-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L93tJNtwyhBfJAD3QfMYqOWMhNW5qh6PHG/HaEPPUM04DSVxtNN7q8QcdNKUAGWm S3TvT+6C9989E4l5IbKg2w== 0000912057-99-005439.txt : 19991115 0000912057-99-005439.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005439 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETGATEWAY INC CENTRAL INDEX KEY: 0001075736 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 870591719 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-79751 FILM NUMBER: 99751151 BUSINESS ADDRESS: STREET 1: 300 OCEANGATE STREET 2: 5TH FLR CITY: LONG BEACH STATE: CA ZIP: 90802 BUSINESS PHONE: 5823080010 MAIL ADDRESS: STREET 1: 300 OCEANGATE 5TH FLOOR CITY: LONG BEACH STATE: CA ZIP: 90802 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999 REGISTRATION NO. 333-79751 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ PRE-EFFECTIVE AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ 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 ROY W. CAMBLIN III Chief Executive Officer and Chief Information Officer 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 RCAMBLIN@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. AMOS S. EDELMAN, ESQ. LINDA MINTZ, ESQ. KIM ELLEN LEFKOWITZ, ESQ. JEFFERY BAHNSEN, ESQ. Brock Silverstein LLC Greenberg Traurig 800 Third Avenue Met Life Building 21st Floor 200 Park Avenue New York, New York 10022 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 AEDELMAN@BROCKFIRM.COM MINTZL@GTLAW.COM KLEFKOWITZ@BROCKFIRM.COM BAHNSENJ@GTLAW.COM
------------------------------ 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. / / ------------------------------ CALCULATION OF REGISTRATION FEE SEE ATTACHED PAGE. ------------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 3,450,000 Common Stock, par value, $.001 per share.......... shares(2) $10.00 $34,500,000 $9,591 300,000 Representative's Warrants......................... warrants(3) $0.001 $300.00 $0.08 Common Stock, par value, $.001 per share, issuable upon exercise of the Representative's Warrants........................................ 300,000 shares(4) $16.50 $4,950,000 $1,376.10 Total............................................. -- -- $39,450,300 $10,967.18(5)
(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 450,000 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. (5) A filing fee of $12,908.84 was previously paid. SUBJECT TO COMPLETION, DATED NOVEMBER 12, 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 3,000,000 SHARES [LOGO] NETGATEWAY, INC. COMMON STOCK ------------------ We are a provider of turn-key electronic commerce 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 electronic commerce by means of the Internet. 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 November 9, 1999, the last reported sale price of our common stock on the OTC Bulletin Board was $7.812. We anticipate that the public offering price per share will be between $7.00 and $9.00. INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS. --------------------- 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 450,000 shares of common stock from us at the public offering price, less underwriting discounts and commissions. ------------------------ CRUTTENDEN ROTH INCORPORATED PENNSYLVANIA MERCHANT GROUP, LTD. THE DATE OF THIS PROSPECTUS IS , 1999 INSIDE FRONT COVER PAGE 1 PICTURE OF LIGHTSWITCH FOLLOWED BY "SWITCH ON," PICTURE OF ELECTRICAL PLUG FOLLOWED BY "PLUG INTO," PICTURE OF KEY FOLLOWED BY "UNLOCK," AND PICTURE OF FAUCET FOLLOWED BY "TURN ON," ALL FOLLOWED BY ECOMMERCE . . ." INSIDE COVER PAGE 2 PICTURES OF WEB PAGES OF CUSTOMERS OF NETGATEWAY AND CUSTOMER LOGOS. INSIDE COVER PAGE 3 MATRIX OF TRANSACTION VOLUME AND BUSINESS RULE COMPLEXITY DESCRIBING NETGATEWAY'S INTERNET COMMERCE CENTER WITH STATEMENT ". . . THE INTERNET CONVENTION CENTER-TM- (ICC) COVERS THE ENTIRE SPECTRUM OF ECOMMERCE." FOLLOWED BY LOGOS OF CUSTOMERS OF NETGATEWAY. TABLE OF CONTENTS
PAGE ----------- Prospectus Summary......................................................................................... 3 Risk Factors............................................................................................... 10 Use of Proceeds............................................................................................ 25 Price Range of Common Stock................................................................................ 27 Dividend Policy............................................................................................ 27 Capitalization............................................................................................. 28 Dilution................................................................................................... 29 Selected Financial Data.................................................................................... 31 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 33 Business................................................................................................... 39 Management................................................................................................. 53 Principal Stockholders..................................................................................... 67 Related Party Transactions................................................................................. 69 Description of Securities.................................................................................. 71 Shares Eligible for Future Sale............................................................................ 73 Underwriting............................................................................................... 74 Legal Matters.............................................................................................. 77 Experts.................................................................................................... 78 Additional Information..................................................................................... 78 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. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO NETGATEWAY. SEE "CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS" ON PAGE 24. NETGATEWAY OUR BUSINESS We provide turn-key electronic commerce services designed to enable clients to extend their business to the Internet to conduct commercial transactions between business enterprises. The hub of our electronic commerce solution is our proprietary Internet Commerce Center, which consists of the hardware, proprietary and licensed software, and the related technical services necessary for our clients to transact electronic commerce, known in our industry as eCommerce. We also design and build custom interfaces, or SPOKES, to connect business clients to the ICC. Our ICC provides a continuum of increasingly sophisticated and technologically complex solutions, ranging from a simple Internet storefront advertising their products and taking orders through e-mail to a highly complex system of private Websites, known as EXTRANETS. These extranets are accessible only by clients and selected outsiders, such as their customers, suppliers, and vendors, to interact and transact business-to-business electronic commerce. In July 1999, we formed CableCommerce, a new operating division which focuses upon providing electronic commerce services and solutions to cable television operators. Typically, CableCommerce will design, develop, host, and manage branded Internet-based shopping malls in the markets served by the cable television system operator featuring businesses local to each of these markets. In addition, CableCommerce offers local and regional classified advertisements, community calendars, and coupons, provides mall content, trains cable television system sales people, and offers storefront creation and maintenance services to the cable television system's subscribers. To date, we have entered into contracts to provide these services with MediaOne, CableOne, Wireless One, and Frontiervision Media Services. See "Prospectus Summary--Significant Strategic Relationships." OUR SERVICES Our services currently include - Web site development and design, including the development of electronic storefronts for the conduct of electronic commerce on the Internet, - Internet-based "shopping 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 electronic commerce 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 hardware and software infrastructure, which we believe is a highly economical method to obtain and maintain an electronic commerce presence; 3 - clients with existing Web sites can maintain their investment in the creation of that presence while seamlessly adding electronic commerce capabilities; - because our infrastructure enables our customers to access a continuum of sophisticated and technologically complex electronic commerce solutions, we can offer incremental services to our clients through the activation of additional portions of our proprietary software in response to client growth or commercial requirements quickly and cost-effectively; and - 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 updates, patches, and fixes to software with no additional effort by the client. OUR MARKET International Data Corp., an industry research firm, forecasts that the market for Internet and electronic commerce 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 electronic commerce 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 electronic commerce 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 STRATEGIC RELATIONSHIPS MEDIAONE. In July 1999, we entered into a strategic relationship with MediaOne, a leading cable television operator, under which we will design, develop, host, and manage Internet-based shopping malls in each of MediaOne's markets. These markets currently consist of more than five million households. These shopping malls will be branded with the MediaOne name, brand, and image, will feature businesses local to each market, and will offer additional online services, such as classified advertisements, local community events calendars, and coupons. MediaOne has agreed to contribute commercial advertising time on their cable systems in order to promote these malls. In connection with this relationship, MediaOne acquired 50,000 shares of our common stock and warrants, to purchase up to an aggregate of 200,000 shares of our common stock, at an exercise price per share equal to the current market price on the date of the vesting of these warrants. These warrants vest in four installments upon the satisfaction of milestones relating to the scope of the launch of these Internet-based shopping malls. See "Business--Clients and Strategic Relationships." CABLEONE. In August 1999, we entered into a cable reseller and mall agreement with CableOne, a large cable television operator, under which we will design and develop an Internet-based shopping mall, to be branded with the CableOne name, brand, and image, and will offer our storefront creation and maintenance services to CableOne's subscribers. We will also be responsible for marketing support, including development of mall content, training of CableOne sales people, and production of advertising to promote their services. CableOne will promote this mall with a minimum of 400 cablecasts per broadcast month in each broadcast market where the mall services are offered. WIRELESS ONE. In June 1999, we entered into a reseller and mall agreement with Wireless One, Inc. under which we will design and develop an Internet-based shopping mall, to be branded with the Wireless One name, brand, and image, and will offer our storefront creation and maintenance services 4 to Wireless One's subscribers. We will also be responsible for marketing support, including development of mall content, training of Wireless One sales people, development of Wireless One branded collateral material and periodic distribution and updating of advertising spots to promote their services. Wireless One will promote this mall with a total of 1,000 30-second spots every month jointly developed by us and Wireless One in all systems in which it is able to provide advertising. FRONTIERVISION MEDIA SERVICES. In July 1999, we entered into a reseller and mall agreement with Frontiervision Media Services, a provider of cable television programming services, pursuant to which we will design and develop an Internet-based shopping mall, to be branded with the Frontiervision name, brand, and image, and will offer our storefront creation and maintenance services to Frontiervision's subscribers. We will also be responsible for marketing support, including development of mall content, training of Frontiervision sales people, and production of advertising spots to promote their services. Frontiervision will promote this mall with a minimum of 1,000 cablecasts per broadcast month in each broadcast market where the mall services are offered. XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS: XMCM), an electronic commerce 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 products and services which permit its members to create and maintain storefronts on the Web through XOOM.com and are the sole provider of electronic commerce processing services to XOOM.com's electronic commerce customers. In addition, XOOM.com is reselling our electronic commerce services and we are developing XOOM.com's Internet-based shopping 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' Internet-based shopping mall and client extranet. This Web site is designed to permit CB Richard Ellis personnel to conduct all of their corporate materials purchasing, including computers and building and maintenance supplies, and all global facilities management by means of the Internet. In addition, CB Richard Ellis will 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. BUYSELLBID.COM In August 1999, we entered into a distributor mall and reseller agreement with BuySellBid.com under which we will design and develop Internet-based shopping malls for BuySellBid.com, which will in turn resell and/or sublicense these Internet-based shopping mall packages, custom-branded, to other resellers, or alternatively brand any such Internet-based mall with the BuySellBid.com name, brand, and image, and offer our storefront creation and maintenance services to its own subscribers. Under this agreement, we will be responsible for marketing support, including development of mall content, and training of BuySellBid.com sales people. B2BSTORES.COM INC. In July 1999, we entered into an electronic commerce services agreement with B2BStores.com Inc., a catalogue aggregator and procurement company, under which we will develop, manage, and service an internet commerce site for B2BStores.com which will use the internet commerce site to offer and sell goods and services to businesses. RELIANT INNOVATIONS. In June 1999, we entered into an electronic commerce services agreement with Reliant Innovations, under which we will develop an electronic commerce site that will enable Reliant Innovations to sell computer products to clients who are members of specific associations with which Reliant Innovations has formed a partnership. We expect to complete implementation of this agreement by November 30, 1999. BERGEN BRUNSWIG DRUG COMPANY. In October 1999, we entered into an internet services agreement, with Bergen Brunswig Drug Company, a leading supplier of pharmaceuticals, medical-surgical supplies 5 and specialty healthcare products, under which we will design, develop, manage, and service an Internet-based shopping mall to be branded with the Bergen Brunswig name, brand, and image and which will contain on-line storefronts for affiliated local pharmacies. We will also be responsible for training of Bergen Brunswig personnel. OTHER RESELLERS. We have also recently entered into reseller agreements, under 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, Found.com Inc., Card Service International, and O.T.I. Cable Advertising. 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 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 electronic commerce applications developer, in exchange for 400,000 shares of our 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. Our executive offices are located at 300 Oceangate, 5th Floor, Long Beach, California 90802 and our telephone number is (562) 308-0010. Our website is located at www.netgateway.net. Information contained on our website is not part 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 8,000,000 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 1,872,284 SHARES OF COMMON STOCK ARE OUTSTANDING ON THE DATE OF THIS PROSPECTUS, AND - UP TO AN AGGREGATE OF 1,672,154 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, - OUR RECEIPT OF $522,500 OF NET PROCEEDS IN OCTOBER 1999 FROM OUR MAY THROUGH SEPTEMBER 1999 PRIVATE PLACEMENT OF SECURITIES, - THE ISSUANCE OF 270 SHARES OF COMMON STOCK IN NOVEMBER 1999 UPON THE EXERCISE OF OUTSTANDING WARRANTS FOR $270, - THE ISSUANCE OF 8,000 SHARES OF COMMON STOCK IN OCTOBER 1999 UPON THE CONVERSION OF $20,000 OF CONVERTIBLE DEBENTURES, 6 - THE ISSUANCE OF 962,444 SHARES OF COMMON STOCK UPON THE EXERCISE OF OUTSTANDING WARRANTS ON A CASHLESS BASIS DURING OCTOBER 1999; AND - THE ISSUANCE TO THREE OF OUR EXECUTIVE OFFICERS OF AN AGGREGATE OF 1,200,000 SHARES IN OCTOBER 1999 OF COMMON STOCK WHICH MAY BE FORFEITED BY THESE INDIVIDUALS IF THEY SHOULD END THEIR EMPLOYMENT WITH US PRIOR TO VESTING IN EXCHANGE FOR OUTSTANDING STOCK OPTIONS UNDER OUR EXISTING STOCK OPTION PLANS. PLEASE SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES" AND "MANAGEMENT--EXECUTIVE COMPENSATION." THE OFFERING Common stock offered............ 3,000,000 shares Common stock outstanding immediately prior to this offering...................... 12,495,768 shares(1) Common stock outstanding immediately following this offering...................... 15,495,768 shares(1) Use of proceeds................. We intend to use the net proceeds of this offering to repay indebtedness, including $6,483,500 principal amount of indebtedness which we incurred in our May through September 1999 private placement, 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 8,000,000 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 1,872,284 shares of common stock are outstanding on the date of this prospectus, up to an aggregate of 1,183,725 shares of common stock issuable upon the exercise of outstanding warrants, and up to 443,429 shares of common stock issuable upon the conversion of convertible securities or upon the exchange of exchangeable securities. 7 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 year ended June 30, 1999 and the selected balance sheet data as of June 30, 1999 are derived from our consolidated financial statements and related notes included elsewhere in this prospectus audited by KPMG LLP, our independent auditors. The selected financial data as of and for the three months ended September 30, 1999 is unaudited. 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 Infobahn Technologies, LLC (dba 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 as if they were acquired by us on March 4, 1998. The selected statement of operations data for the year ended June 30, 1999 includes the results of operations of Spartan Multimedia 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 as if it was acquired by us on July 1, 1998. The pre-offering pro forma balance sheet data as of September 30, 1999 is adjusted to reflect: - our receipt of $522,500 of the net proceeds from our May through September 1999 private placement of securities received by us after September 30, 1999; - the issuance of 270 shares of common stock in November 1999 upon the exercise of outstanding warrants for $270; - the issuance of 8,000 shares of common stock in October 1999 upon the conversion of $20,000 of convertible debentures; - the issuance of 962,444 shares of common stock upon the exercise of outstanding warrants on a cashless basis during October 1999; and - the issuance to three of our executives of an aggregate of 1,200,000 shares of common stock in October 1999 which may be forfeited by those individuals if they should end their employment with us prior to vesting in exchange for outstanding stock options under our stock option plans. The post-offering pro forma, as adjusted balance sheet data as of September 30, 1999 is adjusted to reflect: - our receipt of $522,500 of the net proceeds from our May through September 1999 private placement of securities received by us after September 30, 1999; - the issuance of 270 shares of common stock in November 1999 upon the exercise of outstanding warrants for $270; - the issuance of 8,000 shares of common stock in October 1999 upon the conversion of $20,000 of convertible debentures; - the issuance of 962,444 shares of common stock upon the exercise of outstanding warrants on a cashless basis during October 1999; - the issuance to three of our executives of an aggregate of 1,200,000 shares of common stock in October 1999 which may be forfeited by those individuals if they should end their employment with us prior to vesting in exchange for outstanding stock options under our stock option plans; and - the receipt of estimated net proceeds of approximately $20.3 million from the sale of our common stock at the assumed public offering price of $8.00 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. 8
PERIOD FROM MARCH 4, 1998 (INCEPTION) THROUGH THREE MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED JUNE 30, 1999 SEPTEMBER 30, ------------------------- ------------------------------ ------------------------------- ACTUAL PRO FORMA ACTUAL PRO FORMA 1998 1999 ----------- ----------- ------------ ------------ ------------ ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues...................... $ 2,800 $ 124,325 $ 143,426 $ 146,867 $ 22,470 $ 212,733 Total operating expenses...... 4,555,459 4,736,557 11,303,848 11,518,898 1,778,173 3,014,976 Interest expense, net......... 19,277 19,277 925,097 925,097 2,408 1,029,812 Loss before extraordinary item........................ (4,571,936) (4,631,509) (12,140,248)(1) (12,351,857)(1) (1,812,840) (3,832,055) Loss before extraordinary item per weighted average common share outstanding (basic and diluted).................... (0.84) (0.81) (1.36)(1) (1.39)(1) (.22) (0.38) Weighted average common shares outstanding (basic and diluted).................... 5,416,242 5,721,327 8,912,041 8,912,041 8,280,801 10,017,740 CUMULATIVE PERIOD FROM MARCH 4, 1998 (INCEPTION) THROUGH SEPTEMBER 30, 1999(2) ------------------- STATEMENT OF OPERATIONS DATA: Revenues...................... $ 358,959 Total operating expenses...... 18,874,283 Interest expense, net......... 1,974,186 Loss before extraordinary item........................ (20,544,239)(1) Loss before extraordinary item per weighted average common share outstanding (basic and diluted).................... (2.26)(1) Weighted average common shares outstanding (basic and diluted).................... 8,372,298
SEPTEMBER 30, 1999 --------------------------------------- JUNE 30, PRO FORMA, ------------------------- AS 1998 1999 ACTUAL PRO FORMA ADJUSTED ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Current assets................................... $ 371,467 $ 1,379,326 $2,441,451 $2,962,899 $15,871,445 Total assets..................................... 871,552 3,458,350 4,617,114 5,138,562 18,047,108 Working capital (deficit)........................ (1,959,776) (1,545,420) (3,042,769) (2,658,821) 13,828,761 Shareholders' equity (deficit)................... (1,827,583) 545,291 (867,106) (483,158) 16,004,424
