $.02
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0%; risk-free interest rate of 5.16%; volatility of 100%; and
an expected life of two months. The warrants were subsequently repriced to $2.00
per share and the exercise date was extended to October 1, 1998. The fair value
of the warrants on the date of repricing remained consistent with the fair value
on date of grant.
(8) STOCK OPTIONS
In June 1998, the Board of Directors approved, for future grants, 500,000
options to acquire an equivalent number of shares of common stock at an exercise
price of $1 per share to certain senior management. No options were granted as
of June 30, 1998.
In June 1998, the Board of Directors granted 100,000 options to acquire an
equivalent number of shares of common stock at an exercise price of $6 per share
as a legal fee retainer. The options vest ratably as services are provided and
expire on April 30, 2005. The fair value of the options on the date of the grant
was estimated to be $.66 using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%; risk-free interest rate of 5.66%;
volatility of 100%; and an expected life of seven years. As of June 30, 1998,
only a minimal amount of legal services had been provided under the agreement.
In June 1998, the Company granted a consultant 100,000 options to purchase
an equivalent number of shares of common stock at an exercise price of $3.50 per
share as compensation for services. The options vest upon the consultant
achieving certain sales goals related to the sale of training courses under the
ProSoft license agreement by June 1999. The options expire on June 1, 2003. As
of June 30, 1998, no options had been earned under the agreement. The fair value
of the options on the date of the grant was estimated to be $.59 per share using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%; risk-free interest rate of 5.50%; volatility of 100%; and an
expected life of 5 years. Subsequent to June 30, 1998, these options were
canceled.
The following is a summary of stock option activity:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
----------- ---------------
Balance at March 4, 1998........................................... -- $ --
Granted............................................................ 200,000 4.75
-----------
Balance at June 30, 1998........................................... 200,000 4.75
----------- -----
----------- -----
F-17
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS (CONTINUED)
The following table summarizes information about shares under option at June
30, 1998:
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- ----------- ------------- -----------
$3.50 to 6.00 200,000 5.88 years $ 4.75 -- $ --
----------- ----------- ----------- --- -----------
----------- ----------- ----------- --- -----------
In July 1998, the Board of Directors adopted the 1998 Stock Compensation
Program ("Program") which consists of an Incentive Stock Option Plan,
Non-Qualified Stock Option Plan, Restricted Share Plan, Employee Stock Purchase
Plan, Non-Employee Director Stock Option Plan, Stock Appreciation Rights Plan
and Other Stock Rights Plan. An aggregate of 1,000,000 shares were reserved for
issuance under the Program.
In December, 1998, the Board of Directors adopted, subject to approval by
our stockholders, the 1998 Stock Option Plan for Senior Executives. This plan
provides for the grant of options to purchase up to 5,000,000 shares of common
stock to senior executives of Netgateway. Options may be either "incentive stock
options" or non-qualified stock options under Federal tax laws.
(9) INCOME TAXES
Income tax expense for the period March 4, 1998 (inception) through June 30,
1998 represents the California state minimum franchise tax of $800 and is
included in selling, general and administrative expenses in the accompanying
consolidated statement of operations.
Income tax expense attributable to loss from operations during the period
March 4, 1998 (inception) through June 30, 1998, differed from the amounts
computed by applying the U.S. federal income tax rate of 34 percent to loss from
operations as a result of the following:
Computed "expected" tax benefit................................. $(1,564,458)
Decrease (increase) reduction in income taxes resulting from:
State and local income tax benefit, net of federal effect....... (278,196)
Change in the valuation allowance for deferred tax assets
allocated to income taxes..................................... 1,859,974
Other......................................................... (27,320)
----------
Income tax expense............................................ $ 800
----------
----------
F-18
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1998 are presented below:
Deferred tax assets:
Net operating loss carryforwards.............................. $ 199,036
License fees.................................................. 1,470,280
Stock compensation expense.................................... 179,872
Intangible assets, principally due to differences in
amortization................................................ 10,290
Property and equipment, principally due to differences in
depreciation................................................ 496
----------
Total gross deferred tax assets............................. 1,859,974
Less valuation allowance.................................... (1,859,974)
----------
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
schedule reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In order to fully realize
the deferred tax assets, the Company will need to generate future taxable income
of approximately $4,650,000 prior to the expiration of the carryforward period
in 2013. 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, 1998, the Company had approximately $498,000 of net operating
loss carryforwards available for Federal and state income tax purposes,
respectively, which expire 2013. 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.
(10) LEASE COMMITMENTS
The Company has noncancelable operating leases for office space which expire
at various dates through July 2001. Minimum annual commitments under
noncancelable operates leases are $71,102 in 1999, $66,571 in 2000 and $69,552
in 2001. All other operating leases are month-to-month arrangements.
Rent expense amounted to $18,367 during the period March 4, 1998 (inception)
through June 30, 1998.
(11) SUBSEQUENT EVENTS
During July 1998 through September 1998, the Company sold 949,800 units in
exchange for $1,899,600, of which 5,000 shares valued at $10,000 have yet to be
issued. Each unit consisted of one
F-19
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) SUBSEQUENT EVENTS (CONTINUED)
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 subsequently
repriced to $2.00 per share. During July 1998 through October 1998, warrants to
purchase 132,100 shares of common stock were exercised generating proceeds of
$264,200.
Subsequent to June 30, 1998, the Company paid $700,000 of scheduled
principal payments under the notes payable to ProSoft I-Net Solutions, Inc. In
connection with a settlement agreement and termination of the license agreements
with ProSoft I-Net Solutions, Inc., the unpaid principal balance of $1,800,000
was forgiven in December 1998.
During the period of July 1998 through March 1999, the Company granted
908,337 options to employees at exercise prices ranging from $2.17 to $5.34 per
share.
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, 2,408,888 which had been granted as of March 31, 1999.
In January 1999, the Company acquired 100% of the outstanding stock of
Spartan Multimedia, Inc., a Canadian corporation, in exchange for 185,715 shares
of common stock of StoresOnline.com, LTD, a wholly-owned Canadian subsidiary,
valued at $464,286. The shares are convertible on a one-to-one basis into common
stock of the Company. The issuance of an additional 185,714 shares was
contingent upon 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 $928,572. The acquisition of Spartan Multimedia, Inc.
was recorded for 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, with the excess consideration of $926,267
recorded as acquired technology and trade secrets.
During July 1998 and August 1998, the Company advanced an aggregate of
$800,000 to Admor Memory Corp. (Admor) with which the Company was in merger
discussions. Certain Company officers and directors were minor shareholders of
Admor. The merger was not consummated and the advances were deemed uncollectible
in December 1998 and written-off.
From January 1999 to February 1999, the Company issued $1,000,000 of
convertible debentures bearing interest at the 90-day treasury bill rate plus
4%. The debentures are convertible into the Company's common stock at $2.50 per
share at the Company's option. The debentures are due in December 1999.
During March 1999 and April 1999, the Company sold 312,600 shares of common
stock in exchange for $937,000.