- ------------------------ (1) Before extraordinary gain of $1,653,232 relating to extinguishment of indebtedness of $0.19, $0.19, and $0.20 per weighted-average common shares outstanding during the year ended June 30, 1999 actual, pro forma, and the cumulative period from March 4, 1998 (inception) through September 30, 1999, respectively. (2) The cumulative period statement of operations data is included in accordance with applicable generally accepted accounting principles since we are a development stage company. 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; 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, 1999 and September 30, 1999, we had a working capital (deficit) of $(1,545,420) and $(3,042,769), respectively, and shareholders' equity (deficit) of $545,291 and $(867,106) at June 30, 1999 and September 30, 1999, respectively. See our financial statements and the related notes. We generated revenues of $143,426 for the year ended June 30, 1999 and $212,733 during the three months ended September 30, 1999. For the year ended June 30, 1999 and the three months ended September 30, 1999, we incurred net losses of $(10,487,016) and $(3,832,055), respectively. We may never achieve profitability. In addition, during the year ended June 30, 1999 and the three months ended September 30, 1999, we recorded negative cash flows from operations of $(4,552,912) and $(2,156,738), respectively. To succeed, we must leverage our existing relationships and develop new relationships to substantially increase our revenue derived from more comprehensive electronic commerce 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 during our fiscal year ended June 30, 1999 and the three months ended September 30, 1999, we recognized revenue only upon completion of a customer transaction through the ICC. This required 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. OUR AUDITORS HAVE QUALIFIED THEIR REPORT ON OUR FINANCIAL STATEMENTS WITH RESPECT TO OUR ABILITY TO CONTINUE AS A GOING CONCERN The report of KPMG LLP, our independent auditors, with respect to our financial statements and the related notes, indicate that, at the date of their report, we were in the development stage, had generated minimal revenues since inception, and were continuing to incur losses. Accordingly, KPMG LLP qualified their report to indicate that these matters raise substantial doubt, at such date, about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes. 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. Consequently, we have a very limited operating history upon which you may base an evaluation of our business and determine our prospects for achieving our intended business objectives. Although we have 10 recently entered into agreements with electronic commerce resellers providing us with access to more than eight million potential clients, we are currently providing electronic commerce transaction processing services to only approximately 1,600 clients. We are prone to all of the risks inherent to the establishment of any new business venture, including unforeseen changes in our business plan. For example, in June 1998, we changed our business plan to the development of technology to enable businesses and other organizations to engage in electronic commerce, whereas our prior efforts focused on the licensing and distribution of software support materials for the governmental and educational markets. 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 electronic commerce. To address these risks, we must, among other things, - maintain and increase our client base, - implement and successfully execute our business and marketing strategy, - 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 our operating results may fluctuate materially, as a result of which quarter-to-quarter comparisons of our results of operations may not be meaningful. 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. You should not rely on our results of any interim period as an indication of our future performance. Additionally, our 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. Factors that may cause our quarterly results to fluctuate include, among others: - our ability to retain existing clients and electronic commerce resellers, to attract new clients and electronic commerce resellers at a steady rate, and to maintain client satisfaction; - our ability to motivate our existing clients, and the ability of certain of our clients to motivate their customers, to begin to conduct certain portions of their business on the Internet; - the ability of our resellers to resell our StoresOnline services; - 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 electronic commerce; - 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; 11 - 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 the 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 electronic commerce. 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 electronic commerce 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 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; - conduct 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 electronic commerce transactions through the use of our hardware and software infrastructure. If the volume of transactions through our infrastructure substantially increases, 12 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 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 accounting, 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 transaction processing systems and to integrate newly-developed and purchased software 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. IF WE CHANGE OUR REVENUE RECOGNITION PRINCIPLES, OUR RESULTS OF OPERATIONS FOR PRIOR PERIODS MAY CHANGE We currently recognize revenues using the completed contract method. We intend to consider using the percentage of completion method to recognize revenues when we meet the criteria necessary to use that method. Under the completed contract method, revenue is recognized upon completion or substantial completion of the contract. Under the percentage of completion method, revenue is recognized on a pro rata basis as work progresses on the contract, and percentage of completion is determined on the basis of cost incurred to total estimated costs. Under the percentage of completion method, in the period in which one determines that a loss will result from a performance of a contract, the entire amount of the estimated loss is recognized. In the event that we should make this change, we will be required to restate comparative prior periods. We cannot guarantee that any amendments to our financial statements as a result of this change will not be material. 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 4,769,101 shares, or 30.7% of the outstanding shares of common stock, 13 or approximately 29.1% 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 $10.2 million, or 50.2%, 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; MANY OF OUR EMPLOYEES HAVE RECENTLY JOINED US AND MUST BE INTEGRATED INTO OUR OPERATIONS From our inception on March 4, 1998 to June 30, 1998, during the year ended June 30, 1999, and during the three months ended September 30, 1999, we expanded from seven to 16 employees, from 16 to 68 employees, and from 68 to 101 employees, respectively. Some of our officers have no prior senior management experience in public companies and have only recently joined us. 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. 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. See "Business--Employees" and "Management." WE HAVE LIMITED HUMAN RESOURCES; WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL; AND WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH WITH OUR LIMITED RESOURCES We expect that the expansion of our business will 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 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 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." 14 WE DEPEND UPON OUR SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY COULD PUT US AT A COMPETITIVE DISADVANTAGE 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 of Keith D. Freadhoff, our Chairman of the Board of Directors. We cannot guarantee that we will be able to replace this key individual in the event his services become unavailable. See "Management--Employment Agreements." AS OUR CHAIRMAN OF THE BOARD OF DIRECTORS HAS PLEDGED HIS STOCK, WE MAY EXPERIENCE A CHANGE OF CONTROL Keith D. Freadhoff, our Chairman of the Board of Directors, has pledged 825,000 shares of our common stock held by him as security for his personal financial obligations, which, at the date of this prospectus, are approximately $1,100,000. These financial obligations are due on demand. If Mr. Freadhoff defaults on these obligations, Mr. Freadhoff may lose ownership of these shares, including the right to vote 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 REQUIRED TO USE FUNDS WHICH WE WOULD OTHERWISE USE FOR GROWTH TO RESCIND OUR MAY THROUGH SEPTEMBER 1999 PRIVATE PLACEMENT During May through September 1999, we completed a private placement of $6,483,500 principal amount of notes and 660,850 shares of common stock for aggregate gross proceeds of approximately $6,483,500, of which $522,500 was received in October 1999. Although we intend to use a portion of the net proceeds of this offering to repay those notes, pursuant to the Securities Act, the rules and regulations under the Securities Act, and the interpretations of the Commission, the investors in this private placement may have the right to require us to repurchase the securities which they purchased in this private placement for a price equal to the amount they paid for these securities when they were purchased from us. Investors would be required to bring any action for rescission within one year from the date of discovery of the omission or misstatement or the date that it should have been discovered, but no more than three years from the sale. If we are required to rescind the private placement in its entirety, we would be required to refund all of the gross proceeds of this private offering to the investors. These proceeds would be paid in part with the net proceeds of this offering. Even following the repayment of these notes, based on this Act, rules and regulations, and interpretations, the investors in this private offering may have the right to require us to repurchase the shares of common stock which they received in this private placement if they can successfully argue that these shares were issued in lieu of a higher interest rate on these notes. We believe that the likelihood of an investor commencing an action for rescission on this basis will increase if the trading price of the common stock drops below the offering price in this offering. In addition, although we have no current plans to conduct an additional private offering of securities prior to the closing of this offering, in the event that this offering is materially delayed, we may be required to conduct an additional private offering in order to satisfy our working capital requirements. In this event, the investors in this private placement may also have the right to require us to repurchase the securities which they purchased in this private placement as described above. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 15 WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE LIABLE FOR INFRINGING 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. Although we have one patent application pending 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." 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 THROUGH SEPTEMBER 1999 PRIVATE PLACEMENT, WHICH COULD LIMIT OUR ABILITY TO EXPAND We intend to use approximately $6.8 million, or 33.5%, of the net proceeds of this offering to repay the promissory notes issued in our private placement which closed from May through September 1999 and $150,000 principal amount of notes issued to settle a financial obligation 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 16 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. 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 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 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 17 decides is relevant. As a result, investors may have to sell their shares of common stock to realize their investment. 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: netgateway.net, netgateway.org, federalbuyersmall.com, storesonlinemall.com, solint.net, Clevelandstores.com, Clevelande-mall.com, Clevelandemall.com, Cleveland-emall.com, E-Cart.com, cablecommerce.net, cablenetmall.com, citdmall.com, frontiervisionmall.com, mikesofamerica.com, northshorestores.com, otimall.com, showcasestores.com, cconnections.com, entchat.com, golfmate.com, openemail.net, opentrade.net, eknowledge.net , dgenesis.com, communicationsgroup.com, quickgrill.com, flashgrill.com, afisteaks.com , and storesonline.com. We have registered with Internic.com the Internet domain names: millenniumemall.com and millenniumemall.net. However, there are other substantially similar domain names which are registered by companies which may compete with us, which may cause potential users and advertisers to confuse our domain name with other similar domain names. In addition, new domains may be added in the future, allowing combinations and similar domain names that may be confusingly similar to our own. 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, WHICH MAY LIMIT THE OPPORTUNITY OF OUR STOCKHOLDERS TO SELL THEIR SHARES AT A PREMIUM TO THE THEN MARKET PRICE 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 by providing them with the opportunity to sell their shares at a premium to the then market price. Our by-laws contain provisions which regulate the introduction of business at annual meetings of our stockholders by other than the board of directors. These provisions may have the effect of rendering more difficult, delaying, discouraging, preventing, or rendering more costly an acquisition of the 18 Company or a change in control of the Company. In addition, our certificate of incorporation authorizes the board of directors to issue up to 4,000,000 shares of preferred stock, which may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors, without further action by stockholders, and may include voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion, and redemption rights, and sinking fund provisions. No shares of preferred stock are currently outstanding, and we have no present plans for the issuance of any preferred stock. However, the issuance of any preferred stock could materially adversely affect the rights of holders of our common stock, and, therefore, could reduce its value. In addition, specific rights granted to future holders of preferred stock could be used to restrict the Company's ability to merge with, or sell its assets to, a third party. The ability of the board of directors to issue preferred stock could have the effect of rendering more difficult, delaying, discouraging, preventing, or rendering more costly an acquisition of us or a change in our control thereby preserving our control by the current stockholders. See "Description of Securities." RISKS SPECIFIC TO OUR INDUSTRY INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS The processing of electronic commerce 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 ELECTRONIC COMMERCE 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. 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. 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 19 as a medium of commerce. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and few services and products have generated profits. For us to be successful, consumers of both retail and business to business services must be willing to accept and use novel and cost efficient ways of conducting business and exchanging information. In addition, the public in general may not accept the Internet and other online services as a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. To the extent that the Internet and other online retail and business to business services continue to experience significant growth in the number of users, their frequency of use, or in their bandwidth requirements, the infrastructure for the Internet and online services may be unable to support the demands placed upon them. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. Significant issues concerning the commercial use of the Internet and online services technologies, including security, reliability, cost, ease of use, and quality of service, remain unresolved and may inhibit the growth of Internet business solutions that utilize these technologies. Changes in, or insufficient availability of, telecommunications services to support the Internet or other online services also could result in slower response times and adversely affect usage of the Internet and other online services generally and our product and services in particular. WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ELECTRONIC COMMERCE, THE ELECTRONIC COMMERCE SERVICES INDUSTRY, AND CUSTOMER DEMANDS CONTINUE TO EVOLVE We may not be able to adapt as the Internet, electronic commerce, the electronic commerce services market, and consumer demands continue to evolve. Our failure to respond in a timely manner to changing market conditions or client requirements would have a material adverse effect on our business, prospects, financial condition, and results of operations. The Internet, the electronic commerce, and the electronic commerce 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, and 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. See "Business--Business Strategy." 20 WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY While the market for electronic commerce 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 electronic commerce services offered, the breadth and quality of these services, creative design and systems engineering expertise, pricing, technological innovation, and understanding clients' strategies and needs. A number of these factors are beyond our control. Existing or future competitors may develop or offer electronic commerce 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, Ariba, VerticalNet, Intel, Microsoft, AT&T, Intershop, MCI Worldcom, 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 in our business. Although we have one patent application pending at this time, we have no patented, and only a limited amount of other proprietary, technology that would preclude or inhibit competitors from entering the electronic commerce 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 electronic commerce 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--Electronic Commerce Services Industry" and "Business--Competition." 21 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 electronic commerce. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services, could have a material adverse effect on our business, prospects, financial condition, and results of operations. Due to the increasing popularity and use of the Internet and other online services, federal, state, and local governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet or other online services covering issues such as taxation, user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services. In 1998, the United States Congress established the Advisory Committee on Electronic Commerce which is charged with investigating, and making recommendations to Congress regarding, the taxation of sales by means of the Internet. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws to impose additional burdens on companies conducting business online. The adoption of any additional laws or regulations upon the recommendation of this Advisory Committee or otherwise may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for our 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. 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, loss of existing clients, 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. 22 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 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 OUR COMMON STOCK MAY DECLINE IF CRUTTENDEN ROTH OR PENNSYLVANIA MERCHANT GROUP 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 they have no obligation to do so, Cruttenden Roth and Pennsylvania Merchant Group intend to make a market in our shares and may otherwise effect transactions in our common stock. If Cruttenden Roth and Pennsylvania Merchant Group participate in the market, it may influence the market, if one develops, for our common stock. Either of these firms may discontinue making a market in the common stock at any time. Moreover, if either of these firms sells the shares of common stock issuable upon exercise of the representatives' warrants, that firm 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 the direct or indirect participation of that firm in the market. INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION The public offering price per share in this offering exceeds the net tangible book value per share of our 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 47.2% of the total amount invested to date to fund us, but will only own 19.4% of the shares of common stock outstanding. SIGNIFICANT ADDITIONAL DILUTION IF OUTSTANDING OPTIONS AND WARRANTS ARE EXERCISED We also have outstanding stock options to purchase approximately 2.1 million shares of common stock and warrants and convertible or exchangeable securities to purchase approximately 1.6 million shares of common stock, some of which have exercise prices significantly below the public offering price of our common stock in this offering. 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 15,495,768 23 shares of common stock. Of these shares, an aggregate of 5,481,567 shares, including the 3,000,000 shares being offered in this offering, will be freely tradeable. Our directors and officers and a number of our stockholders who hold together an aggregate of 7,698,988 shares 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 the date of this prospectus. Giving effect to these lock-up agreements and applicable legal restrictions, 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 - ----------------- ----------------------------------------------------------------------------------------------- 5,309,913 At the date of this prospectus (including the 3,000,000 shares of common stock in this offering) 1,304,737 Within six months from the date of this prospectus 8,881,118 Between six and twelve months from the date of this prospectus
As of the date of this prospectus, we have reserved an aggregate of 1,634,174 shares of common stock issuable upon the exercise of outstanding warrants and convertible or exchangeable securities. Following this offering, we intend to file a registration statement to register for issuance and resale the 8,000,000 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 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. We also intend to file a registration statement to register the resale of approximately 480,000 of the shares of common stock which we issued in October 1999 upon the exercise of outstanding warrants on a cashless basis, as well as 400,000 shares of common stock which we issued or are issuable upon the conversion of our convertible debentures. Some of our stockholders, holding approximately 1,511,429 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 these shares have waived this right 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. In addition, any demand to include these shares in our registration statements could have an adverse effect on our ability to raise needed capital. 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. 24 USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $20.3 million from the sale of the common stock offered by us in this offering, assuming a public offering price of $8.00 per share. If the underwriters exercise their over-allotment option in full, we will receive net proceeds of approximately $23.5 million. These estimates are after deducting estimated underwriting discounts and commissions and other fees and expenses payable by us. We intend to use approximately $6.8 million, or 33.5%, of the net proceeds of this offering to repay indebtedness incurred in connection with our May through September 1999 private placement of $6,458,500 principal amount of Series A 12% Senior Notes due 2000 and 660,850 shares of common stock and $150,000 principal amount of notes issued to settle a financial obligation in May 1999. The notes are due on the earlier of April 30, 2000 or completion of this offering and accrue interest at the rate of 12% per annum. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." We intend to use approximately $3.7 million, or 18.2%, of the estimated net proceeds of this offering to expand our marketing efforts. With respect to our marketing efforts conducted directly, we intend to begin to do the following: - advertise on the Internet; - advertise on television in selected markets; - direct mail; - conduct 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: - 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. See "Risk Factors--Our Marketing Strategy Has Not Been Tested and May Not Result in Success." We intend to use approximately $1.3 million, or 6.4%, of the estimated net proceeds of this offering for research and development and for the continued enhancement of our ICC eCommerce transaction processing system. See "Business--Research and Development." We intend to use approximately $3.6 million, or 17.7%, 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 $4.9 million, or 24.2%, 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; 25 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. Under the Securities Act, the rules and regulations under the Securities Act, and the interpretations of the Commission, we may be required to offer rescission to investors in our May through September 1999 private placement. These investors hold $6,458,500 principal amount of our 12% Senior Notes due 2000, which notes we are required to repay with a portion of the net proceeds of this offering. See "Risk Factors--We May Be Required To Use Funds Which We Would Otherwise Use For Growth To Rescind Our May through September 1999 Private Placement." 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 "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. 26 PRICE RANGE OF COMMON STOCK Our common stock has been traded on the OTC Bulletin Board since July 6, 1998. The following table sets forth, for the fiscal periods indicated, the quarterly high and low sales prices for our common stock, as reported by Nasdaq.