F-20
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
The Company's schedule of valuation and qualifying accounts and reserves for
the period of March 4, 1998 (inception) through June 30, 1998 as follows:
BALANCE AT BALANCE AT
BEGINNING CHARGED TO COSTS END OF
OF PERIOD AND EXPENSES DEDUCTIONS PERIOD
----------- ----------------- ----------- ------------
Allowance for doubtful accounts.............. $ -- $ 25,000 $ -- $ 25,000
F-21
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
MARCH 31,
1999
-------------
ASSETS
Current assets:
Cash............................................................................................. $ 137,233
Accounts receivable.............................................................................. 37,000
Notes receivable................................................................................. --
Debt issue costs................................................................................. 141,595
Other current assets............................................................................. 10,100
-------------
Total current assets......................................................................... 325,928
Property and equipment, net........................................................................ 196,119
Intangible assets, net............................................................................. 1,201,256
Other assets....................................................................................... 8,194
-------------
$ 1,731,497
-------------
-------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................................................. $ 447,432
Accrued liabilities.............................................................................. 353,512
Convertible debentures (note 4).................................................................. 237,500
Current portion of note payable to related parties............................................... 100,000
Current portion of notes payable................................................................. 160,000
-------------
Total current liabilities.................................................................... 1,298,444
Shareholders' equity (note 6):
Common stock, par value $.001 per share. Authorized 25,000,000 shares; issued and outstanding
9,357,900 shares at March 31, 1999............................................................. 9,358
Additional paid-in captial....................................................................... 10,308,156
Deferred compensation............................................................................ (12,500)
Deficit accumulated during development stage..................................................... (9,871,961)
-------------
Total shareholders' equity................................................................... 433,053
Subsequent events (note 7)
-------------
Total liabilities and shareholders' equity................................................... $ 1,731,497
-------------
-------------
See accompanying notes to consolidated financial statements.
F-22
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
AND FOR THE CUMULATIVE PERIOD FROM MARCH 4, 1998 (INCEPTION) THROUGH MARCH 31,
1999
CUMULATIVE
PERIOD FROM
MARCH 4, 1998
NINE MONTHS (INCEPTION)
ENDED THROUGH
MARCH 31, 1999 MARCH 31, 1999
-------------- ------------------------
Service revenue........................................................ $ 198,759 201,559
Operating expenses:
License fees (note 5)................................................ -- 3,822,000
Depreciation and amortization........................................ 120,577 132,826
Selling, general and administrative.................................. 6,862,966 7,584,176
-------------- -----------
Total operating expenses........................................... 6,983,543 11,539,002
-------------- -----------
Loss from operations............................................... (6,784,784) (11,337,443)
Loss on sale of equity securities...................................... 54,729 54,729
Interest expense....................................................... 313,744 333,021
-------------- -----------
Loss before extraordinary item..................................... (7,153,257) (11,725,193)
Extraordinary gain on extinguishment of debt........................... 1,853,232 1,853,232
-------------- -----------
Net loss........................................................... $ (5,300,025) (9,871,961)
-------------- -----------
-------------- -----------
Basic and diluted extraordinary gain per share......................... $ .21 $ .24
-------------- -----------
-------------- -----------
Basic and diluted loss per share....................................... $ (0.61) (1.29)
-------------- -----------
-------------- -----------
Weighted average common shares outstanding--basic and diluted.......... 8,659,851 7,628,895
-------------- -----------
-------------- -----------
See accompanying notes to consolidated financial statements.
F-23
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
AND THE NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
COMMON STOCK ADDITIONAL
PRICE PER ---------------------- PAID-IN DEFERRED
DATE SHARE SHARES AMOUNT CAPITAL COMPENSATION
----------- ----------- --------- ----------- ------------- -------------
Sale of common stock for cash........... 3/98 $.07 - .33 754,545 $ 755 199,245 --
Common stock issued for services........ 3/98 0.22 1,445,455 1,445 316,555 --
Common stock issued in exchange for
shareholders' payment of Company
debt.................................. 3/98 0.50 400,000 400 199,600 --
Common stock issued to acquire
license............................... 3/98 0.22 1,000,000 1,000 219,000 --
Common stock issued for services........ 4/98 0.22 100,000 100 21,900 --
Deferred compensation on stock issued
for services.......................... 4/98 -- -- -- (14,080)
Amortization of deferred compensation... 4/98 - 6/98 -- -- -- 1,760
Common stock issued to acquire
license............................... 4/98 0.22 1,900,000 1,900 416,100 --
Common stock issued for services........ 5/98 0.22 200,000 200 43,800 --
Common stock issued in exchange for
shareholders' payment of Company
debt.................................. 5/98 1.00 200,000 200 199,800 --
Sale of common stock for cash........... 5/98 - 6/98 1.00 303,000 303 302,697 --
Conversion of debt by officer........... 6/98 -- -- 100,000 --
Shares issued and adjustment resulting
from reverse acquisition.............. 6/98 450,000 450 (310) --
Shares issued in business acquisition... 6/98 1.00 400,000 400 399,600 --
Conversion of debt to common stock,
including interest.................... 6/98 1.00 184,000 184 185,349 --
Stock issued for deferred
compensation.......................... 6/98 1.00 100,000 100 99,900 (100,000)
Sale of common stock for cash........... 6/98 2.00 73,000 73 145,927 --
Net loss................................ -- -- -- --
--------- ----------- ------------- -------------
Balance at June 30, 1998................ 7,510,000 7,510 2,849,163 (112,330)
Unaudited...............................
Sale of common stock for cash........... 7/98 - 9/98 2.00 949,800 950 1,898,650 --
Exercise of warrants.................... 7/98 - 9/98 2.00 132,100 132 264,068 --
10/98 -
Warrants granted for services........... 3/99 2.00 - 2.50 -- -- 1,410,400 --
Stock compensation paid by
stockholders.......................... -- -- 400,000 --
Amortization of deferred compensation... 7/98 - 3/99 -- -- -- 89,260
Forfeited stock......................... (48,000) (48) (10,512) 10,560
Subsidiary convertible common issued in
business acquisition.................. 1/99 2.50 -- -- 928,572 --
Options issued for legal services....... 7/98 - 3/99 -- -- 194,160 --
Warrants granted for debt issue costs... 2/99 2.50 -- -- 369,969 --
Shares issued for debenture
conversion............................ 3/99 2.50 305,000 305 762,195 --
10/98 -
Shares issued for services.............. 3/99 2.00 - 3.00 390,600 390 901,409 --
Shares issued for debt issue costs...... 3/99 2.50 30,000 30 74,970 --
Sale of common stock for cash........... 3/99 3.00 88,400 89 265,111 --
Net loss................................ -- -- -- --
--------- ----------- ------------- -------------
Balance at March 31, 1999............... 9,357,900 $ 9,358 10,308,156 (12,500)
--------- ----------- ------------- -------------
--------- ----------- ------------- -------------
DEFICIT
ACCUMULATED TOTAL
DURING SHAREHOLDERS'
DEVELOPMENT EQUITY
STAGE (DEFICIT)
----------- ------------
Sale of common stock for cash........... -- 200,000
Common stock issued for services........ -- 318,000
Common stock issued in exchange for
shareholders' payment of Company
debt.................................. -- 200,000
Common stock issued to acquire
license............................... -- 220,000
Common stock issued for services........ -- 22,000
Deferred compensation on stock issued
for services.......................... -- (14,080)
Amortization of deferred compensation... -- 1,760
Common stock issued to acquire
license............................... -- 418,000
Common stock issued for services........ -- 44,000
Common stock issued in exchange for
shareholders' payment of Company
debt.................................. -- 200,000
Sale of common stock for cash........... -- 303,000
Conversion of debt by officer........... -- 100,000
Shares issued and adjustment resulting
from reverse acquisition.............. -- 140
Shares issued in business acquisition... -- 400,000
Conversion of debt to common stock,
including interest.................... -- 185,533
Stock issued for deferred
compensation.......................... --
Sale of common stock for cash........... 146,000
Net loss................................ (4,571,936) (4,571,936)
----------- ------------
Balance at June 30, 1998................ (4,571,936) (1,827,583)
Unaudited...............................