HIGH LOW --------- --------- FISCAL YEAR ENDED JUNE 30, 1999 First Quarter (from July 6, 1998)............................................................... $ 11 1/8 $ 6 3/8 Second Quarter.................................................................................. 9 3/4 2 1/4 Third Quarter................................................................................... 13 1/4 4 3/4 Fourth Quarter.................................................................................. 15 5/8 9 1/4 FISCAL YEAR ENDING JUNE 30, 2000 First Quarter (through November 9, 1999)........................................................ 11 15/16 6 7/8
The last reported sale price of our common stock on the OTC Bulletin Board on November 9, 1999 was $7.812 per share. As of November 9, 1999, there were 457 holders of record of our common stock. 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. 27 CAPITALIZATION The following table sets forth, as of September 30, 1999: - our actual short-term debt and capitalization, - our pre-offering as adjusted short-term debt and capitalization, which gives effect to (1) $522,500 of the net proceeds from our May through September 1999 private placement of securities received by us after September 30, 1999, (2) the issuance of 270 shares of common stock in November 1999 upon the exercise of outstanding warrants for $270; (3) the issuance of 8,000 shares of common stock in October 1999 upon the conversion of $20,000 of convertible debentures; (4) the issuance of 962,444 shares of common stock upon the exercise of outstanding warrants on a cashless basis during October 1999, and (5) the issuance to three of our executive officers of an aggregate of 1,200,000 shares of common stock in October 1999 which may be forfeited by these individuals if they should end their employment with us prior to vesting in exchange for outstanding options under our existing stock option plans, and - our post-offering as adjusted short-term debt and capitalization, which give effect to (1) $522,500 of the net proceeds from our May through September 1999 private placement of securities received by us after September 30, 1999, (2) the issuance of 270 shares of common stock in November 1999 upon the exercise of outstanding warrants for $270; (3) the issuance of 8,000 shares of common stock in October 1999 upon the conversion of $20,000 of convertible debentures; (4) the issuance of 962,444 shares of common stock upon the exercise of outstanding warrants on a cashless basis during October 1999, (5) the issuance to three of our executive officers of an aggregate of 1,200,000 shares of common stock in October 1999 which may be forfeited by these individuals if they should end their employment with us prior to vesting in exchange for outstanding options under our existing stock option plans, and (6) our receipt of net proceeds of approximately $20.3 million from the sale of the shares in this offering at the assumed public offering price of $8.00 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.
SEPTEMBER 30, 1999 ---------------------------------------------- PRE-OFFERING POST-OFFERING ACTUAL AS ADJUSTED AS ADJUSTED -------------- -------------- -------------- Short-term debt.................................................. $ 3,424,330 $ 3,561,830 $ 181,799 Stockholders' equity Common stock--$0.001 par value, authorized--40,000,000 shares; issued and outstanding--10,322,554 shares, actual; 12,495,768 shares as adjusted; and 15,495,768 shares, as further adjusted............................................. 10,323 12,496 15,496 Additional paid-in capital....................................... 18,402,614 26,837,565 47,184,565 Deferred compensation............................................ (34,380) (8,434,380 (8,434,380) Stock subscription receivable.................................... (350,000) -- -- Accumulated other comprehensive loss............................. (4,656) (4,656) (4,656) Accumulated deficit.............................................. (18,891,007) (18,894,814) (22,756,601) -------------- -------------- -------------- Total stockholders' equity (deficit)............................. (867,106) (483,158) 16,004,424 -------------- -------------- -------------- Total short-term debt and capitalization......................... $ 2,557,224 $ 3,078,672 $ 16,186,223 ============== ============== ==============
28 DILUTION As of September 30, 1999, our net tangible net book value (deficit) was $(2,790,004) or approximately $(0.27) per share of common stock based on 10,322,554 shares of common stock outstanding. The 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 September 30, 1999. After giving effect to - our receipt after September 30, 1999 of estimated net proceeds of $522,500 from our May through September 1999 private placement, - the issuance of 270 shares of common stock in November 1999 upon the exercise of outstanding warrants for $270; - the issuance of 8,000 shares of common stock in October 1999 upon the conversion of $20,000 of convertible debentures; - the issuance of 962,444 shares of common stock upon the exercise of outstanding warrants on a cashless basis during October 1999, and - the issuance to three of our executive officers of an aggregate of 1,200,000 shares of common stock in October 1999 which may be forfeited by these individuals if they should end their employment with us prior to vesting in exchange for outstanding stock options under our existing stock option plans, our pre-offering pro-forma net tangible book value (deficit) at September 30, 1999 would have been $(2,404,634) or approximately $(0.19) per share of common stock. After giving effect to - our receipt after September 30, 1999 of net proceeds of $522,500 from our May through September 1999 private placement of securities - the issuance of 270 shares of common stock in November 1999 upon the exercise of outstanding warrants for $270; - the issuance of 8,000 shares of common stock in October 1999 upon the conversion of $20,000 of convertible debentures; - the issuance of 962,444 shares of common stock upon the exercise of outstanding warrants on a cashless basis during October 1999, and - the issuance to three of our executive officers of an aggregate of 1,200,000 shares of common stock in October 1999 which may be forfeited by these individuals if they should end their employment with us prior to vesting in exchange for outstanding stock options under our existing stock option plans, and - our receipt of estimated net proceeds of approximately $20.3 million from our sale of 3,000,000 shares of common stock offered in this offering at the assumed public offering price per share of $8.00 and the initial application of those proceeds as described under the heading "Use of Proceeds," Our post-offering pro forma as adjusted net tangible book value at September 30, 1999 would have been $14,492,892 or approximately $.94 per share of common stock. This represents an increase in the pro forma as adjusted net tangible book value of $1.21 per share to existing stockholders and an 29 immediate dilution in the pro forma as adjusted net tangible book value of $7.06 per share, or 88.3%, to investors in this offering. The following table illustrates the per share dilution:
PER SHARE OF COMMON STOCK -------------------- Assumed public offering price.................................................................. $ 8.00 Actual tangible book value (deficit) at September 30, 1999................................... $ (0.27) Increase in net tangible book value, giving effect to the Summer 1999 private placement and October and November 1999 stock issuances............................ 0.08 --------- Pre-offering pro forma net tangible book value (deficit)..................................... (.19) Increase in net tangible book value.......................................................... 1.13 --------- Post-offering pro forma net tangible book value after this offering............................ .94 --------- Dilution of net tangible book value to new investors........................................... $ 7.06 =========
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........................... 12,495,768 80.6 $ 26,850,061 52.8% $ 2.15 New investors................................... 3,000,000 19.4 24,000,000 47.2 8.00 ------------- --------- ------------- --------- --------- Total........................................... 15,495,768 100.0% $ 50,850,061 100.0% $ 3.28 ============= ========= ============= ========= =========
30 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 year ended June 30, 1999 and the selected balance sheet data as of June 30, 1999 are derived from our consolidated financial statements and related notes included elsewhere in this prospectus audited by KPMG LLP, our independent auditors. The selected financial data as of and for the three months ended September 30, 1999 is unaudited. The selected balance sheet data as of September 30, 1999 is unaudited. 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 Infobahn Technologies LLC (dba 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 year ended June 30, 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 pre-offering pro forma balance sheet data as of September 30, 1999 is adjusted to reflect: - the receipt of $522,500 of net the proceeds from our May through September 1999 private placement of securities received by us after September 30, 1999; - the issuance of 270 shares of common stock in November 1999 upon the exercise of outstanding warrants for $270; - the issuance of 8,000 shares of common stock in October 1999 upon the conversion of $20,000 of convertible debentures; - the issuance of 962,444 shares of common stock upon the exercise of outstanding warrants on a cashless basis during October 1999; and - the issuance to three of our executives of an aggregate of 1,200,000 shares of common stock in October 1999 which may be forfeited by these individuals if they should end their employment with us prior to vesting in exchange for outstanding stock options under our existing stock option plans. The post-offering proforma, as adjusted balance sheet as of September 30, 1999 is adjusted to reflect: - the receipt of $522,500 of the net proceeds from our May through September 1999 private placement of securities received by us after September 30, 1999; - the issuance of 270 shares of common stock in November 1999 upon the exercise of outstanding warrants for $270; - the issuance of 8,000 shares of common stock in October 1999 upon the conversion of $20,000 of convertible debentures; - the issuance of 962,444 shares of common stock upon the exercise of outstanding warrants on a cashless basis during October 1999; - the issuance to three of our executives of an aggregate of 1,200,000 shares of common stock in October 1999 which may be forfeited by these individuals if they should end their employment with us prior to vesting in exchange for outstanding stock options under our existing stock option plans; and - the receipt of estimated net proceeds of approximately $20.3 million from the sale of our common stock at the assumed public offering price of $8.00 per share and the initial application of these proceeds as described under "Use of Proceeds." 31 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 THREE MONTHS FROM MARCH 4, 1998 JUNE 30, 1998 ENDED SEPTEMBER 30, (INCEPTION) YEAR ENDED JUNE 30, 1999 THROUGH SEPTEMBER ---------------------- ------------------------ 30, 1999(2) ACTUAL PRO FORMA ACTUAL PRO FORMA 1998 1999 ---------- ---------- ----------- ----------- ----------- ------------- ------------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues.................... $ 2,800 $ 124,325 $ 143,426 $ 146,867 $ 22,470 $ 212,733 $ 358,959 Total operating expenses.... 4,555,459 4,736,557 11,303,848 11,518,898 1,778,173 3,014,976 18,874,283 Interest expense............ 19,277 19,277 925,097 925,097 2,408 1,029,812 1,974,186 Net loss before extraordinary item........ (4,571,936) (4,631,509) (12,140,248)(1) (12,351,857)(1) (1,812,840) (3,832,055) (20,544,239)(1) Loss before extraordinary item per weighted average common share outstanding (basic and diluted)....... (0.84) (0.81) (1.36)(1) (1.39)(1) (.22) (0.38) (2.26)(1) Weighted average common shares outstanding (basic and diluted).............. 5,416,242 5,721,327 8,912,041 8,912,041 8,280,801 10,017,740 8,372,298
SEPTEMBER 30, 1999 JUNE 30, ------------------------------------- ---------------------- PRO FORMA, 1998 1999 ACTUAL PRO FORMA AS ADJUSTED ---------- ---------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Current assets................................................. $ 371,467 $1,379,326 $2,441,451 $2,962,899 $15,871,445 Total assets................................................... 871,552 3,458,350 4,617,114 5,138,562 18,047,108 Working capital (deficit)...................................... (1,959,776) (1,545,420) (3,042,769) (2,658,821) 13,828,761 Shareholders' equity (deficit)................................. (1,827,583) 545,291 (867,106) (483,158) 16,004,424
- ------------------------ (1) Before extraordinary gain of $1,653,232 relating to extinguishment of indebtedness of $0.19, $0.19, and $0.20 per weighted-average common shares outstanding during the year ended June 30, 1999 actual, pro forma and the cumulative period from March 4, 1998 (inception) through September 30, 1999, respectively. (2) The cumulative period statement of operations data is included in accordance with generally accepted accounting principles since we are a development stage company. 32 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 electronic commerce services designed to enable clients to extend their business to the Internet to conduct commercial transactions between business enterprises. As of June 30, 1999 and September 30, 1999, we had a working capital deficiency of $1,545,420 and $3,042,769, respectively and stockholders' equity (deficit) of $545,291 and $(867,106), respectively. We generated revenues of $2,800 during the period from our inception on March 4, 1998 through June 30, 1998, revenues of $143,426 during the year ended June 30, 1999 and revenues of $212,733 during the three months ended September 30, 1999. We have incurred net losses since inception and expect to continue to generate operating losses for the foreseeable future. We may never achieve profitability. In addition, during the period from our inception on March 4, 1998 through June 30, 1998, the year ended June 30, 1999 and the three months ended September 30, 1999, we incurred negative cash flows from operations of $253,119, $4,552,912 and $2,156,738, 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. During the year ended June 30, 1999, we estimate that approximately 95% of our revenues were attributable to Web site development and design and the development of electronic storefronts, and 5% were attributable to transaction processing. We anticipate that, over the next three years, as we implement our operating and expansion plan, approximately - 20% of our revenues will be attributable to Web site development and design and the development of electronic storefronts, - 50% of our revenues will be attributable to Internet-based shopping mall development and design, - 25% of our revenues will be attributable to transaction processing, and - the remainder will be attributable to data warehousing and transaction reporting, customer support services, advertising, and provision of connectivity solutions. During the year ended June 30, 1999 and three months ended September 30, 1999, we expended our resources principally in development of our technology. We anticipate that, over the next three years, as we implement our operating and expansion plan, approximately - 30% of our expenditures will be attributable to Web site development and design and the development of electronic storefronts, 33 - 45% of our expenditures will be attributable to Internet-based shopping mall development and design, - 20% of our expenditures will be attributable to transaction processing, and - the remainder will be attributable to data warehousing and transaction reporting, customer support services, advertising, and provision of connectivity solutions. Based on our operating and expansion plan, we anticipate that, over the next three years, - greater revenue growth as a percentage of revenues will be attributable to transaction processing than to Web site development and design and Internet-based shopping mall development and design, and - as transaction volume through our ICC increases, our gross margins and operating margins will increase as the relatively fixed costs associated with these activities is spread over such larger volume of transactions. From our inception on March 1, 1998 until June 1998, our business plan was to engage in the licensing and distribution of software support materials for the governmental and educational markets. The principal licenses into which we entered during this time period were related to the proprietary courseware of Pro-Soft I-Net, a software and Internet training solutions provider. As a result of changes in the software market and the related training and support materials market, we determined to change our business plan to the development of technology to enable businesses and other organizations to engage in electronic commerce. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Related Party Transactions." 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 enable businesses to transact business-to-business Internet commerce efficiently and effectively, - our ability to identify and position ourselves as a significant participant in the business-to-business Internet commerce market, and - the willingness of the market place to adapt and engage in electronic commerce. 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. 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." 34 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 had no meaningful operating results through September 30, 1999, as we focused on the development of our ICC services and technology. 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 $925,097 and $1,029,812 was incurred during the year ended June 30, 1999 and three months ended September 30, 1999 respectively, primarily related to amortization of debt issuance costs and debt discount. 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 September 30, 1999, our cash was $956,636. Net cash used by operating activities was $2,156,738 for the three months ended September 30, 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 adjusted principally for non-cash expenses of $3,822,000 in amortization and write-off of license fees and $371,680 of stock based compensation. See "Related Party Transactions." We were established as eClassroom and, shortly thereafter, acquired two exclusive sublicenses to sell proprietary ProSoft I-Net Solutions courseware to governmental and educational markets. 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." Net cash used in investing activities from March 4, 1998 (inception) through June 30, 1998, was related principally to the purchase of $102,034 of fixed assets and $75,000 of loans to customers. Net cash provided by financing activities from 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 to related parties, and reduced by the repayment of notes payable in the amount of $100,000. 35 YEAR ENDED JUNE 30, 1999 Net cash used in operations was $4,552,912 during the year ended June 30, 1999, which resulted principally from net losses of $10,487,016 for such period adjusted for non-cash items of gain on extinguishment of indebtedness of $1,653,232, common stock issued for services in the amount of $1,262,200, compensation expense for contributed capital of $400,000, interest and amortization of debt issue costs of $679,535, options and warrants issued for services in the amount of $2,820,428, the provision for doubtful accounts of $26,876, and the write-off of an $800,000 note receivable. Accounts payable and accrued liabilities increased by $1,220,010. Net cash used in investing activities for the year ended June 30, 1999 was related to the purchase of equity securities in the amount of $100,733, a loan to Admor of $800,000, a loan to an officer of $30,000, and the purchase of $250,579 of fixed assets. Net cash provided by financing activities during the year ended June 30, 1999 of $5,951,912 resulted from $4,253,360 of private placements of common stock, $264,200 from the exercise of warrants, $2,506,000 from the issuance of notes payable and convertible debentures, $100,000 from the issuance of notes payable to related parties, $181,018 of cash paid for debt issue costs and the repayment of notes payable in the amount of $990,630. In June 1998, we commenced an offering of 1,022,800 units, each consisting of one share of common stock at $2.00 per share and one warrant, expiring on October 9, 1998, to purchase one additional share of common stock at $4.00 per share. By June 30, 1998, $146,000 had been received. During the three months ended September 30, 1998, 949,800 units were issued for $1,899,600. In January and February 1999, we received $1,000,000 from the sale of convertible debentures at a conversion price of $2.50 per share. During March 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 and June 1999, we sold in a private placement a total of $2,880,000 principal amount of our 12% promissory notes due on the earlier of April 30, 2000 or completion of this offering. As part of this transaction, we issued to the investors a total of 288,000 shares of our common stock and 144,000 warrants with a fair value of $301,300. In May 1999, the Company issued $150,000 of 12% notes due on the earlier of April 30, 2000 or completion of this offering as settlement for a financial obligation. Additionally, 15,000 shares of common stock were issued as part of the settlement agreement. See "Risk Factors--We May Be Required To Use Funds Which We Would Otherwise Use For Growth To Rescind Our May through September 1999 Private Placement." 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 due on the notes was cancelled. See "Related Party Transactions." In March 1999, Keith D. Freadhoff, our Chairman of the Board of Directors, loaned $100,000 to us on an interest-free basis. We repaid the loan in May 1999. As of June 30, 1999, our principal sources of liquidity consisted of $569,472 in 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. THREE MONTHS ENDED SEPTEMBER 30, 1999 Net cash used in operations was $2,156,738 during the three months ended September 30, 1999, which resulted principally from net losses of $3,832,055 for such period adjusted for non-cash items of common stock issued for services in the amount of $14,400, amortization of deferred compensation of $24,224, amortization of debt issue costs and debt discount of $913,712, and options issued for services in the amount of $5,105. Accounts payable and accrued liabilities increased by $886,477. 36 Net cash used in investing activities for the three months ended September 30, 1999 was related to the repayment of notes receivable of $30,000 and the purchase of $229,331 of fixed assets. Net cash provided by financing activities during the three months ended September 30, 1999 of $2,744,291 resulted from $1,890,269 of private placements of common stock, $957,450 from the issuance of notes payable and $103,428 of cash paid for debt issue costs. In August and September 1999, we sold in a private placement a total of $3,578,500 principal amount of our 12% promissory notes due on the earlier of April 30, 2000 or completion of this offering. As part of this transaction, we issued to the investors a total of 357,850 shares of our common stock of which $500,000 was received in October 1999 and 149,375 warrants with a fair value of $396,500. See "Risk Factors--We May Be Required To Use Funds Which We Would Otherwise Use For Growth To Rescind Our May through September 1999 Private Placement." In July 1999 we issued 50,000 shares of common stock valued at $300,000 for prepaid advertising. We also issued 2,400 shares of common stock valued at $14,400 for services in July 1999. In September 1999, we began offering to holders of certain of our outstanding warrants the right to exercise warrants on a cashless basis. As of September 30, 1999, our principal sources of liquidity consisted of $956,636 in 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. RECENT ACTIVITY On October 13, 1999, warrants exercisable for an aggregate of 1,184,730 shares of common stock were exercised on a cashless basis for an aggregate of 962,444 shares of our common stock. Our purpose in taking this action was to decrease the number of warrants outstanding. In October 1999, we issued to three of our executives an aggregate of 1,200,000 shares of common stock which may be forfeited by these individuals if they should end their employment with us prior to vesting in exchange for an aggregate of 1,980,000 stock options outstanding under our existing stock option plans and terminated additional stock options under these plans exercisable for an aggregate of 316,667 shares of common stock. Our purpose in taking this action was to decrease the number of stock options outstanding under our existing stock option plans. See "Management--Executive Compensation." In October 1999, we received $500,000 relating to our May through September 1999 private placement. In October 1999, we sold in a private placement a total of $25,000 principal amount of our 12% promissory notes due on the earlier of April 30, 2000 or completion of this offering generating net proceeds of $22,500. As part of this transaction, we issued to investors 2,500 shares of common stock and 1,250 warrants with a fair value of $3,349. See "Risk Factors--We May Be Required to Use Funds Which We Would Otherwise Use For Growth To Rescind Our May Through September 1999 Private Placement". In October 1999, we issued 8,000 shares of common stock upon the conversion of $20,000 of convertible debentures. In November 1999, we issued 270 shares of common stock upon the exercise of warrants for $270. 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" 37 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; - communications networks, such as the Internet and private intranets, on which we depend to permit electronic commerce 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 believe that our expenditures to upgrade our internal systems and applications and replace non-compliant systems will not exceed $100,000 and will not be material to our business, prospects, financial condition, and results of operations. To date, we have incurred $20,000 in connection with our Year 2000 compliance activities. We have utilized, and intend to continue to utilize, general working capital in order to fund these activities. We have not had to defer any information technology projects as a result of these activities. 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 electronic commerce 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 have implemented a Year 2000 program to assess and monitor Year 2000 issues with all of our significant clients, suppliers, and other third parties. We have appointed a single individual to head our Year 2000 program. The following significant parties, which provide us with essential or critical systems, have certified through Year 2000 compliance testing or vendor certification that such systems are Year 2000 compliant: Exodus Communications, PAJO, Dell Computers, Intel, PAL Employer Services, Inc., Verisign, Inc., and Thawte, Inc. We have identified and have contacted the following significant parties by letter or telephone: PaymentNet, Cardservice International, Authorizenet, eCommerce Exchange, Clear Exchange, XOOM.com, Inc., CB Richard Ellis, Reliant Innovations, Inc., Wireless One, Inc., Found.com, Inc., On Track Inc. (O.T.I. Cable Advertising), and Power Enterprises, Inc. We intend to continue to contact these significant parties until there is either a satisfactory determination that the significant party has reasonably addressed any Year 2000 issues or, in the absence of such determination, until one or more replacement parties are identified and engaged. We have conducted 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 are presently developing a contingency plan for handling Year 2000 problems that are not detected and corrected prior to this occurrence and anticipate completing this plan by October 1999. Our most likely worst case Year 2000 scenario is unknown at this time. Our failure to address any unforeseen Year 2000 issue could materially adversely affect our business, prospects, financial condition, and results of operations. 38 BUSINESS IN GENERAL We provide turn-key electronic commerce services designed to enable clients to extend their business to the Internet to conduct commercial transactions between business enterprises. The HUB of our electronic commerce 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 electronic commerce. We also design and build custom interfaces, or SPOKES, to connect business clients to the ICC. Our ICC permits a continuum of sophisticated and technologically complex, or scalable, solutions ranging from a simple Internet storefront advertising their products and taking orders through e-mail to a highly complex system of secure client extranets allowing vendors to interact and transact business-to-business electronic commerce with one or more specific customers. In July 1999, we formed CableCommerce, a new operating division which focuses upon providing electronic services and solutions to cable television operators. Typically, CableCommerce will design, develop, host, and manage branded Internet-based shopping malls in the markets served by the cable television system operator featuring businesses local to each of these markets. In addition, CableCommerce offers local and regional classified advertisements, community calendars, and coupons, provides mall content, trains cable television system sales people, and offers storefront creation and maintenance services to the cable television system's subscribers. To date, we have entered into contracts to provide these services with MediaOne, CableOne, Wireless One, and Frontiervision Media Services. 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. ELECTRONIC COMMERCE 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 39 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 electronic commerce 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 the business-to-business sector. Currently, KPMG estimates that business to business Internet commerce doubles approximately every 90 days. ELECTRONIC COMMERCE SERVICES MARKET IDC forecasts that the market for Internet and electronic commerce 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 electronic commerce 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 electronic commerce 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 electronic commerce 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 electronic commerce solutions, including integrated strategy, technology and creative design, connectivity, transaction processing, data warehousing, transaction reporting, help desk, 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. 40 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 electronic commerce servers. As a result of our HUB and SPOKE structure, we can offer rapidly deployed, low cost electronic commerce 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. 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 electronic commerce. 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 electronic commerce 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 41 ADVANTAGES We believe that the following are significant advantages of our electronic commerce 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 electronic commerce presence. - Clients with existing Web sites can maintain their investment in the creation of that presence while seamlessly adding electronic commerce capabilities. - Because our infrastructure permits scalable electronic commerce solutions, we can offer incremental services to our clients through the activation of additional proprietary software 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 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 electronic commerce 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 electronic commerce 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 electronic commerce solution will strengthen the relationship. Examples of our resellers include Internet portal companies, telecommunications companies, Internet service providers, cable television companies, banks, and computer hardware manufactures. See "Business--Clients and Strategic Relationships." - PROVIDE EASY ACCESS TO SCALABLE ELECTRONIC COMMERCE FUNCTIONALITY. We have designed the ICC and our hardware and software infrastructure to permit scalable electronic commerce solutions and can offer incremental services to our clients through the activation of additional proprietary software 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. - USE OF TECHNOLOGY TO CREATE ELECTRONIC COMMERCE HUBS. We have improved the attractiveness of our services by creating electronic commerce HUBS in the form of (1) private label Internet-based "shopping malls", where electronic commerce sites sponsored by a common reseller or of similar 42 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 electronic commerce servers. As a result, we can offer electronic commerce 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. In May 1999, we consummated the acquisition of the technology of Shopping Planet, an electronic commerce applications developer, which we believe will enhance our functionality. In exchange for their technology, we agreed to the following: - we issued to Shopping Planet 35,000 shares of our common stock; and - leased the technology, including the right to enhancements, back to Shopping Planet on a non-transferable basis for nominal consideration. As a condition to this acquisition, we entered into an employment agreement with the head developer of the Shopping Planet technology. See "Risk Factors" and "Use of Proceeds." SERVICES OFFERED We offer our electronic commerce 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 electronic commerce. 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-BASED "SHOPPING MALL" DEVELOPMENT AND DESIGN. We believe that the use of Internet-based shopping malls is critical to create an effective electronic commerce marketplace. Through the creation and use of private labeled Internet malls, users of our services can take advantage of both the pre-existing relationships and marketing efforts of the reseller sponsoring the private labeled mall, thereby increasing traffic to, and exposure of, their site. In addition, we have developed and feature a proprietary electronic commerce 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 electronic commerce 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 electronic 43 commerce 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 electronic commerce 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, Authorize 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, we plan to pursue our 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 electronic commerce 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 hour per day and seven day per week customer service and support through our customer support staff of six individuals. - ADVERTISING. We have signed an agreement with 24/7, Inc. to manage national banner advertising in our Internet-based shopping malls. We share advertising revenues with the respective mall owner on whose Web site the advertisement resides. - CONNECTIVITY SOLUTIONS. In order for business customers to effectively engage in electronic commerce, 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. - CABLECOMMERCE SOLUTIONS. In July 1999, we formed CableCommerce, a new operating division which will focus on providing electronic commerce services and solutions to cable television operators. See "Business--Client and Strategic Relationships." 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 11 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-based shopping 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-based shopping 44 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. In July 1999, we established our call center in American Fork, Utah. The center has immediate capacity for 40 telephone salespeople, with future expansion capabilities to add up to 130 telephone sales stations. The primary focus of the call center is to produce revenues by means of outbound sales call campaigns and selling our products and services. We believe that the center will also produce revenues by performing outbound calling services for our reseller channel partners charging hourly fees and for other clients requiring inbound or outbound services by charging a combination of development, activation, and hourly fees. The center also supports inbound technical questions from the Company's user base 24 hours per day, seven days per week. The center is equipped with the latest technology, affording the operators digital capabilities such as queue control over voice, e-mail, and fax in digital format, rapid development and deployment of outbound marketing campaigns, database integration into the outbound queuing system, Web-based monitoring tools, and drastically reduced costs as compared to other standard telephone technologies. 45 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.
PACKAGE THREE BUSINESS TO PACKAGE ONE PACKAGE TWO BUSINESS INTRODUCTORY STORESONLINE.COM ELECTRONIC FEATURES PACKAGE PACKAGE COMMERCE - ---------------------------------------------- --------------- ------------------- ----------------- - ------------------------------------------------------------------------------------------------------- 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 -- INTRODUCTORY PACKAGE 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 electronic commerce, 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. 46 SERVICE PACKAGE TWO--STORESONLINE.COM PACKAGE This package is sold by means of authorized Netgateway resellers and permits clients to have a fully functional electronic 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 ELECTRONIC COMMERCE For businesses that need more robust electronic commerce 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 electronic commerce site in question and our resellers. We are currently processing electronic commerce transactions for over 1,600 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: MEDIAONE. In July 1999, we entered into a strategic relationship with MediaOne, a leading cable television operator, under which we will design, develop, host, and manage Internet-based shopping malls in each of MediaOne's markets. These markets currently consist of more than five million households. These shopping malls will be branded with the MediaOne name, brand, and image, will feature businesses local to each market, and will offer additional online services, such as classified advertisements, local community events calendars, and coupons. MediaOne has agreed to contribute commercial advertising time on their cable systems in order to promote these malls. As a term of this relationship, MediaOne acquired 50,000 shares of our common stock and warrants, exercisable for up to an aggregate of 200,000 shares of our common stock, which vests in four installments upon the satisfaction of milestones relating to the scope of the launch of these Internet-based shopping malls. See "Business--Clients and Strategic Relationships." CABLEONE. In August 1999, we entered into a cable reseller and mall agreement with CableOne, a large cable television operator, under which we will design and develop an Internet-based shopping mall, to be branded with the CableOne name, brand, and image, and will offer our storefront creation and maintenance services to CableOne's subscribers. We will also be responsible for marketing support, including development of mall content, training of CableOne sales people, and production of advertising to promote their services. CableOne will promote this mall with a minimum of 400 cablecasts per broadcast month in each broadcast market where the mall services are offered. WIRELESS ONE. In June 1999, we entered into a reseller and mall agreement with Wireless One, Inc. under which we will design and develop an Internet-based shopping mall, to be branded with the Wireless One name, brand, and image, and will offer our storefront creation and maintenance services to Wireless One's subscribers. We will also be responsible for marketing support, including development of mall content, training of Wireless One sales people, development of Wireless One branded collateral material and periodic distribution and updating of advertising spots to promote their 47 services. Wireless One will promote this mall with a total of 1,000 30-second spots every month jointly developed by us and Wireless One in all systems in which it is able to provide advertising. FRONTIERVISION MEDIA SERVICES. In July 1999, we entered into a reseller and mall agreement with Frontiervision Media Services, a provider of cable television programming services, pursuant to which we will design and develop an Internet-based shopping mall, to be branded with the Frontiervision name, brand and image, and will offer our storefront creation and maintenance services to Frontiervision's subscribers. We will also be responsible for marketing support, including development of mall content, training of Frontiervision sales people, and production of advertising spots to promote their services. Frontiervision will promote this mall with a minimum of 1,000 cablecasts per broadcast month in each broadcast market where the mall services are offered. XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS: XMCM), an electronic commerce 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 products and services which permit its members to create and maintain storefronts on the Web through XOOM.com; - we developed XOOM.com's Internet-based shopping mall located at WWW.XOOMMEMBERSTORES.COM; - we are the sole provider of electronic commerce processing services to XOOM.com's electronic commerce customers; and - we will utilize XOOM.com as a Netgateway reseller to provide electronic commerce solutions and services to its member companies. BUYSELLBID.COM In August 1999, we entered into a distributor mall and reseller agreement with BuySellBid.com under which we will design and develop Internet-based shopping malls for BuySellBid.com, which will in turn resell and/or sublicense these Internet-based shopping mall packages, custom-branded, to other resellers, or alternatively brand any such Internet-based mall with the BuySellBid.com name, brand, and image, and offer our storefront creation and maintenance services to its own subscribers. Under this agreement, we will be responsible for marketing support, including development of mall content, and training of BuySellBid.com sales people. B2BSTORES.COM INC. In July 1999, we entered into an electronic commerce services agreement with B2BStores.com Inc., a catalogue aggregator and procurement company, under which we will develop, manage, and service an Internet commerce site for B2BStores.com which will use the Internet commerce site to offer and sell goods and services to businesses. 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' Internet-based shopping mall and client extranet. This Web site is designed to permit CB Richard Ellis personnel to conduct all of their corporate materials purchasing, including computers and building and maintenance supplies, and all global facilities management by means of the Internet. In addition, CB Richard Ellis will offer to the tenants in the buildings they manage volume purchasing services on the Internet for a variety of office products and supplies. RELIANT INNOVATIONS. In June 1999, we entered into an electronic commerce services agreement with Reliant Innovations under which we will develop an electronic commerce site that will enable Reliant Innovations to sell computer products to clients who are members of specific associations with which Reliant Innovations has formed a partnership. 48 BERGEN BRUNSWIG DRUG COMPANY. In October 1999, we entered into an internet services agreement with Bergen Brunswig Drug Company, a leading supplier of pharmaceuticals, medical-surgical supplies, and specialty healthcare products, under which we will design, develop, manage, and service an Internet-based shopping mall to be branded with the Bergen Brunswig name, brand, and image and which will contain on-line storefronts for affiliated local pharmacies. We will also be responsible for training of Bergen Brunswig personnel. OTHER RESELLERS. We have also recently entered into reseller agreements, under 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, Found.com Inc., Card Service International and O.T.I. Cable Advertising. Initial customer service and support for our customers will be provided through our customer support staff of ten 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. RESEARCH AND DEVELOPMENT Since June 1998, we have conducted extensive research and development with respect to our technology. During the year ended June 30, 1999, we invested approximately $499,000 in the research and development of our technology. Our research and development efforts have: - emphasized the development of advanced technology and new services and the enhancement and refinement of existing services in response to rapidly changing client specifications and industry needs, and - included introducing support for evolving communications methodologies and protocols, software methodologies and protocols, and computer hardware technologies, as well as improving functionality, flexibility, ease of use and enhancing the quality of documentation, training materials, and technical support tools. We intend to conduct additional research and development to, among other things, further our strategy of developing cost effective services with broad appeal, to provide easy access to scalable electronic commerce services, and to offer additional functionality of our ICC services. At June 30, 1999, our research and development activities utilized 22 computer programmers and technicians. COMPETITION The electronic commerce 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 electronic commerce services offered, the breadth and quality of these services, creative design, engineering expertise, pricing, technological innovation, and understanding clients' strategies and needs. A number of these factors are beyond our control. Existing or future competitors may develop or offer electronic commerce services that provide significant technological, creative, performance, price, or other advantages over the services offered by us. 49 Our current and potential competitors include: - Internet integrators and Web presence providers, such as IBM, iXL, Organic Online, Proxicom, and USW; - large information technology consulting service providers, such as Andersen Consulting, Cambridge Technology Partners, and EDS; - Internet commerce providers, such as Yahoo! Stores, Ariba, and VerticalNet; - software development companies, such as Microsoft, Broadvision, Open Market, and InterShop; - telecommunications companies, such as AT&T and MCI; - application service providers, such as US Internetworking and the recently announced EDS/SAP relationships, and - Internet and online service providers, such as America Online, Lycos, and Earthlink. Although most of these types of competitors 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. 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 electronic commerce 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 electronic commerce 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 one patent application pending with the United States Patent and Trademark Office for our electronic commerce system and method. We also have trademark applications pending with the United States Patent and Trademark Office for NETGATEWAY, NETGATEWAY ICC, NETGATEWAY INTERNET COMMERCE CENTER, NETGATEWAY "WHERE BUSINESS DOES 50 BUSINESS ON THE INTERNET," STORESONLINE, STORESONLINE.COM, STORESONLINE.COM "WHERE MERCHANTS DO BUSINESS ON THE INTERNET", NETGATEWAY KNOWLEDGE AND COMMERCE OF THE DIGITAL AGE, NETGATEWAY, THE POWER OF ORGANIZED INTERNET COMMERCE, CABLECOMMERCE 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. EMPLOYEES As of the date of this prospectus, we had 101 full-time employees: 35 engaged in sales and marketing, 39 engaged in the development of our electronic commerce solutions, six in customer support, and 21 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 24 hour per day, seven day per week accessible operating 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 24 hour per day, seven day per week keycard access, video monitors, motion sensors, and staff members on-site. 51 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 taxation, user privacy, pricing, and characteristics and quality of products and services. In 1998, the United States Congress established the Advisory Committee on Electronic Commerce which is charged with investigating, and making recommendations to Congress regarding, the taxation of sales by means of the Internet. The adoption of any such laws or regulations upon the recommendation of this Advisory Committee or otherwise may decrease the growth of the Internet, which could in turn decrease the demand for our products or services, our cost of doing business or otherwise have an adverse effect on our business, prospects, financial condition, or results of operations. Moreover, the applicability to the Internet of existing laws governing issues, 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. Except as described below, we are not aware of any material legal proceedings threatened against us. In January 1999, we entered into a binding letter of intent to acquire the assets and technology of iShopper, an Internet-based shopping mall. The purchase price in the letter of intent was (1) $50,000, (2) 50,000 shares of our common stock upon closing, and (3) up to an additional 100,000 shares of our common stock based upon meeting designated financial milestones. The letter of intent included a number of conditions to our obligation to consummate the acquisition, including: - our satisfaction with our due diligence review of iShopper; and - that iShopper's technology permitted the portability of the stores in their mall to our technology. In June 1999, we terminated this letter of intent because these conditions were not satisfied. iShopper contacted us contesting this termination and alleging bad faith. We afforded iShopper the opportunity to demonstrate that these conditions can be met. We were later informed that iShopper sold its assets to a third party. iShopper has claimed they have been damaged by us. To date, no litigation has been commenced. 52 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 Roy W. Camblin III..................... 52 Chief Executive Officer, Chief Information Officer, and Director Nominee 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 John M. Wendel......................... 42 Senior Vice President Craig Gatarz........................... 37 General Counsel Scott Beebe............................ 47 Director William Brock.......................... 49 Director Ronald Spire........................... 49 Director James Demetriades...................... 37 Director Nominee John Dillon............................ 50 Director Nominee