Sale of common stock for cash........... -- 1,899,600
Exercise of warrants.................... -- 264,200
Warrants granted for services........... -- 1,410,400
Stock compensation paid by
stockholders.......................... -- 400,000
Amortization of deferred compensation... -- 89,260
Forfeited stock......................... -- --
Subsidiary convertible common issued in
business acquisition.................. -- 928,572
Options issued for legal services....... -- 194,160
Warrants granted for debt issue costs... -- 369,969
Shares issued for debenture
conversion............................ -- 762,500
Shares issued for services.............. -- 901,800
Shares issued for debt issue costs...... -- 75,000
Sale of common stock for cash........... -- 265,200
Net loss................................ (5,300,025) (5,300,025)
----------- ------------
Balance at March 31, 1999............... (9,871,961) 433,053
----------- ------------
----------- ------------
F-24
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND
FOR THE CUMULATIVE PERIOD FROM MARCH 4, 1998 (INCEPTION) THROUGH MARCH 31, 1999
CUMULATIVE
PERIOD FROM
MARCH 4, 1998
NINE MONTHS (INCEPTION)
ENDED MARCH THROUGH
31, 1999 MARCH 31, 1999
-------------- ------------------
Cash flows from operating activities:
Net loss.................................................................... $ (5,300,025) (9,871,961)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 120,577 132,826
Common stock issued for services.......................................... 901,800 1,273,480
Amortization and write-off of license fees................................ -- 3,822,000
Loss on sale of equity securities......................................... 54,729 54,729
Amortization of deferred compensation..................................... 89,260 89,260
Gain on extinguishment of debt............................................ (1,853,232) (1,853,232)
Compensation expense for contributed capital.............................. 400,000 400,000
Interest expense for debt converted to equity............................. 35,488 54,765
Interest expense on warrants issued as debt issue......................... 303,374 303,374
Options and warrants issued for services.................................. 1,604,560 1,604,560
Provision for doubtful accounts........................................... 48,026 73,026
Changes in assets and liabilities:
Accounts receivable..................................................... (63,721) (65,721)
Other assets............................................................ 32,474 (12,948)
Accounts payable and accrued liabilities................................ 644,007 760,040
-------------- ----------
Net cash used in operating activities................................. (2,982,683) (3,235,802)
-------------- ----------
Cash flows from investing activities:
Cash assumed in business acquisition........................................ 4,781 8,102
Purchase of equity securities............................................... (100,733) (100,733)
Proceeds from sale of equity securities..................................... 46,004 46,004
Notes receivable............................................................ 50,000 (25,000)
Purchase of property and equipment.......................................... (91,303) (193,337)
-------------- ----------
Net cash used in investing activities................................. (91,251) (264,964)
-------------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock...................................... 2,164,800 2,813,800
Proceeds from exercise of warrants.......................................... 264,200 264,200
Proceeds from issuance of notes payable and convertible debentures.......... 1,160,000 1,392,429
Proceeds from issuance of notes payable to related parties.................. 100,000 --
Repayment of notes payable to related parties............................... (732,429) (832,429)
-------------- ----------
Net cash provided by financing activities............................. 2,956,571 3,638,000
-------------- ----------
Net increase (decrease) in cash....................................... (117,363) 137,234
Cash at beginning of period................................................... 254,597 --
-------------- ----------
Cash at end of period......................................................... $ 137,234 137,234
-------------- ----------
-------------- ----------
Supplemental schedule of noncash activities:
Issuance of common stock for business acquisition........................... $ -- 400,000
Issuance of convertible stock in business acquisition....................... 464,286 464,286
Accrued asset purchases..................................................... -- 27,743
Conversion of notes payable to equity....................................... -- 284,000
Conversion of debt to common stock.......................................... 762,500 762,500
Common stock issued in exchange for shareholders' payment of Company debt... -- 400,000
Warrants issued for debt issue costs........................................ 369,969 369,969
Stock issued for debt issue costs........................................... 75,000 75,000
-------------- ----------
-------------- ----------
See accompanying notes to consolidated financial statements.
F-25
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(1) DESCRIPTION OF BUSINESS
Netgateway is an internet commerce and connectivity company which provides
turn-key solutions designed to enable companies of any size to extend their
business to the internet for a wide variety of purposes, including the
advertising and sale of products or services by retailers and the conduct of
commercial transactions between business enterprises.
The Company is a development stage enterprise as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7. The Company is devoting
substantially all of its present efforts to developing technology. Planned
principal operations have commenced, but have not produced significant revenue.
Only minimal service and consulting revenues were generated through March 31,
1999.
On June 2, 1998, the Company acquired 100% of the outstanding stock (450,000
shares) of Video Calling Card, Inc. ("VCC"), a Nevada public shell corporation,
in exchange for all of the issued and outstanding common stock of Netgateway.
Each Netgateway share was exchanged for 10 shares of VCC. The transaction was
recorded as a reverse acquisition under the purchase method of accounting
whereby the accounting acquiror is Netgateway. Accordingly, the common stock
account of the Company has been adjusted retroactively to reflect the
outstanding common stock of VCC as of the date of the acquisition and for all
prior periods. 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 statement of operations of the Company
from June 2, 1998 through June 30, 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 $464,286. The shares are convertible on a one-to-one basis into common
stock of the Company. The issuance of an additional 185,714 shares was
contingent upon 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 $928,572. The acquisition of Spartan Multimedia, Inc.
was recorded for 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, with the excess consideration of $926,267
recorded as acquired technology and trade secrets. The operations of Spartan
Multimedia, Inc. are included in the consolidated statement of operations of the
Company from January 15, 1999 through March 31, 1999. Unaudited pro forma
consolidated results of operations for the nine months ended March 31, 1999 are
summarized below to reflect the acquisition of Spartan Multimedia, Inc. as if it
had occurred on July 1, 1998:
Revenue $ 201,982
----------
----------
Net loss (5,379,256)
----------
----------
Loss per share (.62)
----------
----------
F-26
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(2) LIQUIDITY
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. As of
the date of this report, the Company's planned principal operations have not
commenced and minimal revenues have been generated as the Company continues to
develop its technology. The Company has relied upon private placements of its
stock and issuances of debt to generate funds to meet its operating needs and
plans to continue pursuing financing in this manner during the next year.
However, there are no assurances that such financing will be available when and
as needed to satisfy current obligations. As such, substantial doubt exists as
to whether the Company will continue as a going concern.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
(B) REVENUE
Revenue from services is recognized as the services are performed.
Services revenue earned but not invoiced is recorded as revenue and
unbilled accounts receivable until invoiced. Services billed in advance
are recorded to deferred revenue as advance billings and collections
relating to future services are recognized as revenue when earned.
(C) RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development costs are expensed as incurred.
(D) COMPREHENSIVE INCOME
On March 4, 1998 (inception), the Company adopted SFAS 130, "Reporting
Comprehensive Income" (SFAS No. 130). 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 does
not have any components of other comprehensive income (loss), therefore,
comprehensive loss is the same as net loss for the period March 4, 1998
(inception) through June 30, 1998 and the nine months ended March 31,
1999.
(E) LOSS PER SHARE
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings (loss)
per share reflects the potential dilution that could occur if
F-27
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 5,706,825 options and 1,308,300 warrants to purchase shares
of common stock that were outstanding during the period July 1, 1998
through March 31, 1999. There were $237,500 of debentures outstanding
which were convertible into 95,000 shares of common stock and 185,715
shares of common stock granted in the Company's Canadian subsidiary,
StoresOnline.com, Ltd. that are convertible into 185,715 shares common
stock outstanding as of March 31, 1999. None of these items were
included in the computation of diluted loss per share because the impact
would have been antidilutive.
(E) COSTS OF START-UP ACTIVITIES
Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities," the Company expenses all the costs of
start-up activities as incurred.