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 of Netgateway since our inception and has also served as Chief Executive Officer of Netgateway since our inception through September 1999. From November 1994 to November 1997, Mr. Freadhoff was the co-founder, Chairman of the Board of Directors, and Chief Executive Officer of Prosoft I-Net Solutions, a public company engaged in development and provision of software and Internet training solutions. From November 1993 to November 1994, Mr. Freadhoff has served as the Executive Director of Career Planning Center, a community based organization serving disadvantage populations with job training and social services. From 1993 to 1994, he also served as President of the Focus Institute, a California based Microsoft Authorized Training and Education Center. From 1991 to 1992, Mr. Freadhoff served as a Vice President of Frojen Advertising, an advertising and marketing firm. From 1987 to 1991, Mr. Freadhoff founded and served as President of Oasis Corporate Education and Training, a customized training company that developed courseware for manufacturing, financial, service, and public organizations. Mr. Freadhoff completed graduate level work at the University of Southern California and earned his undergraduate degree at the University of Nebraska. ROY W. CAMBLIN III, has served as Chief Executive Officer of Netgateway commencing on October 1, 1999. Mr. Camblin has also served as Chief Information Officer of Netgateway since July 1999. Prior to joining Netgateway, from May 1998 until July 1999, Mr. Camblin was the Chief Information Officer and an Executive Vice President of CB Richard Ellis. From January 1996 to April 1998, Mr. Camblin was the Head of Global Operations and Technology and a Vice President at Citibank. From July 1993 to December 1995, Mr. Camblin was the Chief Information Officer and Senior Vice President of Oracle Corporation. DONALD M. CORLISS, JR., joined Netgateway in January 1998 and 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. From July 1993 through June 1998, Mr. Corliss served as a vice president and a 53 director of Westover Hills Development, Inc., a real estate development company. From August 1993 through June 1998, Mr. Corliss served as a vice president and a director of the general partner of Brentwood Development, a residential real estate development company, which was charged with management of the development projects undertaken by the partnership. From August 1994 through March 1998, Mr. Corliss served as a consultant and was a founder of Ice Specialty Entertainment, a developer of ice arena complexes, which was charged with the structuring and negotiation of the business and projects undertaken by ICE Specialty Entertainment. From June 1995 to date, Mr. Corliss served as a director and secretary of SHH Properties, Inc., a real estate investment company. From 1996 to June 1998, Mr. Corliss served as a vice president and a director of, Brentwood Development III, Inc., a real estate development company, which was one of two corporate general partners of Inglehave Farm L.P. From 1997 through May 1998, Mr. Corliss served as a vice president and a director of Executive Property Management Services, Inc. a provider of executive management services relating to real estate development. As co-founder in many of these projects, responsibilities included the operation, management, structuring, and implementation of business strategies and plans, as well as the development and implementation of the general business and accounting systems necessary for such business operations. From 1977 to 1993, Mr. Corliss was engaged in private law practice. Mr. Corliss earned a LLM in Taxation from New York University, his Juris Doctorate degree from the University of Santa Clara, and a Bachelor of Arts degree from the University of California at Santa Barbara. Of the ventures of Mr. Corliss, two real estate development ventures, Westover Hills Development, Inc. and Inglehame Farms L.P. sought protection from creditors pursuant to Chapter 11 of the United States Bankruptcy Code in 1997 and 1998, respectively. Westover has since emerged from Chapter 11 and has 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 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. JOHN M. WENDEL, has served as Senior Vice President since June 1999. Mr. Wendel directs marketing, sales and call center support operations. Mr. Wendel served as the Executive Vice President and General Manager of Sento Training, a training solutions and information technology support solutions company from June 1998 to June 1999. Mr. Wendel served as Executive Vice President from January 1996 to June 1998 of Interactive Teleservices Corporation and as Senior Worldwide Director of Sykes Enterprises from 1994 to January 1996. Mr. Wendel has consulted with and/or published help desk strategies for such organizations as SSI (Matrixx), Stream, MicroAge, and Unisys. Mr. Wendel worked at Microsoft where he directed National Accounts and Strategies. CRAIG GATARZ, has served as General Counsel of Netgateway since April 1999. From 1989 until April 1999, Mr. Gatarz was an attorney at Jones, Day, Reavis & Pogue, a law firm, and specialized in 54 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. WILLIAM BROCK has served as a Director of Netgateway since July 1999. Since May 1999, Mr. Brock has served as the President and Chief Operating Officer of Marketplace Technologies, Inc., a corporate finance electronic commerce company. From September 1996 to April 1999, Mr. Brock served as vice president and Head of the Structured Note Group in the Fixed Income Division of Salomon Smith Barney. From December 1994 to August 1996, Mr. Brock served as Managing Director of Blizzard Capital Markets, a leveraged buyout company. From 1987 to November 1994, Mr. Brock served as Vice President and Co-Head of Medium Term Notes at Goldman, Sachs & Co. From 1980 to 1987, Mr. Brock served as Vice President, Short Term Debt at The First Boston Corporation. Since April 1996, Mr. Brock has served as a Director and owner of Middleton's, a mill working company. 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. DIRECTOR NOMINEES The following individuals are nominees to our Board of Directors and will be appointed as a Director upon the closing of this offering. ROY W. CAMBLIN III. See "Management--Our Directors and Executive Officers." JAMES DEMETRIADES. In 1991, Mr. Demetriades formed Software Technologies Corporation, a provider of solutions for integrating applications, databases and legacy systems, in real-time and batch, across the entire enterprise. He has served as Chairman, Chief Executive Officer and President of Software Technologies Corporation. Mr. Demetriades graduated from Loyola Marymount in 1985 with majors in Computer Science and Economics and a minor in Business. JOHN DILLON. In September 1999, Mr. Dillon joined Salesforce.com, a second generation Internet ASP start-up company focused on business application services, as President and Chief Executive Officer. Mr. Dillon served as the interim President and Chief Executive Officer of Perfecto Technologies, a start-up company delivering products for insuring Internet application security from May 1999 to September 1999. Mr. Dillon served as President and Chief Executive Officer for Hyperion Solutions, the global company formed through the merger of Arbor Software and Hyperion Software from May 1998 to May 1999. From December 1993 through May 1998, Mr. Dillon worked at Arbor Software, first as vice president of sales and then as President and Chief Executive Officer. Mr. Dillon received a Bachelor of Science degree in engineering from the United States Naval Academy at Annapolis and an MBA from Golden Gate University. He served for five years on active duty in the United States Navy nuclear submarine service and retired with the rank of Commander from the Naval Reserve. 55 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. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS During our fiscal year ended June 30, 1999, our Board of Directors held one meeting and took action an additional 22 times by written consent. In September 1998, the board of directors created a compensation committee, which will, upon the closing of the offering, be comprised of Messrs. Brock, 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, Brock, 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. EXECUTIVE COMPENSATION None of our executive officers received cash compensation during the period from our inception on March 4, 1998 to June 30, 1998. 56 The following table sets forth the compensation earned during the fiscal year ended June 30, 1999, by our Chief Executive Officer and our six other most highly compensated executive officers for services rendered in all capacities for that fiscal year. SUMMARY COMPENSATION TABLE FOR LAST FISCAL YEAR
LONG TERM COMPENSATION AWARD ------------------------------------ ANNUAL COMPENSATION RESTRICTED SECURITIES --------------------- STOCK UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) AWARDS(1) OPTIONS(#) - -------------------------------- ---------- --------- --------------- ------------------- Keith D. Freadhoff, ............ Chairman of the Board of Directors $ 100,625 $ 57,500 $ 3,200,000(2) 0(2) Roy W. Camblin III ............. Chief Executive Officer, Chief Information Officer, and Director-Nominee 0 0 0 0 Donald M. Corliss, Jr. ......... President and Director 96,250 50,000 3,200,000(3) 0(3) David Bassett-Parkins .......... Chief Financial Officer, Chief Operating Officer, And Director 87,500 50,000 3,200,000(4) 0(4) Hahn Ngo ....................... Executive Vice President--Operations 75,000 25,000 0 75,000(5) John M. Wendel ................. Senior Vice President 10,833 0 0 0 Craig Gatarz ................... General Counsel 30,000 7,500 0 21,703(6)
- ------------------------ (1) Subsequent to June 30, 1999, we terminated performance-based stock options exercisable for an aggregate of 780,000 shares of common stock and other stock options exercisable for an aggregate 1,200,000 shares of common stock granted to Messrs. Freadhoff, Corliss, and Bassett-Parkins and issued in lieu of these options restricted stock awards of an aggregate of 1,200,000 shares of common. Subsequent to June 30, 1999, we terminated performance-based stock options exercisable for an aggregate of 200,000 shares of common stock and other stock options exercisable for an aggregate of 116,667 shares of common stock granted to Ms. Ngo. (2) During the year ended June 30, 1999, Mr. Freadhoff earned performance-based stock options exercisable for an aggregate of 69,000 shares of common stock and other options exercisable for an aggregate of 200,000 shares of common stock. Subsequent to June 30, 1999, all performance and other options granted to Mr. Freadhoff, including the options referenced in the preceding sentence, were terminated. In lieu of these options, Mr. Freadhoff received a restricted stock award of 400,000 shares of common stock. (3) During the year ended June 30, 1999, Mr. Corliss earned performance-based stock options exercisable for an aggregate of 64,000 shares of common stock and other options exercisable for an aggregate of 200,000 shares of common stock. Subsequent to June 30, 1999, all performance and 57 other options granted to Mr. Corliss, including the options referenced in the preceding sentence, were terminated. In lieu of these options, Mr. Corliss received a restricted stock award of 400,000 shares of common stock. (4) During the year ended June 30, 1999, Mr. Bassett-Parkins earned performance-based stock options exercisable for an aggregate of 60,000 shares of common stock and other options exercisable for an aggregate of 200,000 shares of common stock. Subsequent to June 30, 1999, all performance and other options granted to Mr. Bassett-Parkins, including the options referenced in the preceding sentence, were terminated. In lieu of these options, Mr. Bassett-Parkins received a restricted stock award of 400,000 shares of common stock. (5) During the year ended June 30, 1999, Ms. Ngo earned performance-based stock options exercisable for an aggregate of 50,000 shares of common stock and other options exercisable for an aggregate of 133,333 shares of common stock. Subsequent to June 30, 1999, all performance options granted to Ms. Ngo, including the performance options referenced in the preceding sentence, were terminated and all other options awarded to Ms. Ngo were reduced so as to be exercisable for an aggregate of 150,000 shares of common stock. (6) Subsequent to June 30, 1999, we amended performance-based stock options exercisable for an aggregate of 150,000 shares of common stock granted to Mr. Gatarz so as to provide that these warrants would vest over a period of two years and not as a result of the satisfaction of performance milestones. As a result of this amendment, of such options, options exercisable for an aggregate of 21,703 shares of common stock were deemed to have vested by June 30, 1999. For further information with respect to the employment agreements of these individuals, see "Management--Employment Agreements." OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options during the fiscal year ended June 30, 1999 to our Chief Executive Officer and our six other most highly compensated executive officers. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with rules of the Commission and do not represent our estimate or projection of our common stock price. Actual gains, if any, on stock option exercises are dependent on the future performance of our common stock, overall market conditions, and the option holders' continued employment through the vesting period. Unless the market price of our common stock appreciates over the option term, no value will be realized from the option grants made to these executive officers. The potential realizable values shown in the table are calculated by assuming that the estimated fair market value of our common stock on the date of grant increases by 5% and 10%, respectively, during each year of the option term. The fair market value of our common stock was determined on the basis of the closing sales price of our common stock on June 30, 1999. Each of the options has a ten-year term. However, the options will 58 terminate earlier if the optionee ceases service with us unless the option is an employee terminated without cause and certain instances in cases of changes in control of Netgateway.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK INDIVIDUAL GRANTS PRICE ---------------------------- APPRECIATION NUMBER OF PERCENT OF FOR SECURITIES TOTAL OPTIONS OPTION UNDERLYING GRANTED TO TERM($) OPTIONS EMPLOYEES IN EXERCISE OR CLOSING --------- NAME GRANTED(#) FISCAL YEAR(6) BASE PRICE($) EXPIRATION DATE SALE PRICE($) 5% - ---------------------------- ----------- --------------- ----------------- ----------------- --------------- --------- Keith D. Freadhoff ......... 276,000(1) 7.7 2.50 December 15, 2008 4.87 1,499,430 400,000(1) 11.1 4.87 December 15, 2008 4.87 1,225,087 Roy W. Camblin III (2) ..... -- -- -- -- -- -- Donald M. Corliss, Jr. ..... 264,000(3) 7.3 2.50 December 15, 2008 4.87 1,434,237 400,000(3) 11.1 4.87 December 15, 2008 4.87 1,225,087 David Bassett-Parkins ...... 240,000(4) 6.7 2.50 December 15, 2008 4.87 1,303,852 400,000(4) 11.1 4.87 December 15, 2008 4.87 1,225,087 Hahn Ngo ................... 200,000(5) 5.6 2.50 December 15, 2008 4.87 1,086,543 266,667(5) 7.4 4.87 December 15, 2008 4.87 816,726 John M. Wendel ............. -- -- -- -- -- -- Craig Gatarz ............... 161,812 4.5 6.50 April 4, 2009 12.88 2,343,064 NAME 10% 0%(6) - ---------------------------- --------- --------- Keith D. Freadhoff ......... 2,796,301 1,262,560 3,104,610 -- Roy W. Camblin III (2) ..... -- -- Donald M. Corliss, Jr. ..... 2,674,723 1,207,666 3,104,610 -- David Bassett-Parkins ...... 2,431,566 -- 3,104,610 -- Hahn Ngo ................... 2,026,305 914,898 2,069,743 -- John M. Wendel ............. -- -- Craig Gatarz ............... 4,353,941 1,958,918
- ---------------------------------- * Less than one percent. (1) Subsequent to June 30, 1999, all of these options granted to Mr. Freadhoff were terminated. (2) Mr. Camblin commenced his employment with us in August 1999. (3) Subsequent to June 30, 1999, all of these options granted to Mr. Corliss were terminated (4) Subsequent to June 30, 1999, all of these options granted to Mr. Bassett-Parkins were terminated. (5) Subsequent to June 30, 1999, options exercisable for an aggregate of 316,667 shares of common stock granted to Ms. Ngo were terminated. (6) Calculated using the Black Scholes pricing model with the following assumptions: (a) volatility - 100%, (b) risk free rate - 5%, (c) dividend yield - 0% and (d) time of exercise - 10 years. 59 AGGREGATE FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning the year-end number and value of unexercised options with respect to each of these executive officers. None of these individuals exercised any options during this period.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1) -------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------------------------------- ----------- ------------- ------------- ------------- Keith D. Freadhoff(2)...................................... -- -- -- -- Roy W. Camblin III(3)...................................... -- -- -- -- Donald M. Corliss, Jr.(4).................................. -- -- -- -- David Bassett-Parkins(5)................................... -- -- -- -- Hahn Ngo(6)................................................ 75,000 75,000 478,500 478,500 John M. Wendel(7).......................................... -- -- -- -- Craig Gatarz(8)............................................ 21,703 140,109 103,089 665,118
- ------------------------ (1) Based on the closing sale price of our common stock on the OTC bulletin board at fiscal year end of $11.25 per share less the exercise price payable for such shares. The fair market value of our common stock at June 30, 1999 was determined on the basis of the closing sale price of our common stock on June 30, 1999. (2) At June 30, 1999, Mr. Freadhoff held stock options under our plans exercisable for an aggregate of 676,000 shares of common stock. Subsequent to June 30, 1999, all of these options granted to Mr. Freadhoff were terminated. In lieu of these options, Mr. Freadhoff received a restricted stock award of 400,000 shares of common stock. At June 30, 1999, Mr. Freadhoff held exercisable in-the-money stock options for an aggregate of 200,000 shares of common stock with a value of $1,276,000 and held unexercisable in-the-money stock options for an aggregate of 476,000 shares of common stock with a value of $3,036,880. (3) Mr. Camblin commenced his employment with us in August 1999. (4) At June 30, 1999, Mr. Corliss held stock options under our plans exercisable for an aggregate of 664,000 shares of common stock. Subsequent to June 30, 1999, all of these options granted to Mr. Corliss were terminated. In lieu of these options, Mr. Corliss received a restricted stock award of 400,000 shares of common stock. At June 30, 1999, Mr. Corliss held exercisable in-the-money stock options for an aggregate of 200,000 shares of common stock with a value of $1,276,000 and held unexercisable in-the-money stock options for an aggregate of 464,000 shares of common stock with a value of $2,960,320. (5) At June 30, 1999, Mr. Bassett-Parkins held stock options under our plans exercisable for an aggregate of 640,000 shares of common stock. Subsequent to June 30, 1999, all of these options granted to Mr. Bassett-Parkins were terminated. In lieu of these options, Mr. Bassett-Parkins received a restricted stock award of 400,000 shares of common stock. At June 30, 1999, Mr. Bassett-Parkins held exercisable in-the-money stock options for an aggregate of 200,000 shares of common stock with a value of $1,276,000 and held unexercisable in-the-money stock options for an aggregate of 440,000 shares of common stock with a value of $2,807,200. (6) At June 30, 1999, Ms. Ngo held stock options under our plans exercisable for an aggregate of 466,667 shares of common stock. Subsequent to June 30, 1999, options exercisable for an aggregate 60 of 316,667 shares of common stock granted to Ms. Ngo were terminated. At June 30, 1999, Ms. Ngo held exercisable in-the-money stock options for an aggregate of 133,333 shares of common stock with a value of $850,665 and held unexercisable in-the-money stock options for an aggregate of 333,334 shares of common stock with a value of $2,126,671. (7) At June 30, 1999, Mr. Wendel held no stock options. (8) At June 30, 1999, Mr. Gatarz held stock options under our plans exercisable for an aggregate of 161,812 shares of common stock. Subsequent to June 30, 1999, we amended performance-based stock options exercisable for an aggregate of 150,000 shares of common stock granted to Mr. Gatarz so as to provide that these warrants would vest over a period of two years and not as a result of the satisfaction of performance milestones. As a result of this amendment, of such options, options exercisable for an aggregate of 21,703 shares of common stock were deemed to have vested by June 30, 1999. Accordingly, at June 30, 1999, Mr. Gatarz held exercisable in-the-money stock options for an aggregate of 21,703 shares of common stock with a value of $103,089 and held unexercisable in-the-money stock options for an aggregate of 140,109 shares of common stock with a value of $665,118. 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. However, in connection with Mr. Brock joining our Board of Directors, the Compensation Committee granted Mr. Brock stock options under our 1999 stock compensation program exercisable for an aggregate of 150,000 shares of common stock exercisable at $11.00 per share, which options vest as follows: 50,000 at July 20, 1999 and the remainder in equal quarterly increments for two years. 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 $201,500 Eligible for bonus of up to 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 Roy W. Camblin III, July 26, 1999 July 25, 2000 $175,000 As determined by the board Chief Executive Officer, of directors Chief Information Officer, and Director-Nominee
61
CONTRACT COMMENCEMENT CONTRACT NAME DATE TERMINATION DATE PER ANNUM SALARY BONUS ARRANGEMENTS - --------------------------------- -------------- ----------------- ------------------ --------------------------- 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 of up to thereafter $27,500 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 David Bassett-Parkins, January 1, December 31, 2001 $175,000 $50,000 payable in July Chief Operating Officer, Chief 1999 1999 Financial Officer, and Director Eligible for bonus of up to $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 John M. Wendel June 1, 1999 May 31, 2001 $130,000 $40,000 payable in June Senior Vice President 1999 Eligible for bonus of up to $7,500 for each of the three month periods ended May 31, 2000 and upon satisfaction of earnings milestones Eligible for bonus of up to $17,500 for each of the three month periods ended May 31, 2001 and upon satisfaction of earnings milestones Craig Gatarz, April 5, 1999 April 5, 2002 $120,000 through Monthly bonus of $3,750 for General Counsel December 31, 1999 the period from July 1, $150,000 1999 through December 31, thereafter 1999. Otherwise as determined by the board of directors.
In the event of a change in control of Netgateway, 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 we are required to pay to such individual in the case of Messrs. Freadhoff, Corliss, Wendel 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, Mr. Gatarz, or Mr. Camblin 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 or by the relevant individual with good reason then we are required to pay the relevant individual a lump 62 sum severance payment equal to his or her current annual salary for the remainder of the employment period. 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, and our stockholders approved, the 1998 stock option plan for senior executives. This plan provides for the grant of options to purchase up to 5,000,000 shares of common stock to senior executives of Netgateway. Options may be either "incentive stock options" or non-qualified stock options under Federal tax laws. This plan 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 500,000 shares of common stock were outstanding pursuant to this plan at a weighted average exercise price of $6.68 per share. 63 1999 STOCK OPTION PLAN FOR NON-EXECUTIVES In July 1999, the board of directors adopted, subject to approval by our stockholders, the 1999 Stock Option Plan for Non-Executives. This plan provides for the grant of options to purchase up to 2,000,000 shares of common stock to non-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 any 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 July 1, 1999. 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 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 terminate upon an optionee's easing 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 555,764 shares of common stock were outstanding pursuant to this plan, subject to stockholder approval, at a weighted averaged exercise price of $10.18 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, 64 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 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 this 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, - rights to purchase shares of our common stock to employees, - restricted shares of our common stock, - stock appreciation rights, and - performance shares of common stock, 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 814,019 shares of common stock were outstanding pursuant to this plan at a weighted average exercise price of $3.44 per share. We have agreed not to grant any additional compensation pursuant to this plan. 65 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. We have a directors and officers liability insurance policy in an amount of not less than $9 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. 66 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.
BENEFICIAL OWNERSHIP ----------------------------------------------------------------------------- NUMBER OF WARRANTS, OPTIONS GRANTED UNDER OUR STOCK OPTION PLANS OR SHARES OF COMMON STOCK SUBJECT TO FORFEITURE INCLUDED IN NUMBER OF PERCENT PRIOR PERCENT AFTER NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES SHARES TO OFFERING OFFERING - -------------------------------------------- ----------------- ------------------------ --------------- --------------- Keith D. Freadhoff.......................... 2,118,549(1) 400,000 16.9% 13.7% Roy W. Camblin III.......................... 50,000 50,000 * * Donald M. Corliss, Jr....................... 552,000 400,000 4.4 3.6 David Bassett-Parkins....................... 585,000 400,000 4.7 3.8 Hanh Ngo.................................... 255,000 150,000 2.0 1.6 John W. Wendel.............................. 62,500 62,500 * * Craig Gatarz................................ 65,109 65,109 * * Scott Beebe................................. 943,651 0 7.6 6.1 1845 Baywood Salt Lake City, Utah 84117 William Brock............................... 50,000 50,000 * * Marketplace Technologies, Inc. 125 Cambridge Park Drive Cambridge, Massachusetts 02140 Ronald Spire................................ 87,302 0 * * 10880 Wilshire Boulevard Suite 1050 Los Angeles, California 90024 Michael Khaled.............................. 787,302 0 6.3 5.1 42690 Rio Nedo #E Temecula, California 92590 Donald Danks................................ 743,640 0 6.0 4.8 2333 East Coast Highway Suite D Corona Del Mar, California 92625 Michael Vanderhoff.......................... 646,151 0 5.2 4.2 6512 North State Road 32 Peoa, Utah 84061 All directors and executive officers of Netgateway as a group (six persons)....... 4,769,101 1,577,609 37.0 30.0 OPTIONS GRANTED UNDER OUR STOCK OPTION PLANS NOT INCLUDED IN NUMBER OF NAME AND ADDRESS OF BENEFICIAL OWNER SHARES - -------------------------------------------- ------------ Keith D. Freadhoff.......................... 0 Roy W. Camblin III.......................... 150,000 Donald M. Corliss, Jr....................... 0 David Bassett-Parkins....................... 0 Hanh Ngo.................................... 0 John W. Wendel.............................. 37,500 Craig Gatarz................................ 119,396 Scott Beebe................................. 0 1845 Baywood Salt Lake City, Utah 84117 William Brock............................... 100,000 Marketplace Technologies, Inc. 125 Cambridge Park Drive Cambridge, Massachusetts 02140 Ronald Spire................................ 0 10880 Wilshire Boulevard Suite 1050 Los Angeles, California 90024 Michael Khaled.............................. 0 42690 Rio Nedo #E Temecula, California 92590 Donald Danks................................ 0 2333 East Coast Highway Suite D Corona Del Mar, California 92625 Michael Vanderhoff.......................... 0 6512 North State Road 32 Peoa, Utah 84061 All directors and executive officers of Netgateway as a group (six persons)....... 406,896
- ------------------------ * 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. However, see "Risk Factors--As Our Chairman and Chief Executive Has Pledged His Stock, We May Experience A Change Of Control" and "Related Party Transactions." 67 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." 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." 68 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 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, owned approximately 1.6% of the outstanding common stock of Admor. Such individuals did not directly or indirectly receive any of the proceeds of these loans. From our inception on March 1, 1998 until June 1998, our business plan was to engage in the licensing and distribution of software support materials for the governmental and educational markets. In June 1998, we determined to change our business model to the development of technology to enable businesses and other organizations to engage in electronic commerce. In connection with the implementation of our initial business plan, we entered into sublicensing agreements related to proprietary courseware of ProSoft, an Internet training solutions provider based in Austin, Texas. ProSoft entered into a courseware reproduction and licensing agreement with Steps granting this firm the exclusive right to sell courseware to the Federal government. This licensing obligation was personally guaranteed by Scott Beebe. ProSoft also entered into a courseware reproduction and licensing agreement with Training Resources International, granting an exclusive right to sell courseware in the education market. This licensing obligation was personally guaranteed by Michael Khaled, one of our significant stockholders. 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, totaling $1,600,000. In consideration of the sublicense from Steps, we - assumed the minimum royalty payments required under their master license, totaling $1,500,000, - assumed Steps' $200,000 obligation to Vision Holdings, Inc., which had advanced funds to Steps in connection with its master license, and - issued 1,000,000 shares of 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 of our significant stockholders. Mr. Freadhoff was a founder of ProSoft and ProSoft's Chief Executive Officer and a director until his resignation in November 1997. Mr. Freadhoff beneficially owns approximately 3.32% of the outstanding common stock of ProSoft. Donald M. Corliss, Jr., 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 69 $32,429 is not interest bearing and is repayable upon demand. During the year ended June 30, 1999, $30,630 was repaid. During the period from March 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 an aggregate of 600,000 shares of common stock. In May 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 through September 1999 private placement. In June 1999, the Company loaned Mr. Freadhoff $30,000 which was repaid in July 1999. In November 1998, we issued warrants exercisable for an aggregate of 300,000 shares of common stock, 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 between Netgateway and Mr. Khaled. These warrants are exercisable at $1.00 per share and expire in November 2000. In December 1998, Messrs. Freadhoff, Beebe, Danks, and 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 May through September 1999, we conducted our May through September 1999 private placement. Cruttenden Roth acted as one of the placement agents of that offering and received compensation for their services in the form of $249,500 in cash and warrants exercisable for an aggregate of 139,750 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 $16.50 per share. We have 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. 70 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. At the date of this prospectus, 12,495,768 shares of common stock were outstanding and held of record by approximately 457 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 of our 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 permitted 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 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, applicable blue sky 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 71 preferred stock with voting and 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 Colonial Stock Transfer Co., 455 East 400 South, Suite 100, Salt Lake City, Utah 84111. 72 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have 15,495,768 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, 5,481,567 shares, including the 3,000,000 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 7,698,988 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 12,495,768 shares of common stock, 11,491,310 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 1,511,429 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 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 300,000 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." 73 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 and Pennsylvania Merchant Group are acting as representatives, 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..................................................... Pennsylvania Merchant Group...................................................... ---------- Total........................................................................ 3,000,000
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 representatives have 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 representatives. The representatives may elect to change the offering price, concession to selected dealers, or the reallowance to other dealers under certain circumstances. Some examples of such circumstances would include the following: (i) if some or all of the members of the selling syndicate are not prepared to go forward with the offering, due to market conditions or demand for the issuer's securities, either as priced or at the volume of shares to be sold, then the representatives may adjust the concession to selected dealers and the reallowance to other dealers in order to provide sufficient economic incentives to the selling syndicate to complete the offering. Any change in such concessions or reallowances would not, however, change the total compensation to be received by the underwriters, as such was approved by the NASD as fair and reasonable; (ii) if the representatives receive indications from members of the selling syndicate that the offering price is too high to enable them to sell all of the proposed shares of common stock, they could decide to reduce the offering price. If the representatives lower the offering price, the total compensation to be received by the underwriters should still be fair and reasonable, as a lowering of the offering price would lower the total amount of the offering, thus, increasing the amount of compensation to which the underwriters would be entitled under the NASD rules; and (iii) if demand for the issuer's securities from members of the selling syndicate is significantly greater than expected, then the representatives could decide to increase the offering price, provided that such an increase would not render the underwriters compensation, as previously approved by the NASD, unfair or unreasonable. If the representatives change the offering price, the concession to the selected dealers, or the reallowance to other dealers, they would implement the following procedures to adequately advise the appropriate people: (i) file a press release; (ii) give notice to all members of the selling group and 74 receive confirmation from them that the changes were conveyed to the investors; and (iii) file a post-effective amendment. 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 representatives an expense allowance, on a non-accountable basis, equal to % of the gross proceeds derived from the sale of 3,000,000 shares offered in this offering, or 3,450,000 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 representatives' 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. We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . The following table sets forth the amount of discounts and commissions to be paid to the underwriters by Netgateway in connection with the offering:
TOTAL WITHOUT EXERCISE TOTAL WITH EXERCISE OF OVER-ALLOTMENT OF OVER-ALLOTMENT DISCOUNT PER SHARE OPTION OPTION - ------------------- ----------------------- ----------------------- $ $ $
The following table sets forth the amount and nature of other forms of compensation to be paid to the representatives by Netgateway in connection with the offering:
TYPE OF COMPENSATION TERMS TOTAL AMOUNT - --------------------------------- --------------------------------- --------------------------------- Non-Accountable Expense Allowance % of the gross proceeds of the $ ($ if the offering underwriters' over-allotment option is exercised in full) Underwriters Warrant Warrant to purchase up to 300,000 Depends on the market price of shares at an exercise price per common stock at the time of share of % of the public exercise offering price Two Year Consulting Agreement(1) Provide financial advisory $ payable at the closing of services this offering
- ------------------------ (1) Two year consulting agreement is between Netgateway and Cruttenden Roth. 75 We have agreed to retain the representatives as financial consultants for a period of two years to commence on the closing of this offering at an aggregate fee of $ , payable at the closing of this offering. Under this agreement, the representatives shall provide advisory services related to mergers and acquisitions activity, corporate finance and other related matters. In connection with this offering, we have granted the representatives 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 representatives have 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 and Pennsylvania Merchant Group for a period of at least six months after the date of this prospectus. Cruttenden Roth and Pennsylvania Merchant Group may grant or withhold their respective consent in their sole discretion based upon their judgment as to whether any such proposed sales or transfers of our common stock would have an adverse effect on the market price of our publicly traded shares. Cruttenden Roth and Pennsylvania Merchant Group's decision whether to grant or withhold its consent will not be based upon, nor take into account, its own holdings of our common stock. Prior to this offering, our common stock traded on the OTC Bulletin Board. We have applied to have our 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 representatives 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. Cruttenden Roth acted as one of the placement agents in our May through September 1999 private placement. They received compensation for their services in the form of $249,500 in cash and warrants exercisable for an aggregate of 139,750 shares of our common stock for a period of four years commencing one year after the initial closing of that offering at an exercise price of $10.00 per share. ISG Solid Capital Markets, LLC, a member of the NASD, acted as the other placement agent in our May through September 1999 private placement. They received compensation for their services in the form of $ in cash and warrants exercisable for an aggregate of 327,500 shares of our common stock for a period of four years commencing one year after the initial closing of that offering at an exercise price of $10.00 per share. 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 450,000 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. 76 In connection with this offering, we have agreed to sell to the representatives, individually and not as representatives of the several underwriters, at the price of $.001 per warrant, the representatives' warrants to purchase an aggregate of 300,000 shares of common stock. The representatives' 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 representatives' 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 representatives' 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 representatives' warrants have no voting, dividend, or other rights as stockholders of Netgateway with respect to shares of common stock underlying the representatives' warrants, unless the representatives' 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 representatives' 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 representatives' warrants or shares of common stock issued upon their exercise, to make all necessary filings to permit a public offering of the representatives' 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 representatives' warrants and the underlying shares of common stock of our intention to file a registration statement, and in such case, holders of the representatives' 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 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 The validity of the shares of common stock offered hereby will be passed upon for us by Brock Silverstein LLC, New York, New York. The validity of the shares of common stock offered hereby 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. 77 EXPERTS The consolidated financial statements of Netgateway, Inc. and subsidiaries as of June 30, 1999 and 1998 and for the period from March 4, 1998 (inception) to June 30, 1998 and the year ended June 30, 1999 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 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 KPMG LLP, independent certified public accountants, appearing elsewhere herein upon the authority of said firm as experts in accounting and auditing. The 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. The financial statements of Video Calling Card, Inc. as of December 31, 1997 and 1996 and the years then ended and as of December 31, 1996 and 1995 and for the year ended December 31, 1996 and the period from inception (April 13, 1995) through December 31, 1995, have been included herein and in the Form S-1 in reliance upon the reports of Ted A. Madsen, independent certified public 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). 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. 78 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-4 Unaudited Pro Forma Consolidated Statement of Operations for the year ended June 30, 1999.................................................................... F-5 Notes to Unaudited Pro Forma Consolidated Statement of Operations.................. F-6 NETGATEWAY, INC. AND SUBSIDIARY Independent Auditor's Report for Netgateway, Inc................................... F-7 Consolidated Balance Sheets as of June 30, 1999 and 1998........................... F-8 Consolidated Statements of Operations for the year ended June 30, 1999, the period March 4, 1998 (Inception) through June 30, 1998 and the cumulative period March 4, 1998 (Inception) through June 30, 1999.................................. F-9 Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the period March 4, 1998 (Inception) through June 30, 1999.................................. F-10 Consolidated Statements of Cash Flows for the year ended June 30, 1999, the period March 4, 1998 (Inception) through June 30, 1998 and the cumulative period March 4, 1998 (Inception) through June 30, 1999.................................. F-11 Notes to Consolidated Financial Statements......................................... F-12 Unaudited Consolidated Balance Sheet as of September 30, 1999...................... F-27 Unaudited Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998 and the cumulative period March 4, 1998 (Inception) through September 30, 1999....................................................... F-28 Unaudited Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the period March 4, 1998 (Inception) through September 30, 1999.................. F-29 Unaudited Consolidated Statements of Cash Flows for the three months ended September 30, 1999 and 1998 and the cumulative period March 4, 1998 (Inception) through September 30, 1999....................................................... F-31 Notes to Unaudited Consolidated Financial Statements............................... F-32 INFOBAHN TECHNOLOGIES, LLC DBA DIGITAL GENESIS Independent Auditor's Report for Infobahn Technologies, LLC dba Digital Genesis.... F-36 Balance Sheets as of December 31, 1997 and 1996.................................... F-37 Statements of Operations for the Year Ended December 31, 1997 and the period from February 2, 1996 (inception) through December 31, 1996........................... F-38 Statements of Members' Equity (Deficit) for the Year Ended December 31, 1997 and the period from February 2, 1996 (inception) through December 31, 1996........... F-39 Statements of Cash Flows for the Year Ended December 31, 1997 and the period from February 2, 1996 (inception) through December 31, 1996........................... F-40 Notes to Financial Statements...................................................... F-41 Unaudited Balance Sheets as of March 31, 1998 and December 31, 1997................ F-43 Unaudited Statements of Earnings and Members' Equity for the three months ended March 31, 1998 and 1999.......................................................... F-44 Unaudited Statements of Cash Flows for the three months ended March 31, 1998 and 1997............................................................................. F-45 Notes to Unaudited Financial Statements............................................ F-46 SPARTAN MULTIMEDIA, INC. Auditor's Report for Spartan Multimedia, Inc....................................... F-48