(F) DEBT ISSUE COSTS
Debt issue costs are recognized as interest expense ratably over the
term of the related debt.
(4) CONVERTIBLE DEBENTURES AND NOTES PAYABLE
During January 1999 and February 1999, the Company issued $1,000,000 of
convertible debentures bearing interest at the 90-day Treasury Bill rate plus
4%. The debentures are convertible into the Company's common stock at $2.50 per
share at the Company's option. The debentures are due in December 1999. As of
March 31, 1999, $762,500 in convertible debentures had been converted into
305,000 shares of common stock.
In March, 1999, the CEO of the Company loaned the Company $100,000 which is due
within 10 days of the close of bridge financing.
(5) 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). 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. Additionally, the Company acquired supplies,
F-28
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(5) LICENSE AGREEMENTS (CONTINUED)
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 is included as license fees
expense in the accompanying consolidated statement of operations.
(6) STOCKHOLDERS' EQUITY
During the period March 4, 1998 (inception) through June 30, 1998, the Company
issued 1,645,455 shares of common stock valued at $362,000 to certain officers
and employees in exchange for compensation. The shares vested immediately upon
grant. In April 1998, the Company granted 100,000 shares of common stock under a
consulting agreement in exchange for services valued at $22,000. Compensation
expense of $7,920 was recognized for the value of the shares which vested
immediately upon grant. Under the agreement, the Company may repurchase up to
64,000 shares of the common stock issued to the consultant. The shares eligible
for repurchase vest ratably over a 24 month period upon performance of services
under the consulting agreement. Deferred compensation of $14,080 was recorded in
the accompanying consolidated statement of changes in shareholders' equity
(deficit) to reflect the unearned compensation. During the period March 4, 1998
(inception) through June 30, 1998, 8,000 shares eligible for repurchase vested.
As a result, $1,760 of compensation was recorded in the accompanying
consolidated statement of operations. During the nine months ended March 31,
1999, an additional 8,000 shares eligible for repurchase vested and the
consulting agreement was subsequently canceled. As a result, $1,760 of
compensation was recorded in the accompanying consolidated statement of
operations.
In June 1998, the Company issued 100,000 shares of common stock to an employee
in exchange for services valued at $100,000. Half of the shares vested on July
1, 1998 with the remaining shares vesting ratably over a 12 month period.
Accordingly, deferred compensation of $100,000 was recorded at June 30, 1998.
During the nine months ended March 31, 1999, the Company recorded $87,500 of
compensation expense related to these shares.
During the period March 4, 1998 (inception) through June 30, 1998, Mike Khaled,
Don Danks and Lynn Turnbow, shareholders of the Company, paid, on behalf of the
Company, $400,000 of the scheduled payments under the $3,000,000 notes payable
to ProSoft in exchange for 600,000 shares of common stock valued at $400,000.
F-29
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(6) STOCKHOLDERS' EQUITY (CONTINUED)
In March 1998, an officer and shareholder of the Company, Keith Freadhoff,
loaned the Company $100,000. In June 1998, the note was contributed to capital.
In June 1998, $184,000 of notes payable to third parties were converted into
184,000 shares of common stock valued at $185,333, including $1,533 of accrued
interest.
During the period March 4, 1998 (inception) through June 30, 1998, the Company
sold 1,057,545 shares of common stock for $503,000 in cash. Additionally, in
June 1998, the Company sold 73,000 units in exchange for $146,000. Each unit
consisted of one share of common stock and one warrant to purchase an equivalent
number of shares of common stock at an exercise price of $4.00. The warrants
were exercisable at any time prior to September 1, 1998. The estimated fair
value of the warrants on the date of the grant was estimated to be $.02 using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0%; risk-free interest rate of 5.16%; volatility of 100%; and an
expected life of two months. The warrants were subsequently repriced to $2.00
per share and the exercise date was extended to October 1, 1998. The 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 and proceeds of $264,200.
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 a legal retainer. The options vest ratably as services are provided and
expire on April 30, 2005. As of June 30, 1998, only a minimal amount of legal
services had been provided under the agreement. During the nine months ended
March 31, 1999, under the anti-dilution clause of the agreement, the number of
options increased to 240,000 and the exercise price was decreased to $2.50 per
share. The fair value of the options was estimated to be $194,160 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 7 years. All services under the agreement were provided through March
31, 1999, therefore, legal expense of $194,160 was recognized in the
accompanying consolidated financial statements.
During the nine months ended March 31, 1999, the Company issued warrants as
consideration for various consulting fees and debt issue costs associated with
the convertible debentures. The warrants were exercisable within two years from
the dates of issuance. The fair value of the warrants on the dates of issuance
was estimated to be $1,360,368 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 $990,400, debt issuance costs of $66,595 and interest expense of
$303,374 were recorded in the accompanying consolidated financial statements.
During July 1998 through September 1998, warrants were exercised to purchase
132,100 shares of common stock for $264,068.
During the nine months ended March 31, 1999, the Company issued 390,600 shares
of common stock valued at $901,800 as payment of consulting services. During
March 1999, the Company issued 30,000 shares of common stock valued at $75,000
as payment of debt issuance costs associated with the issuance of $160,000 of
notes payable.
F-30
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(6) STOCKHOLDERS' EQUITY (CONTINUED)
In November 1998, the Company entered into a settlement agreement with Michael
Khaled, a shareholder of the Company, whereby four shareholders of the Company
contributed 200,000 shares of common stock valued at $400,000 to Mr. Khaled.
Additionally, the Company granted warrants to purchase 100,000 shares of common
stock to Mr. Khaled and warrants to purchase 200,000 shares of common stock to
the four shareholders who contributed their stock. The fair value of the
warrants on the issuance date was estimated to be $420,000 using the Black
Scholes option-pricing with the following assumptions: dividend yield of 0%;
risk-free interest rate of 5%; volatility of 100% and an expected life of 2
years. Accordingly, compensation expense of $820,000 was recognized in the
accompanying consolidated financial statements.
In December 1998, the Board of Directors adopted the 1998 Stock Option Plan for
Senior Executives. An aggregate of 5,000,000 shares were reserved for issuance
under the plan. As of March 31, 1999, 2,408,488 options had been granted under
the Plan.
During March 1999, the Company sold 88,400 shares of common stock in exchange
for cash of $265,200. During April and May 1999, the Company sold 237,934 shares
of common stock in exchange for cash of $713,800.
In April 1999, the Company issued 2,570 shares of common stock in connection
with the cashless exercise of warrants.
During the nine months ended March 31, 1999, the Company granted 908,337 options
to employees at exercise prices ranging from $2.17 to $5.34 per share.
During the period of April and May 1999, $25,000 of convertible debentures were
converted to 10,000 shares of common stock.
In May 1999, the Company agreed to purchase and lease back technology from
UnitNetImaging (Shopping Planet) in exchange for 35,000 shares of common stock.
F-31
INDEPENDENT AUDITORS' REPORT
April 20, 1999
To the Members of
Infobahn Technologies, LLC.
dba Digital Genesis:
We have audited the accompanying balance sheets of Infobahn Technologies,
LLC. dba Digital Genesis (a California Limited Liability Corporation) as of
December 31, 1997 and 1996, and the related statements of operations, members'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Infobahn Technologies, LLC
dba Digital Genesis as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ WRIGHT FORD YOUNG & CO.
--------------------------------------
WRIGHT FORD YOUNG & CO.
F-32
INFOBAHN TECHNOLOGIES, LLC.
DBA DIGITAL GENESIS
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---------- ---------
ASSETS
Current assets:
Cash..................................................................................... $ 6,783 $ 3,649
Accounts receivable...................................................................... 75,174 21,296
---------- ---------
Total current assets................................................................. 81,957 24,945
---------- ---------
Equipment.................................................................................. 20,193 2,067
Less--accumulated depreciation............................................................. (1,432) (69)
---------- ---------
Net equipment........................................................................ 18,761 1,998
---------- ---------
Total assets......................................................................... $ 100,718 $ 26,943
---------- ---------
---------- ---------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 14,177 $ 10,319
Accrued expenses......................................................................... 2,874 1,585
---------- ---------
Total current liabilities............................................................ 17,051 11,904
Members' equity............................................................................ 83,667 15,039
---------- ---------
Total liabilities and members' equity................................................ $ 100,718 $ 26,943
---------- ---------
---------- ---------
The accompanying notes are an integral part of these balance sheets.
F-33
INFOBAHN TECHNOLOGIES, LLC.
DBA DIGITAL GENESIS
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---------- ----------
Revenues.................................................................................. $ 507,891 $ 167,572
Selling, general and administrative expenses.............................................. 446,416 181,940
---------- ----------
Net income (loss)....................................................................... $ 61,475 $ (14,368)
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
F-34
INFOBAHN TECHNOLOGIES, LLC.
DBA DIGITAL GENESIS
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Balance at December 31, 1995...................................................... $ --
Members' contributions.......................................................... 29,407
Net loss........................................................................ (14,368)
---------
Balance at December 31, 1996...................................................... 15,039
Members' contributions.......................................................... 7,153
Net income...................................................................... 61,475
---------
Balance at December 31, 1997...................................................... $ 83,667
---------
---------
The accompanying notes are an integral part of these statements.
F-35
INFOBAHN TECHNOLOGIES, LLC
DBA DIGITAL GENESIS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---------- ----------
Cash flows from operating activities:
Net income (loss)....................................................................... $ 61,475 $ (14,368)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation........................................................................ 1,363 69
Increase in accounts receivable..................................................... (53,878) (21,296)
Increase in accounts payable........................................................ 3,858 10,319
Increase in accrued expenses........................................................ 1,289 1,585
---------- ----------
Net cash provided by (used in) operating activities............................. 14,107 (23,691)
---------- ----------
Cash flows from investing activities:
Purchase of equipment............................................................... (18,126) (2,067)
---------- ----------
Cash flows from financing activities:
Members' contributions.............................................................. 7,153 29,407
---------- ----------
Net increase in cash and equivalents...................................................... 3,134 3,649
Cash at beginning of year................................................................. 3,649 --
---------- ----------
Cash at end of year....................................................................... $ 6,738 $ 3,649
---------- ----------
---------- ----------
Supplemental disclosures of cash flow information:
Interest paid....................................................................... $ -- $ --
Income taxes paid................................................................... $ -- $ --
The accompanying notes are an integral part of these statements.
F-36
INFOBAHN TECHNOLOGIES, LLC
DBA DIGITAL GENESIS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND SUBSEQUENT EVENT
Infobahn Technologies, LLC. dba Digital Genesis (the Company) is a
California corporation engaged primarily as an internet consulting company. The
Company essentially ceased operation in June 1998, when the Company sold all of
its net assets to Netgateway, a publicly traded company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue as the consulting services are provided to
the customer.
EQUIPMENT
Equipment is stated at cost. Depreciation on equipment is provided on the
straight-line method over the estimated useful lives of the assets, which is
five years.
INCOME TAXES
The Company is treated as a partnership for federal and state income tax
purposes. Consequently, income taxes are not payable by, or provided for, the
Company. Members are taxed individually on their respective shares of the
Company's earnings
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the report amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
3. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of trade receivables. The Company's customer base
consists primarily of technology based businesses. Significant customers as a
percentage of revenues is as follows:
1997 1996
----- -----
Customer A...................................................................... 61% --
Customer B...................................................................... 13% 17%
Customer C...................................................................... 9% 13%
F-37
AUDITOR'S REPORT
To the Shareholders
of Spartan Multimedia Inc.
I have audited the balance sheet of Spartan Multimedia Inc. as at August 31,
1998 and the statement of earnings and retained earnings and changes in
financial position for the year then ended. These financial statements are the
responsibility of the company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In my opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at August 31, 1998 and the
results of its operations and the changes in its financial position for the year
then ended in accordance with generally accepted accounting principles.
/s/ ALLAN HOGENSON
--------------------------------------
ALLAN HOGENSON
Chartered Accountant
Calgary, Alberta
April 19, 1999
F-38
SPARTAN MULTIMEDIA INC.
BALANCE SHEET
AUGUST 31, 1998
(IN CANADIAN DOLLARS)
ASSETS
CURRENT
Cash............................................................................ $ 53,075
Accounts receivable (Note 2).................................................... 39,042
---------
92,117
CAPITAL (Note 3).................................................................. 10,714
---------
$ 102,831
---------
---------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities (Note 2)............................... $ 30,042
Due to shareholders (Note 2).................................................... 24,030
---------
54,072
---------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4)............................................................ 147,510
RETAINED EARNINGS (DEFICIT)....................................................... (98,751)
---------
48,759
---------
$ 102,831
---------
---------
APPROVED ON BEHALF OF THE BOARD:
__/s/ David Rosenthal__, Director
David Rosenthal
__/s/ Jordi MacDonald__, Director
Jordi MacDonald
F-39
SPARTAN MULTIMEDIA INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
FOR THE YEAR ENDED AUGUST 31, 1998
(IN CANADIAN DOLLARS)
REVENUE........................................................................... $ 13,188
---------
EXPENSES
Advertising and promotion....................................................... 39,547
Depreciation.................................................................... 1,335
Management fees................................................................. 53,674
Office.......................................................................... 4,299
Postage and delivery............................................................ 195
Professional fees............................................................... 2,651
Telephone....................................................................... 4,921
Travel.......................................................................... 5,317
---------
111,939
---------
NET EARNINGS (LOSS) and RETAINED EARNINGS
(DEFICIT), end of year............................................................ $ (98,751)
---------
---------
F-40
SPARTAN MULTIMEDIA INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED AUGUST 31, 1998
(IN CANADIAN DOLLARS)
OPERATING ACTIVITIES
Net earnings.................................................................... $ (98,751)
Item not affecting cash
Depreciation.................................................................. 1,335
---------
(97,416)
Net change in non-cash working capital balances................................. 15,030
---------
(82,386)
---------
FINANCING ACTIVITIES
Issuance of share capital....................................................... 147,510
---------
INVESTMENT ACTIVITIES
Purchase of capital assets...................................................... (12,049)
---------
INCREASE IN CASH.................................................................. 53,075
CASH, beginning of year........................................................... --
---------
CASH, end of year................................................................. $ 53,075
---------
---------
F-41
SPARTAN MULTIMEDIA INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
CAPITAL ASSETS
Capital assets are recorded at cost and are depreciated using the following
annual rates and methods:
Computer equipment 30% Declining balance
2. RELATED PARTY TRANSACTIONS
During the year, the company had business transactions with its
shareholders. The particulars of these transactions and balances owing from or
to these shareholders for the year ended August 31 were as follows:
Transactions during the year:
Management fees.................................................. $ 51,357
Computer equipment............................................... 9,000
Balances at end of year:
Accounts receivable (share subscriptions)........................ $ 37,500
Accounts payable (management fees)............................... 14,000
Amounts due to shareholders are non-interest bearing and are not subject to
specified terms of repayment.