F-1 Balance Sheet as of August 31, 1998................................................ F-49 Statement of Earnings and Retained Earnings for the Year Ended August 31, 1998..... F-50 Statement of Changes in Financial Position for the Year Ended August 31, 1998...... F-51 Notes to Financial Statements...................................................... F-52 Unaudited Balance Sheets as of November 30, 1998 and August 31, 1998............... F-54 Unaudited Statements of Earnings and Retained Earnings for the three months ended November 30, 1998 and for the period September 19, 1997 (Inception) through November 30, 1997................................................................ F-55 Unaudited Statements of Changes in Financial Position for the three months ended November 30, 1998 and for the period September 19, 1997 (Inception) through November 30, 1997................................................................ F-56 Notes to Unaudited Financial Statements............................................ F-57 VIDEO CALLING CARD, INC. Auditor's Report for Video Calling Card, Inc....................................... F-59 Balance Sheet as of December 31, 1997 and 1996..................................... F-60 Statement of Operations for the years ended December 31, 1997 and 1996............. F-61 Statement of Cash Flows for the years ended December 31, 1997 and 1996............. F-62 Statement of Stockholders' Equity from Date of Inception (April 13, 1995) to December 31, 1997................................................................ F-63 Notes to Financial Statements...................................................... F-64 Auditor's Report for Video Calling Card, Inc....................................... F-65 Balance Sheet as of December 31, 1996 and 1995..................................... F-66 Statement of Operations for the year ended December 31, 1996 and the period from Inception (April 13, 1995) through December 31, 1995............................. F-67 Statement of Cash Flows for the year ended December 31, 1996 and the period from Inception (April 13, 1995) through December 31, 1995............................. F-68 Statement of Stockholders' Equity from Date of Inception (April 13, 1995) to December 31, 1996................................................................ F-69 Notes to Financial Statements...................................................... F-70 Unaudited Balance Sheet as of March 31, 1998 and December 31, 1997................. F-71 Unaudited Statement of Operations for the three months ended March 31, 1998 and 1997............................................................................. F-73 Unaudited Statement of Cash Flows for the three months ended March 31, 1998 and 1997............................................................................. F-74 Unaudited Statement of Stockholders' Equity from Date of Inception (April 13, 1995) to March 31, 1998................................................................ F-75 Notes to Unaudited Financial Statements............................................ F-76
F-2 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS The following unaudited pro forma consolidated data present the Unaudited Pro Forma Consolidated Statement of Operations of the Company for the year ended June 30, 1999, and the 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 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-3 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........................ $ 2,800 115,651 5,874 124,325 Operating expenses: License fees......................... 3,822,000 -- -- 3,822,000 Depreciation and amortization........ 12,249 228 -- 99,480 1,2 111,957 Selling, general and administrative..................... 721,210 62,030 19,360 -- 802,600 ------------- ---------- --------- --------- --------- ----------- Total operating expenses......... 4,555,459 62,258 19,360 99,480 4,736,557 ------------- ---------- --------- --------- --------- ----------- Income (loss) from operations.... (4,552,659) 53,393 (13,486) (99,480) (4,612,232) Interest expense....................... 19,277 -- -- -- 19,277 ------------- ---------- --------- --------- --------- ----------- Net income (loss)................ $ (4,571,936) 53,393 (13,486) (99,480) (4,631,509) ============= ========== ========= ========= ========= =========== 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-4 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1999
HISTORICAL --------------------------- PRO FORMA SPARTAN --------------------------------------- NETGATEWAY MULTIMEDIA ADJUSTMENTS REFS TOTAL -------------- ----------- ----------- ----------- ------------- Service revenue.................................. $ 143,426 3,441 146,867 Operating expenses: Depreciation and amortization.................. 257,342 -- 139,055 1 396,397 Selling, general and administrative............ 11,046,506 75,995 11,122,501 -------------- --------- --------- ------------- Total operating expenses................. 11,303,848 75,995 139,055 11,518,898 -------------- --------- --------- ------------- Loss from operations..................... (11,160,422) (72,554) (139,055) (11,372,031) Loss on sale of equity securities................ 54,729 -- -- 54,729 Interest expense................................. 925,097 -- -- 925,097 -------------- --------- --------- ------------- Loss before extraordinary item........... (12,140,248) (72,554) (139,055) (12,351,857) Extraordinary gain on extinguishment of debt........................................ 1,653,232 -- -- 1,653,232 -------------- --------- --------- ------------- Net loss................................. $ (10,487,016) (72,554) (139,055) (10,698,625) ============== ========= ========= ============= Basic and diluted extraordinary gain per share...................................... .19 -- -- .19 ============== ========= ========= ============= Basic and diluted loss per share................. $ (1.18) -- -- (1.20) ============== ========= ========= ============= Weighted average common shares outstanding - basic and diluted.............................. 8,912,041 -- -- 8,912,041 ============== ========= ========= =============
F-5 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 YEAR ENDED JUNE 30, 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 valued at $400,000 and 371,429 shares of common stock of Storesonline.com, a wholly-owned subsidiary of the Company valued at $1,392,858, 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 $1,390,548, which is being amortized on a straight line basis over a five year useful life. Additional amortization of $92,703 for the period from March 4, 1998 (inception) to June 30, 1998 and $139,055 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, which are being amortized on a straight line basis over useful lives of seven years and ten years, respectively. 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 valued at $400,000 to acquire Infobahn Technologies. F-6 INDEPENDENT AUDITORS' REPORT The Board of Directors Netgateway, Inc.: We have audited the accompanying consolidated balance sheets of Netgateway, Inc. and subsidiaries (a development stage enterprise) as of June 30, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' deficit and cash flows for the year ended June 30, 1999, the period March 4, 1998 (inception) through June 30, 1998 and the cumulative period March 4, 1998 (inception) through June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Netgateway, Inc. and subsidiaries as of June 30, 1999 and 1998 and the results of its operations and its cash flows for the year ended June 30, 1999, the period March 4, 1998 (inception) through June 30, 1998 and the cumulative period March 4, 1998 (inception) through June 30, 1999, 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 commenced, however, minimal revenues have been generated. Additionally, the Company continues to incur net losses and has continuing financial needs. These matters raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP Los Angeles, California August 23, 1999 F-7 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND 1998
1999 1998 -------------- ----------- ASSETS Current assets: Cash.............................................................................. $ 569,472 254,597 Accounts receivable less allowance for doubtful accounts of $3,000 and $0 as of June 30, 1999 and 1998, respectively............................................ 44,198 21,305 Note receivable from officer (note 6)............................................. 30,000 -- Short-term notes receivable, net (note 6)......................................... -- 50,000 Debt issue costs.................................................................. 336,288 -- Prepaid offering costs............................................................ 325,887 -- Other current assets.............................................................. 73,481 45,565 -------------- ----------- Total current assets............................................................ 1,379,326 371,467 Property and equipment, net (note 4)................................................ 496,536 143,384 Intangible assets, net (note 5)..................................................... 1,562,635 351,804 Other assets........................................................................ 19,853 4,897 -------------- ----------- $ 3,458,350 871,552 ============== =========== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Current portion of notes payable (note 8)......................................... $ 1,496,000 -- Convertible debentures (note 8)................................................... 200,000 -- Accounts payable.................................................................. 278,723 106,242 Accrued wages and benefits........................................................ 278,741 12,720 Accrued interest.................................................................. 44,301 130,122 Accrued liabilities............................................................... 543,632 30,000 Deferred revenue.................................................................. 81,550 -- Current portion of notes payable to related parties (note 8)...................... 1,799 2,052,159 -------------- ----------- Total current liabilities....................................................... 2,924,746 2,331,243 Notes payable to related parties, less current portion (note 8)..................... -- 367,892 -------------- ----------- Total liabilities............................................................... 2,924,746 2,699,135 -------------- ----------- Shareholders' deficit (notes 9 and 10): Common stock, par value $.001 per share. Authorized 25,000,000 shares; issued and outstanding 9,912,304 and 7,510,000 at June 30, 1999 and 1998, respectively..... 9,913 7,510 Additional paid-in capital........................................................ 15,639,160 2,849,163 Deferred compensation............................................................. (52,919) (112,320) Accumulated other comprehensive loss.............................................. (3,598) -- Deficit accumulated during development stage...................................... (15,058,952) (4,571,936) -------------- ----------- Total shareholders' deficit..................................................... 545,291 (1,827,583) Commitments and subsequent events (notes 12 and 13) -------------- ----------- Total liabilities and shareholders' deficit..................................... $ 3,458,254 871,552 ============== ===========
See accompanying notes to consolidated financial statements. F-8 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD CUMULATIVE MARCH 4, 1998 PERIOD FROM YEAR (INCEPTION) MARCH 4, 1998 ENDED THROUGH (INCEPTION) JUNE 30, JUNE 30, THROUGH 1999 1998 JUNE 30, 1999 -------------- ------------- ------------- Service revenue.................................................... $ 143,426 2,800 146,226 Operating expenses: License fees (note 7)............................................ -- 3,822,000 3,822,000 Depreciation and amortization.................................... 257,342 12,249 269,591 Selling, general and administrative.............................. 11,046,506 721,210 11,767,716 -------------- ----------- ----------- Total operating expenses....................................... 11,303,848 4,555,459 15,859,307 -------------- ----------- ----------- Loss from operations........................................... (11,160,422) (4,552,659) (15,713,081) Loss on sale of equity securities.................................. 54,729 -- 54,729 Interest expense................................................... 925,097 19,277 944,374 -------------- ----------- ----------- Loss before extraordinary item................................. (12,140,248) (4,571,936) (16,712,184) Extraordinary gain on extinguishment of debt....................... 1,653,232 -- 1,653,232 -------------- ----------- ----------- Net loss....................................................... $ (10,487,016) (4,571,936) (15,058,952) ============== =========== =========== Basic and diluted extraordinary gain per share..................... $ 0.19 -- 0.21 ============== =========== =========== Basic and diluted loss per share................................... $ (1.18) (0.84) (1.87) ============== =========== =========== Weighted average common shares outstanding--basic and diluted...... $ 8,912,041 5,416,242 8,058,886 ============== =========== ===========
See accompanying notes to consolidated financial statements. F-9 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
COMMON STOCK ADDITIONAL PRICE -------------------- PAID-IN DEFERRED DATE PER 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 shareholder's payment of Company debt.............................. 3/98 0.50 400,000 400 199,600 -- Common stock issued to acquire license................. 3/98 0.22 1,000,000 1,000 219,000 -- Common stock issued for services....................... 4/98 0.22 100,000 100 21,900 -- Deferred compensation on stock issued for services..... 4/98 -- -- -- (14,080) Amortization of deferred compensation.................. 4/98--6/98 -- -- -- 1,760 Common stock issued to acquire license................. 4/98 0.22 1,900,000 1,900 416,100 -- Common stock issued for services....................... 5/98 0.22 200,000 200 43,800 -- Common stock issued in exchange for shareholder's payment of Company debt.............................. 5/98 1.00 200,000 200 199,800 -- Sale of common stock for cash.......................... 5/98--6/98 1.00 303,000 303 302,697 -- Conversion of debt to capital contribution............. 6/98 -- -- 100,000 -- Adjustment resulting from reverse acquisition.......... 6/98 450,000 450 (310) -- Shares issued in business acquisition.................. 6/98 1.00 400,000 400 399,600 -- Conversion of debt to common stock, including interest............................................. 6/98 1.00 184,000 184 185,349 -- Stock issued for deferred compensation................. 6/98 1.00 100,000 100 99,900 (100,000) Sale of common stock for cash.......................... 6/98 2.00 73,000 73 145,927 -- Comprehensive loss: Net loss............................................. -- -- -- -- Total comprehesive loss................................ --------- --------- ----------- --------- Balance at June 30, 1998............................... 7,510,000 7,510 2,849,163 (112,320) Sale of common stock for cash.......................... 7/98--9/98 2.00 949,800 950 1,898,650 -- Exercise of warrants................................... 7/98--9/98 2.00 132,100 132 264,068 -- Warrants granted for services.......................... 10/98--6/99 2.00--5.50 -- -- 2,340,720 -- Stock compensation paid by shareholders................ 11/98 2.00 -- -- 400,000 -- Stock option compensation.............................. -- -- 233,211 (233,211) Amortization of deferred compensation.................. -- -- -- 282,052 Forfeited stock........................................ (48,000) (48) (10,512) 10,560 Capital contributed upon extinguishment of debt........ 12/98 -- -- 200,000 -- Subsidiary convertible common stock issued in business acquisition.......................................... 1/99--4/99 3.00--4.50 -- -- 1,392,858 -- Options issued for legal services...................... 2/99 5.50 -- -- 479,708 -- Warrants granted for debt issue costs.................. 2/99--6/99 3.50--5.50 -- -- 775,585 -- Shares issued for debenture conversion................. 3/99--5/99 2.50 320,000 320 950,680 -- Shares issued for services............................. 10/98--6/99 2.00--5.50 366,500 366 1,261,834 -- Shares issued for debt issue costs..................... 3/99 4.00 30,000 30 127,470 -- Sale of common stock for cash, net..................... 3/99--6/99 3.00-5.50 614,334 615 2,300,763 -- Cashless exercise of warrants.......................... 4/99 2,570 3 (3) -- Shares issued for technology........................... 5/99 5.00 35,000 35 174,965 -- Comprehensive loss: Net loss............................................. -- -- -- -- Foreign currency translation adjustment.............. -- -- -- -- Total comprehensive loss............................... --------- --------- ----------- --------- Balance at June 30, 1999............................... 9,912,304 $ 9,913 15,639,160 (52,919) ========= ========= =========== ========= DEFICIT ACCUMULATED ACCUMULATED TOTAL DURING OTHER SHAREHOLDERS' COMPREHENSIVE DEVELOPMENT COMPREHENSIVE EQUITY LOSS STAGE LOSS (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 Comprehensive loss: Net loss............................................. (4,571,936) (4,571,936) -- (4,571,936) ---------- Total comprehesive loss................................ (4,571,936) ========== --------- ---------- ----------- Balance at June 30, 1998............................... (4,571,936) -- (1,827,583) Sale of common stock for cash.......................... -- -- 1,899,600 Exercise of warrants................................... -- -- 264,200 Warrants granted for services.......................... -- -- 2,340,720 Stock compensation paid by shareholders................ -- -- 400,000 Stock option compensation.............................. -- -- -- Amortization of deferred compensation.................. -- -- 282,052 Forfeited stock........................................ -- -- -- Capital contributed upon extinguishment of debt........ -- -- 200,000 Subsidiary convertible common stock issued in business acquisition.......................................... -- -- 1,392,858 Options issued for legal services...................... -- -- 479,708 Warrants granted for debt issue costs.................. -- -- 775,585 Shares issued for debenture conversion................. -- -- 951,000 Shares issued for services............................. -- -- 1,262,200 Shares issued for debt issue costs..................... -- -- 127,500 Sale of common stock for cash, net..................... -- -- 2,301,378 Cashless exercise of warrants.......................... -- -- -- Shares issued for technology........................... -- -- 175,000 Comprehensive loss: Net loss............................................. (10,487,016) (10,487,016) -- (10,487,016) Foreign currency translation adjustment.............. (3,598) -- (3,598) (3,598) ---------- Total comprehensive loss............................... (10,490,614) ========== --------- ---------- ----------- Balance at June 30, 1999............................... (15,058,952) (3,598) (533,604) ========= ========== ===========
See accompanying notes to consolidated financial statements. F-10 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE PERIOD FROM MARCH 4, 1998 MARCH 4, 1998 (INCEPTION) (INCEPTION) YEAR ENDED THROUGH THROUGH JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 ------------- ------------- ------------------ Cash flows from operating activities: Net loss......................................................... $(10,487,016) (4,571,936) (15,058,952) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................................. 257,432 12,249 269,591 Common stock issued for services............................... 1,262,200 371,680 1,633,880 Amortization and write-off of license fees..................... -- 3,822,000 3,822,000 Loss on sale of equity securities.............................. 54,729 -- 54,729 Amortization of deferred compensation.......................... 282,052 -- 282,052 Gain on extinguishment of debt................................. (1,653,232) -- (1,653,232) Stock compensation paid by shareholders........................ 400,000 -- 400,000 Interest expense on debt converted to equity................... 236,488 19,277 255,765 Interest expense on warrants issued as debt issue costs........ 535,535 -- 535,535 Amortization of debt issue costs............................... 144,000 -- 144,000 Options and warrants issued for services....................... 2,820,428 -- 2,820,428 Provision for doubtful accounts................................ 26,876 25,000 51,876 Write-off of note receivable................................... 800,000 -- 800,000 Changes in assets and liabilities: Accounts receivable.......................................... (49,769) (2,000) (51,769) Prepaid offering costs....................................... (325,887) -- (325,887) Other assets................................................. (76,668) (45,422) (122,090) Accounts payable and accrued expenses........................ 1,220,010 116,033 1,336,043 ----------- --------- ------------ Net cash used in operating activities...................... (4,552,912) (253,119) (4,806,031) ----------- --------- ------------ Cash flows from investing activities: Cash assumed in business acquisition........................... 4,781 3,321 8,102 Loan for notes receivable...................................... (830,000) (75,000) (905,000) Repayment of notes receivable.................................. 50,000 -- 50,000 Purchase of equity securities.................................. (100,733) -- (100,733) Proceeds from sale of equity securities........................ 46,004 -- 46,004 Purchase of property and equipment............................. (250,579) (102,034) (352,613) ----------- --------- ------------ Net cash used in investing activities...................... (1,080,527) (173,713) (1,254,240) ----------- --------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock......................... 4,253,360 649,000 4,902,360 Proceeds from exercise of warrants............................. 264,200 -- 264,200 Proceeds from issuance of notes payable to related parties..... 100,000 132,429 232,429 Proceeds from issuance of notes payable and convertible debentures....................................... 2,506,000 -- 2,506,000 Cash paid for debt issue costs................................. (181,018) -- (181,018) Repayment of notes payable to related parties.................. (990,630) (100,000) (1,090,630) ----------- --------- ------------ Net cash provided by financing activities.................. 5,951,912 681,429 6,633,341 ----------- --------- ------------ Net increase in cash....................................... 318,473 254,597 573,070 Cash at beginning of period........................................ 254,597 -- -- Effect of exchange rate changes on cash balances................... (3,598) -- (3,598) ----------- --------- ------------ Cash at end of period.............................................. $ 569,472 254,597 569,472 =========== ========= ============ Supplemental schedule of noncash activities: Issuance of common stock for business acquisition................ $ -- 400,000 400,000 Issuance of convertible stock in business acquisition............ 1,392,858 -- 1,392,858 Accrued asset purchases.......................................... -- 27,743 27,743 Conversion of debt to common stock............................... 800,000 284,000 1,084,000 Common stock issued in exchange for shareholders' payment of Company debt................................................... -- 400,000 400,000 Capital contributed upon extinguishment of debt................ 200,000 -- 200,000 Common stock issued for internal-use software.................. 175,000 -- 175,000 Warrants issued for debt issue costs........................... 723,203 -- 723,203 Stock issued for debt issue costs.............................. 77,500 -- 77,500 =========== ========= ============