3. CAPITAL ASSETS
1998
-------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
--------- ------------- -----------
Computer equipment........................................ $ 12,049 $ 1,335 $ 10,714
4. SHARE CAPITAL
AUTHORIZED
Unlimited number of common shares
ISSUED
1,666,668 common shares........................................... $ 147,510
---------
---------
5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date,
F-42
SPARTAN MULTIMEDIA INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1998
5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE (CONTINUED)
resulting in errors when information using year 2000 dates is processed. In
addition, similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year 2000
Issue may be experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may range from minor
errors to significant systems failure which could affect an entity's ability to
conduct normal business operations. It is not possible to be certain that all
aspects of the Year 2000 Issue affecting the entity, including those related to
the efforts of customers, suppliers, or other parties, will be fully resolved.
6. SUBSEQUENT EVENTS
Effective November 1, 1998, an agreement was entered into between the
shareholders of the company, Netgateway, Inc. and its wholly owned subsidiary,
Storesonline.com Ltd. (Storesonline). All of the shares of the company were
transferred to Storesonline on the effective date. The company will be
amalgamated with Storesonline upon closing.
F-43
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NETGATEWAY
[LOGO]
UNTIL , 1999 ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by Netgateway in connection
with the issuance and distribution of the securities being offered hereby,
excluding the underwriters' discounts and commissions (items marked with an
asterisk (*) represent estimated expenses):
SEC Registration Fee.............................................. $ 12,909
Legal Fees and Expenses........................................... 225,000*
Blue Sky Fees (including counsel fees)............................ 40,000*
NASD Filing Fees.................................................. 30,000*
NASDR Fees........................................................ 5,144
Accounting Fees and Expenses...................................... 100,000
Transfer Agent and Registrar Fees................................. 10,000*
Printing and Engraving Expenses................................... 75,000*
Miscellaneous..................................................... 31,947*
---------
Total....................................................... $ 530,000*
---------
---------
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. Our Certificate of Incorporation includes the following
language:
"The personal liability of the Directors of the Corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of Subsection (b) of
Section 102 of the General Corporation Law of the State of Delaware as the same
may be amended and supplemented."
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware law to indemnify directors and officers with respect to
any matter in which the director or officer acted in good faith and in a manner
he reasonably believed to be not opposed to the best interests of Netgateway,
and, with respect to any criminal action, had reasonable cause to believe his
conduct was lawful.
Article VII, Section 7 of the by-laws of Netgateway provides as follows:
"The corporation shall indemnify its officers, directors, employees, and
agents to the extent permitted by the General Corporation Law of Delaware."
Article EIGHTH of the certificate of incorporation of Netgateway, as
amended, permits indemnification of, and advancement of expenses to, among
others, officers and directors of Netgateway. Such Article provides as follows:
"(a) Each person who was or is made a party or is threatened to be made
a party to or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation or any of its direct or
indirect subsidiaries or is or
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was serving at the request of the Corporation as a director, officer,
employee, or agent of any other corporation or of a partnership, joint
venture, trust, or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee, or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights
than permitted prior thereto), against all expense, liability, and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith, and such indemnification shall
continue as to an indemnitee who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators; provided, however, that, except as provided
in paragraph (c) of this Article EIGHTH with respect to proceedings to
enforce rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the board of directors of the Corporation.
"(b) The right to indemnification conferred in paragraph (a) of this
Article EIGHTH shall include the right to be paid by the Corporation the
expenses incurred in defending any proceeding for which such right to
indemnification is applicable in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication") that such indemnitee is not entitled to
be indemnified for such expenses under this Article EIGHTH or otherwise.
"(c) The rights to indemnification and to the advancement of expenses
conferred in paragraphs (a) and (b) of this Article EIGHTH shall be contract
rights. If a claim under paragraph (a) or (b) of this Article EIGHTH is not
paid in full by the Corporation within sixty days after a written claim has
been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by an indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) any suit by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon
a final adjudication that, the indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its board of
directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met
the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its board of directors, independent legal counsel, or its stockholders) that
the indemnitee has not met
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such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any
suit brought by the indemnitee to enforce a right to indemnification or to
an advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden
of proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article EIGHTH or otherwise, shall be on
the Corporation.
"(d) The rights to indemnification and to the advancement of expenses
conferred in this Article EIGHTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, this
certificate of incorporation, by-law, agreement, vote of stockholders or
disinterested directors, or otherwise.
"(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, or agent of the Corporation or
another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation
would have the power to indemnify such person against such expense,
liability, or loss under the Delaware General Corporation Law.
"(f) The Corporation's obligation, if any, to indemnify any person who
was or is serving as a director, officer, employee, or agent of any direct
or indirect subsidiary of the Corporation or, at the request of the
Corporation, of any other corporation or of a partnership, joint venture,
trust, or other enterprise shall be reduced by any amount such person may
collect as indemnification from such other corporation, partnership, joint
venture, trust, or other enterprise.
"(g) Any repeal or modification of the foregoing provisions of this
Article EIGHTH shall not adversely affect any right or protection hereunder
of any person in respect of any act or omission occurring prior to the time
of such repeal or modification."
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Netgateway
pursuant to the foregoing provisions or otherwise, Netgateway has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1
to the Registration Statement for certain provisions regarding indemnification
of Netgateway, its officers and directors, the Underwriters, and any controlling
persons by the Underwriters against certain liabilities for information
furnished by the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the numbers
of shares of common stock sold by Netgateway, the number of options issued by
Netgateway, and the principal amount of debt instruments issued by Netgateway
since March 4, 1998 (inception), the consideration received by Netgateway for
such shares, options and debt instruments and information relating to the
section of the Securities Act or rule of the Securities and Exchange Commission
under which exemption from registration was claimed. None of these securities
was registered under the Securities Act. Except as otherwise indicated, no sales
of securities involved the use of an underwriters and no commissions were paid
in connection with the sale of any securities.
From Netgateway's inception on March 4, 1998 through June 2, 1998,
Netgateway issued to its founding stockholders a total of 2,800,000 shares of
common stock at a price of $.001 per share.
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From Netgateway's inception on March 4, 1998 to June 30, 1998, Netgateway
issued 600,000 shares of common stock to several of its existing stockholders in
order to reimburse such stockholders for satisfying $400,000 of obligations of
Netgateway. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the shares was exempt by virtue of Section 4(2) of the Securities Act and the
rules promulgated thereunder. Each of these stockholders were "accredited
investors" as defined in Rule 501 under the Securities Act.
In April 1998, Netgateway issued 1,000,000 shares of common stock to
S.T.E.P.S., Inc., the primary stockholder of which is Scott Beebe, a Director of
Netgateway, in connection with the granting by Steps to Netgateway of a
sublicense relating to proprietary courseware. The certificates evidencing the
shares of common stock were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
In April 1998, Netgateway issued 1,900,000 shares of common stock to Vision
Holdings, Inc. as consideration of the cancellation of $300,000 of indebtedness
owed by Netgateway to Vision. The certificates evidencing the shares of common
stock were appropriately legended. In the opinion of Netgateway, the offer and
the sale of the shares was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
In April 1998, Netgateway issued 100,000 shares of common stock to Eric
Richardson in payment for legal consulting services. Of such shares of common
stock, 36,000 vested immediately and 64,000 vested upon performance of
consulting services by Mr. Richardson. An aggregate of 52,000 shares of common
stock were issued to Mr. Richardson pursuant to this arrangement. The
certificates evidencing the shares of common stock were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In June 1998, Netgateway issued 100,000 shares to Alex Chafetz, an employee
of Netgateway, in payment for services. The certificates evidencing the shares
of common stock were appropriately legended. In the opinion of Netgateway, the
offer and the sale of the shares was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
In June 1998, Netgateway issued 184,000 shares of common stock to
unaffiliated third party creditors of Netgateway as consideration of the
cancellation of $185,333 of indebtedness owed by Netgateway to such creditors.
The certificates evidencing the shares of common stock were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the shares was
exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
On June 2, 1998, Netgateway issued 400,000 shares of common stock (including
contingent issuances) in connection with the acquisition of Digital Genesis. The
certificates evidencing the shares of common stock were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In June 1998, Netgateway closed a private offering of 687,000 shares of its
common stock. The shares were sold at the price of $1.00 per share, resulting in
gross proceeds of $687,000. Each of the investors agreed to acquire the shares
for investment purposes only and not with a view to distribution. The
certificates evidencing the shares of common stock were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. Of the investors in the offering 16 were "accredited investors" as
defined in Rule 501 under the Securities Act and 11 were not accredited
investors.
In connection with the Legal Fees Services Option Agreement, dated as of
June 3, 1998 with Nida & Maloney P.C., Netgateway issued to such firm options to
purchase 100,000 shares of common
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stock (subsequently adjusted through certain antidilution provisions to be
240,000 shares of common stock) at a strike price of $2.50 per share. In the
opinion of Netgateway, the offer and the sale of the shares was exempt by virtue
of Section 4(2) of the Securities Act and the rules promulgated thereunder.
During the period from July 1998 through March 1999, Netgateway granted to
its employees stock options exercisable for an aggregate of 1,317,559 shares of
common stock at prices ranging from $2.17 to $5.34 per share.
In July 1998, Netgateway closed a private offering of 1,022,800 units, each
unit consisting of one share of common stock and one common stock purchase
warrant entitling the holder to acquire one share of common stock at a price of
$4.00 per share (subsequently repriced to $2.00 per share). The units were sold
at $2.00 per unit. These warrants were exercisable through September 30, 1998,
but were extended through October 30, 1998. Warrants exercisable for an
aggregate of 132,100 shares were exercised prior to expiration of the warrants.
The certificates evidencing the securities underlying the units were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the units (and the securities constituting the units) was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder. Of the
investors in the offering 75 were "accredited investors" as defined in Rule 501
under the Securities Act and 22 were not accredited investors.
In connection with the Consulting and Advisory Agreement, dated October 20,
1998, with Burchmont Equities Group, Inc., Netgateway issued 100,000 shares of
common stock the Burchmont Equities Group, Inc. in payment for advisory
services. The shares will vest upon the happening of all of the following
events: (1) Netgateway becomes listed on the Nasdaq SmallCap Market, (2)
Netgateway files a Registration Statement on Form S-1 for its existing shares
including these shares, and (3) Netgateway files a Form 10 and becomes a 12(g)
reporting company.
On October 20, 1998, Netgateway issued warrants exercisable for an aggregate
of 225,000 shares of common stock to Dean Dumont and 75,000 shares of common
stock to Maylene Burchmont in payment of consulting services. The certificates
evidencing the warrants and any securities underlying the warrants were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the units (and the securities constituting the units) was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On October 21, 1998, Netgateway issued warrants exercisable for an aggregate
of 300,000 shares of common stock to Howard Effron in payment of consulting
services. The certificates evidencing the warrants and any securities underlying
the warrants were appropriately legended. In the opinion of Netgateway, the
offer and the sale of the units (and the securities constituting the units) was
exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In connection with a Consulting and Advisory Agreement with Richard Berns,
on October 21, 1998 Netgateway issued 25,000 shares of common stock in payment
of advisory services. The certificates evidencing the securities underlying the
units were appropriately legended. In the opinion of Netgateway, the offer and
the sale of the units (and the securities constituting the units) was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In payment for merger and acquisition advisory services related to the
acquisition of Spartan Multimedia, in November 1998, Netgateway issued 10,000
shares of common stock to the Chaffetz Family Trust. The certificates evidencing
the securities underlying the units were appropriately legended. In the opinion
of Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
On November 20, 1998, Netgateway issued warrants exercisable for an
aggregate of (i) 50,000 shares to each of Keith D. Freadhoff, Scott Beebe,
Donald D. Danks, and Michael Vanderhoff and
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(ii) 100,000 shares to Michael Khaled. The certificates evidencing the warrants
and any securities underlying the warrants were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
On November 20, 1998, Netgateway issued warrants exercisable for an
aggregate of 100,000 shares to Ronald Spire in payment for consulting services.
The certificates evidencing the warrants and any securities underlying the
warrants were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the units (and the securities constituting the units) was exempt
by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In connection with the Consulting and Advisory Agreement, dated November 1,
1998, with North Coast Securities Corp., Netgateway issued 10,000 shares of
common stock to North Coast Securities Corp. in payment for for advisory
services. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the units (and the securities constituting the units) was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
In connection with a Consulting and Advisory Agreement with Gerold Czuchna,
on December 14, 1998, Netgateway issued 5,000 shares of common stock in payment
of advisory services. The certificates evidencing the securities underlying the
units were appropriately legended. In the opinion of Netgateway, the offer and
the sale of the units (and the securities constituting the units) was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder.
In connection with the Consulting Agreement, dated as of December 24, 1998,
between Netgateway, Inc. and Glashow Associates LLC, Netgateway issued 170,000
shares of common stock and warrants exercisable for an aggregate of 150,000
shares to such firm in payment for consulting services. The certificates
evidencing the shares of common stock were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
In connection with acquisition of Spartan Multimedia, in January 1999,
StoresOnline.com Ltd. issued 371,429 shares of class B common stock, each of
which is convertible into one share of Netgateway common stock. The certificates
evidencing the shares of common stock were appropriately legended. In the
opinion of Netgateway, the offer and the sale of the units (and the securities
constituting the units) was exempt by virtue of Section 4(2) of the Securities
Act and the rules promulgated thereunder.
In connection with the Consulting Agreement, dated as of January 26, 1999,
with Stock Maker, Inc., Netgateway issued 40,000 shares to such firm in payment
for advisory services. The certificates evidencing the shares of common stock
were appropriately legended. In the opinion of Netgateway, the offer and the
sale of the units (and the securities constituting the units) was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. These shares were subsequently returned to the authorized, but
unissued, common stock of Netgateway.
In connection with Netgateway's then pending private offering of convertible
debentures, on February 1, 1999, Netgateway issued warrants exercisable for an
aggregate of (i) 129,000 shares to Dean Dumont,(ii) 12,750 shares to Todd
Torneo, (iii) 3,000 shares to Tradeway Securities Group, (iv) 4,250 to John
Borcich, (v) 66,800 shares to Y2K Capital, (vi) 35,000 to Roxanne Melotte, and
(vii) 32,500 shares to Michael Vanderhoff. The certificates evidencing the
warrants and any securities underlying the warrants were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the units (and the
securities constituting the units) was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
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In payment for financial consulting services, on February 15, 1999,
Netgateway issued an aggregate of 30,000 shares of common stock to two
individuals. The certificates evidencing the shares of common stock were
appropriately legended. In the opinion of Netgateway, the offer and the sale of
the units (and the securities constituting the units) was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder. These
shares were subsequently returned to the authorized, but unissued, common stock
of Netgateway.
In March 1999, Netgateway closed a private offering of $1 million principal
amount of convertible debentures for gross proceeds of $1 million. The
debentures are convertible into shares of common stock at the conversion price
of $2.50 per share. These debentures mature one year following the closing of
this offering. The certificates evidencing debentures, as well as any shares of
common stock issued upon the conversion thereof, were appropriately legended. In
the opinion of Netgateway, the offer and the sale of the debentures was exempt
by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. All of the investors in the offering were "accredited investors" as
defined in Rule 501 under the Securities Act.
On March 5, 1999, Netgateway issued an aggregate of 30,000 shares of common
stock in order to induce Joseph Py and Robert Ciri to make loans to Netgateway.
The certificates evidencing debentures, as well as any shares of common stock
issued upon the conversion thereof, were appropriately legended. In the opinion
of Netgateway, the offer and the sale of the debentures was exempt by virtue of
Section 4(2) of the Securities Act and the rules promulgated thereunder.
On March 17, 1999, Netgateway issued warrants exercisable for an aggregate
of 25,000 shares of common stock to XOOM.com, Inc. These warrants were
exercisable at $12.00 per share and were exercisable on a cashless basis. The
warrants were exercised in full on a cashless basis on April 14, 1999 for an
aggregate of 2,570 shares of common stock. The certificates evidencing the
warrants, as well as any shares of common stock issued upon the exercise
thereof, were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the debentures was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
On March 31, 1999, Netgateway issued 600 shares of common stock to Steve
Jorgenson, a professional golfer, in connection with Mr. Jorgenson acting as a
spokesman for Netgateway.
In April 1999, Netgateway closed a private offering of 329,000 shares of its
common stock. The shares were sold at the price of $3.00 per share, resulting in
gross proceeds of $987,000. Each of the investors agreed to acquire the shares
for investment purposes only and not with a view to distribution. The
certificates evidencing the shares of common stock were appropriately legended.
In the opinion of Netgateway, the offer and the sale of the shares was exempt by
virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. All of the investors in the offering were "accredited investors" as
defined in Rule 501 under the Securities Act.
On April 1, 1999, Netgateway issued warrants exercisable for an aggregate of
5,000 shares of common stock to Andrew Glashow in order to induce such
individual to make a loan to Netgateway. The certificates evidencing the
warrants were appropriately legended. In the opinion of Netgateway, the offer
and the sale of the shares was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
On April 1, 1999, Netgateway issued warrants exercisable for an aggregate of
26,050 shares of common stock to Richard Berns in connection with Netgateway's
convertible debenture private offering. The certificates evidencing the warrants
were appropriately legended. In the opinion of Netgateway, the offer and the
sale of the shares was exempt by virtue of Section 4(2) of the Securities Act
and the rules promulgated thereunder.
In May 1999, Netgateway closed a private offering of 40 units, each unit
consisting of $50,000 principal amount of Series A 12% Senior Notes due 2000 and
5,000 shares of common stock. The
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notes mature on the earlier of April 30, 2000 and the date of the closing of
this offering. The units were sold at the price of $50,000 per unit, resulting
in gross proceeds of $2,000,000. Each of the investors agreed to acquire the
shares for investment purposes only and not with a view to distribution. The
certificates evidencing the securities underlying the units were appropriately
legended. In the opinion of Netgateway, the offer and the sale of the shares was
exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated
thereunder. All of the investors in the offering were "accredited investors" as
defined in Rule 501 under the Securities Act.
On May 3, 1999, Netgateway issued warrants exercisable for an aggregate of
5,000 shares of common stock to GMR for consulting services. The certificates
evidencing the warrants were appropriately legended. In the opinion of
Netgateway, the offer and the sale of the shares was exempt by virtue of Section
4(2) of the Securities Act and the rules promulgated thereunder.
Each of such transactions was exempt from registration under the Securities
Act by virtue of the provisions of Section 4(2) and/or Section 3(b) of the
Securities Act. Each purchaser of the securities described below has represented
that he/she/it understands that the securities acquired may not be sold or
otherwise transferred absent registration under the Securities Act or the
availability of an exemption from the registration requirements of the
Securities Act, and each certificate evidencing the securities owned by each
purchaser bears or will bear upon issuance a legend to that effect.
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
EXHIBIT NO.
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1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2* Bylaws
4.1 Form of Representatives' Warrant
4.2* Form of Common Stock Certificate
5.1* Opinion of Brock Silverstein LLC
10.1 Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and Keith D.
Freadhoff
10.2 Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and Donald M.
Corliss, Jr.
10.3 Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and David
Bassett-Parkins
10.4 Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and Hanh Ngo
10.5 Form of Employment Agreement, dated as of April 5, 1999, between Netgateway, Inc. and Craig Gatarz
10.6 1998 Stock Compensation Program
10.7 1998 Stock Option Plan for Senior Executives
10.8 Office Lease, dated as of June 26, 1998, between Netgateway, Inc. and Pacific Tower Associates
10.9 Form of Internet Data Center Services Agreement, between Netgateway, Inc. and Exodus Communications,
Inc.
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EXHIBIT NO.
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10.10 Form of Secured Convertible Debenture due December 31, 1999
10.11 Agreement and Plan of Reorganization, dated as of June 2, 1998, among Netgateway, Infobahn
Technologies, LLC, Video Calling Card, Inc., the Netgateway Shareholders and the Video Majority
Shareholder
10.12 Software Assignment and Grant Back Limited License Agreement, dated as of November 16, 1999, between
Netgateway and Shopping Planet
10.13 Stock Purchase Agreement, dated as of November 1, 1998, among StoresOnline.com, Ltd., Netgateway,
Inc. and the Selling Stockholders
10.14 Amendment to Stock Purchase Agreement, among StoresOnline.com, Ltd., Netgateway, Inc. and the Selling
Stockholders
10.15 Form of Financial Consulting Agreement.
10.16* Form of Series A 12% Senior Note due 2000
23.1 Consent of KPMG LLP
23.2 Consent of Wright Ford Young & Company
23.3 Consent of Allan Hogenson, Chartered Accountant
23.4* Consent of Brock Silverstein LLC (contained in the Opinion filed as Exhibit 5.1).
24.1 Power of Attorney (set forth on the signature page attached hereto).
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* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The Registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(2) For the purpose of determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of prospectus
as a new registration statement relating to the securities offered therein,
and the offering of such securities at that time as the initial bona fide
offering thereof.
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(c) The Registrant hereby undertakes that it will provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(d) The Registrant hereby undertakes to supplement the prospectus, after the
expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by the
underwriters, and the terms of any subsequent reoffering thereof. If any public
offering by the underwriters is to be made on terms differing from those set
forth on the cover page of this prospectus, a post-effective amendment will be
filed to set forth the terms of such offering.
(e) The Registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement; (i) Include any
Prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
Reflect in the Prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 200
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; (iii) Include any material information which with respect to the
plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement;
(2) For the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) Remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Long Beach, California on May 27, 1999.
NETGATEWAY, INC.
By: /s/ KEITH D. FREADHOFF
-----------------------------------------
Name: Keith D. Freadhoff
Title: Chairman of the Board of
Directors and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Keith D. Freadhoff, Donald M. Corliss, Jr., and
David Bassett-Parkins, and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and his
name, place and stead, and in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective amendments
and registration statements filed pursuant to Rule 462(b) under the Securities
Act of 1933, as amended and otherwise), and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting to said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform such and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or his substitute or substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board of
/s/ KEITH D. FREADHOFF Directors and Chief
- ------------------------------ Executive Officer May 27, 1999
Keith D. Freadhoff (Principal Executive
Officer)
Chief Financial Officer,
/s/ DAVID BASSETT-PARKINS Chief Operating Officer,
- ------------------------------ and Director (Principal May 27, 1999
David Bassett-Parkins Financial and Accounting
Officer)
/s/ DONALD M. CORLISS, JR.
- ------------------------------ President and Director May 27, 1999
Donald M. Corliss, Jr.
/s/ SCOTT BEEBE
- ------------------------------ Director May 27, 1999
Scott Beebe
/s/ RONALD SPIRES
- ------------------------------ Director May 27, 1999
Ronald Spires
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