See accompanying notes to consolidated financial statements. F-11 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 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 June 30, 1999. On June 2, 1998, Video Calling Card, Inc. ("VCC"), a Nevada public shell corporation, acquired 100 percent of the outstanding common stock of Netgateway in exchange for 5,900,000 shares of common stock of VCC. Immediately prior to the acquisition, VCC had 450,000 shares of common stock outstanding and Netgateway had 590,000 shares of common stock outstanding. Since the shareholders of Netgateway received the majority voting interests in the combined company, Netgateway is the acquiring enterprise for financial reporting purposes. The transaction was recorded as a reverse acquisition using the purchase method of accounting whereby equity of Netgateway was adjusted for the fair value of the acquired tangible net assets of VCC. The historical financial statements of Netgateway since March 4, 1998 (inception) have been adjusted retroactively to reflect the equivalent number of shares received in the business combination prior to the reverse acquisition. The 450,000 shares of common stock issued in the reverse acquisition have been included in the weighted-average common shares outstanding since the date of acquisition, June 2, 1998. Also on June 2, 1998, the Company acquired certain assets and liabilities of Infobahn Technologies, LLC (d/b/a Digital Genesis), a California limited liability company, in exchange for 400,000 shares of common stock of the Company valued at $400,000. The consideration was allocated based on the relative fair values of the tangible and intangible assets and liabilities acquired, including acquired technology of $120,000, with the excess consideration of $235,193 recorded as goodwill. The operations of Digital Genesis are included in the consolidated statements of operations of the Company since the date of acquisition, June 2, 1998. In January 1999, the Company acquired 100% of the outstanding stock of Spartan Multimedia, Inc., a Canadian corporation, in exchange for 185,715 shares of common stock of StoresOnline.com, LTD, a wholly-owned Canadian subsidiary valued at $557,145. The shares are convertible on a one-to-one basis into common stock of the Company. The issuance of an additional 185,714 shares was contingent upon the attainment of certain performance standards in future periods. In April 1999, the Board of Directors approved the issuance of the contingent shares and waived the performance standards. Accordingly, the consideration increased to $1,392,858. The acquisition of Spartan Multimedia, Inc. was recorded using the purchase method of accounting. The consideration was allocated based on the relative fair values of the tangible and intangible assets and liabilities acquired. The operations of Spartan Multimedia, Inc. are included in the consolidated statement of operations of the Company from January 15, 1999 through F-12 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) DESCRIPTION OF BUSINESS (CONTINUED) June 30, 1999. Unaudited pro forma consolidated results of operations are summarized below to reflect the acquisition of Spartan Multimedia, Inc. as if it had occurred on July 1, 1998: Revenue......................................................... $ 146,867 ========== Net loss........................................................ (10,698,625) ========== Loss per share.................................................. (1.20) ==========
(2) LIQUIDITY The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of the date of this report, the Company's planned principal operations have commenced, however, minimal revenues have been generated. The Company has relied upon private placements of its stock and issuances of debt to generate funds to meet its operating needs and plans to continue pursuing financing in this manner during the next year. However, there are no assurances that such financing will be available when and as needed to satisfy current obligations. As such, substantial doubt exists as to whether the Company will continue as a going concern. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (B) REVENUE RECOGNITION Revenue generated from consulting services is recognized as services are provided. Web-site development revenues are recognized upon completion of each project. Services billed in advance are recorded as deferred revenue and recognized when revenue is earned. (C) INTANGIBLE ASSETS Intangible assets are amortized on a straight-line basis over their estimated useful lives as follows: 5 to 7 Acquired technology............................................ years Goodwill....................................................... 10 years
F-13 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (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. (H) FINANCIAL INSTRUMENTS The carrying values of cash, accounts receivable, notes receivable, accounts payable, accrued liabilities and current portion of notes payable at June 30, 1999 and 1998 approximated fair value due to the short maturity of those instruments. The fair value of the notes receivable from and payable to related parties could not be estimated due to the nature of the borrowings. All financial instruments are held for purposes other than trading. (I) ACCOUNTING FOR STOCK OPTIONS The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its fixed plan employee stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Compensation F-14 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 has components of other comprehensive income (loss), which are classified in the statement of shareholders' deficit. (K) BUSINESS SEGMENTS AND RELATED INFORMATION Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131) establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. Is also establishes standards for related disclosure about products and services, geographic areas and major customers. It replaces the "industry segment" concept of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," with a "management approach" concept as the basis for identifying reportable segments. The Company has only one operating segment. The Company formed its wholly-owned Canadian subsidiary, StoresOnline.com, in January 1999. Prior to that time, the Company only had operations in the United States All revenues during the year ended June 30, 1999 and the period March 4, 1998 (inception) through June 30, 1998 were generated in the United States. Substantially all of the Company's long-lived assets were located in the United States at June 30, 1999 and 1998. (L) INVESTMENT SECURITIES The Company accounts for investment securities in accordance with Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115 requires investments to be classified based on management's intent in one of the three categories: held-to-maturity securities, available-for-sale securities and trading securities. Held-to-maturity securities are recorded at amortized cost. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported as a separate component of shareholders' equity and comprehensive income (loss). Trading securities are recorded at market value with unrealized gains and losses reported in operations. The Company's investment securities have been classified as available-for-sale. F-15 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (M) FOREIGN CURRENCY TRANSLATION The financial statements of the Company's Canadian subsidiary, StoresOnline.com, have been translated into U.S. dollars from its functional currency in the accompanying consolidated financial statements in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Balance sheet accounts of StoresOnline.com are translated at year-end exchange rates while income and expenses are translated at weighted-average exchange rates for the year. Translation gains or losses that related to StoresOnline.com's net assets are shown as a separate component of shareholders' equity (deficit) and comprehensive income (loss). There were no gains or losses resulting from realized foreign currency transactions (transactions denominated in a currency other than the entities' functional currency) during the year ended June 30, 1999 and the period March 4, 1998 (inception) through June 30, 1998. (N) LOSS PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period in accordance with SFAS No. 128 "Earnings Per Share". Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings (loss) per share is computed similarly to fully diluted earnings (loss) per share pursuant to Accounting Principles Board (APB) Opinion No. 15. There were 3,840,956 options and 1,750,100 warrants to purchase shares of common stock that were outstanding during the year ended June 30, 1999 which were not included in the computation of diluted loss per share because the impact would have been antidilutive. There were 200,000 options and 73,000 warrants to purchase shares of common stock that were outstanding during the period March 4, 1998 (inception) through June 30, 1998 which were not included in the computation of diluted loss per share because the impact would have been antidilutive. (O) COSTS OF START-UP ACTIVITIES Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities," the Company expenses all the costs of start-up activities as incurred. (P) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reporting of revenues and expenses during the reporting periods to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (Q) RECLASSIFICATIONS Certain amounts have been reclassified to conform with current year presentation. F-16 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) PROPERTY AND EQUIPMENT Property and equipment balances at June 30, 1999 and 1998 are summarized as follows:
1999 1998 ---------- --------- Computers and office equipment......................................... $ 583,021 152,244 Less accumulated depreciation.......................................... (86,485) (8,860) ---------- --------- 496,536 143,384 ========== =========
(5) INTANGIBLE ASSETS Intangible assets balances at June 30, 1999 and 1998 are summarized as follows:
1999 1998 ------------ --------- Acquired technology.................................................. $ 1,510,548 120,000 Goodwill............................................................. 235,193 235,193 ------------ --------- 1,745,741 355,193 Less accumulated amortization........................................ (183,106) (3,389) ------------ --------- $ 1,562,635 351,804 ============ =========
(6) NOTES RECEIVABLE AND NOTES RECEIVABLE FROM OFFICER During the period March 4, 1998 (inception) through June 30, 1998, the Company issued a $50,000 note receivable to a customer which was repaid during the year ended June 30, 1999. In July 1998 and August 1998, the Company advanced $800,000 to an entity with which the Company was in merger discussions. Certain Company officers and directors were minor shareholders of the potential merger entity. The merger was not consummated and the advance was deemed uncollectible in December 1998 and written-off. During June 1999, the Company issued its chief executive officer, Keith Freadhoff, a non-interest bearing $30,000 note receivable. The note was repaid in July 1999. (7) LICENSE AGREEMENTS In March 1998, the Company entered into a sublicense agreement related to proprietary courseware with Training Resources International (TRI), which is wholly-owned by Michael Khaled, a stockholder of the Company, in exchange for the assumption of TRI's obligation of $1,600,000 to the original licensor, ProSoft I-Net Solutions, Inc. (ProSoft). Michael Khaled personally guaranteed the repayment of the Company's obligation under the sublicense agreement with TRI to ProSoft. TRI entered into the original license agreement with ProSoft in January 1998. In April 1998, the Company entered into a sublicense agreement related to proprietary courseware with S.T.E.P.S., Inc. (Steps), whose primary stockholder is Scott Beebe, a stockholder and director of the Company, in exchange for (1) the assumption of Steps' remaining obligation of $1,500,000 to the original licensor, ProSoft, (2) the assumption of Step's obligation of $200,000 to Vision Holdings Inc. (Vision), an unrelated entity, which had advanced funds to Steps, and (3) the F-17 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) LICENSE AGREEMENTS (CONTINUED) issuance of 1,000,000 shares of common stock valued at $220,000 to Steps. Scott Beebe personally guaranteed the repayment of the Company's obligation under the sublicense agreement with Steps to ProSoft. Additionally, the Company acquired supplies, books and other materials related to the licensed technology from Vision in exchange for $84,000. The Company had previously entered into a separate loan agreement for $100,000 with Vision. The Company's chief executive officer, Keith Freadhoff, was the chief executive officer at ProSoft when the original license agreement with Steps was entered into. Don Danks is a stockholder of the Company and was an officer of ProSoft at the time the original license agreements were entered into. In April 1998, the Company converted the $300,000 obligation to Vision into 1,900,000 shares of common stock, valued at $418,000. As a result, license fees of $418,000 were recorded for the incremental increase of the stock exchanged for the note payable cancellation. In June 1998, the Company changed its business plan and began focusing on developing technology to enable businesses and other organizations to conduct commerce over the internet. Therefore, the Company determined that the license fees would not ultimately be recoverable. Accordingly, the costs of acquiring the sub-license agreements and related supplies are included as license fees expense in the accompanying consolidated statements of operations. (8) CONVERTIBLE DEBENTURES AND NOTES PAYABLE During December 1998 and January 1999, the Company issued $1,000,000 of convertible debentures bearing interest at the 90-day Treasury Bill rate plus 4 percent and issued 274,350 detachable stock purchase warrants valued at $405,395. The debentures are convertible into the Company's common stock at $2.50 per share at the Company's option. The Company recorded interest expense of $151,000 related to the beneficial conversion feature. The debentures are due in December 1999. As of June 30, 1999, $800,000 of the debentures had been converted into 320,000 shares of common stock. The convertible debentures are secured by the Company's accounts receivable and intellectual property. In March 1999, Keith Freadhoff, the chief executive officer of the Company, loaned the Company $100,000 which is due within 10 days of the close of bridge financing. In March 1999, the Company issued $160,000 of non-interest bearing notes payable to third parties, which are due within 10 days of the close of bridge financing. The notes were repaid in June 1999. In May and June 1999, the Company obtained bridge financing whereby 12% senior notes payable and 288,000 shares of common stock were issued generating proceeds of $2,592,000, net of $288,000 of issuance costs. The senior notes payable are due the earlier of April 30, 2000 or upon the close of a public sale of the Company's common stock. The Company also granted 144,000 warrants to purchase an equivalent number of shares of common stock at an exercise price of $10 per share as additional issuance costs. The warrants are exercisable for a period of four years commencing May 18, 2000. The fair value of the warrants on the dates of issuance was estimated to be $301,300 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected life of 2 years. The net proceeds from the bridge financing were allocated to the senior notes payable and common stock based on their relative fair values, taking into consideration recent debt and equity F-18 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) CONVERTIBLE DEBENTURES AND NOTES PAYABLE (CONTINUED) transactions. Accordingly, $1,346,000 was recorded as notes payable, $1,488,952 as equity, net of $346,349 of stock issuance costs, and $302,952 as debt issuance costs. Under the Securities Act, the rules and regulations under the Securities Act, and the interpretations of the Commission, we may be required to offer rescission to investors in our May through September 1999 private placement. If the Company is required to rescind the May through September private placement in its entirety, the Company would be required to refund all of the gross proceeds of the May through September private placement to the investors. Even following the repayment of the notes, based on the Securities Act, the rule and regulations under the Securities Act, and the interpretations of the Commission, the investors in the May through September private placement may have the right to require the Company to repurchase the shares of common stock which they received in the May through September private placement if they can successfully argue that those shares were issued in lieu of a higher interest rate on those notes. In June 1999, the Company issued a 12% senior note payable of $150,000 and 15,000 shares of common stock valued at $75,000 as settlement of a legal fee obligation. The note is due the earlier of April 30, 2000 or upon the close of a public sale of the Company's common stock. The Company also granted 3,750 warrants to purchase an equivalent number of shares of common stock at an exercise price of $10 per share. The warrants are exercisable for a period of four years commencing May 18, 2000. The fair value of the warrants on the dates of issuance was estimated to be $7,098 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected life of 2 years. As a result, $7,098 of additional legal expense was recorded in the accompanying consolidated financial statements. Notes payable and notes payable to related parties at June 30, 1999 and 1998 consists of the following:
1999 1998 ------------ ----------- 12% senior notes payable due the earlier of April 30, 2000 or upon the close of a public sale of the Company's common stock...................................... $ 1,496,000 -- Non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under license agreements, maturing through October 15, 1998.................................. -- 1,100,000 Non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under license agreements, payable in quarterly principal and interest installments of $200,000 and maturing through December 31, 1999................................ -- 1,287,622 Non-interest bearing note payable to an officer and shareholder, due within 10 days of the close of bridge financing....................................... 1,799 32,429 ------------ ----------- 1,497,799 2,420,051 Less current portion............................................................. 1,497,799 (2,052,159) ------------ ----------- $ -- 367,892 ============ ===========
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 F-19 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) CONVERTIBLE DEBENTURES AND NOTES PAYABLE (CONTINUED) contribution in June 1998. During the year ended June 30, 1999, the Company repaid $30,630 of the note payable. The non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under license agreements due December 31, 1999, is net of imputed interest of $112,378 at June 30, 1998. In August 1998, the notes payable agreements to ProSoft I-Net Solutions, Inc. (ProSoft) aggregating $2,387,622 were amended whereby the scheduled principal payments of $2,100,000 and $400,000 due in fiscal years 1999 and 2000, were changed to $1,800,000 and $700,000, respectively. During the year ended June 30, 1999, the Company repaid $700,000 of the notes payable to ProSoft. In December 1998, ProSoft released the Company of its remaining obligation under the notes payable agreements. As of December 1998, the Company recognized $35,488 of imputed interest as interest expense. The remaining imputed interest balance was expensed upon extinguishment of the debt in December 1998. Additionally, Michael Khaled and Scott Beebe, who personally guaranteed repayment of the Company's obligations to ProSoft, paid ProSoft $200,000 in the aggregate to terminate their individual personal guarantees of the notes payable which was recorded as a capital contribution upon extinguishment of debt. Accordingly, the Company recognized $1,653,232 as gain on extinguishment of debt during the year ended June 30, 1999. (9) SHAREHOLDERS' EQUITY (DEFICIT) During the period March 4, 1998 (inception) through June 30, 1998, the Company issued 1,645,455 shares of common stock valued at $362,000 to certain officers and employees in exchange for compensation. The shares vested immediately upon grant. In April 1998, the Company granted 100,000 shares of common stock under a consulting agreement in exchange for services valued at $22,000. Compensation expense of $7,920 was recognized for the value of the shares which vested immediately upon grant. Under the agreement, the Company may repurchase up to 64,000 shares of the common stock issued to the consultant. The shares eligible for repurchase vest ratably over a 24 month period upon performance of services under the consulting agreement. Deferred compensation of $14,080 was recorded in the accompanying consolidated statement of changes in shareholders' deficit to reflect the unearned compensation. During the period March 4, 1998 (inception) through June 30, 1998, 8,000 of the shares eligible for repurchase vested resulting in $1,760 of compensation. During the year ended June 30, 1999, 8,000 of the shares eligible for repurchase vested and the consulting agreement was subsequently canceled. As a result, $1,760 of additional compensation was recorded and the 48,000 remaining unvested common shares were forfeited. In June 1998, the Company issued 100,000 shares of common stock to an employee in exchange for services valued at $100,000. Half of the shares vested on July 1, 1998 with the remaining shares vesting ratably over a 12 month period. Accordingly, deferred compensation of $100,000 was recorded at June 30, 1998. During the year ended June 30, 1999, the 100,000 shares vested resulting in compensation of $100,000. During the period March 4, 1998 (inception) through June 30, 1998, Michael Khaled, Don Danks and Lynn Turnbow, shareholders of the Company, paid, on behalf of the Company, $400,000 of the F-20 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED) scheduled payments under the $3,000,000 notes payable to ProSoft in exchange for 600,000 shares of common stock valued at $400,000. In March 1998, an officer and shareholder of the Company, Keith Freadhoff, loaned the Company $100,000. In June 1998, the note was contributed to capital. In June 1998, $184,000 of notes payable to third parties was converted into 184,000 shares of common stock valued at $185,333, including $1,533 of accrued interest. During the period March 4, 1998 (inception) through June 30, 1998, the Company sold 1,057,545 shares of common stock for $503,000 in cash. In June 1998, the Company sold 73,000 units in exchange for $146,000. In July 1998 through September 1998, the Company sold 949,800 units in exchange for $1,899,600. Each unit consisted of one share of common stock and one warrant to purchase an equivalent number of shares of common stock at an exercise price of $4.00. The warrants were exercisable at any time prior to September 1, 1998. The estimated fair value of the warrants on the date of the grant was estimated to be $.02 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5.16%; volatility of 100%; and an expected life of two months. The warrants were subsequently repriced to $2.00 per share and the exercise date was extended to October 1, 1998. The estimated fair value of the warrants on the date of repricing remained consistent with the fair value on date of grant. In October 1998, 132,100 warrants were exercised to purchase 132,100 shares of common stock generating proceeds of $264,200. During the year ended June 30, 1999, the Company issued warrants as consideration for various consulting fees and debt issue costs associated with the convertible debentures. The warrants were exercisable within two years from the dates of issuance. The fair value of the warrants on the dates of issuance was estimated to be $3,169,839 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected life of 2 years. Accordingly, compensation expense of $2,394,254, debt issuance costs of $187,668 and interest expense of $535,535 was recorded in the accompanying consolidated financial statements. During the year ended June 30, 1999, the Company issued 366,500 shares of common stock valued at $1,262,200 as payment of consulting and legal services. In May 1999, the Company issued 35,000 shares of common stock valued at $175,000 to acquire internal-use software from UnitNetImaging (Shopping Planet). The value of the technology was capitalized in the accompanying consolidated financial statements. During March 1999, the Company issued 30,000 shares of common stock valued at $127,500 as payment of debt issuance costs associated with the issuance of $160,000 of notes payable. In November 1998, the Company entered into a settlement agreement with Michael Khaled, a shareholder of the Company, whereby four shareholders of the Company contributed 200,000 shares of common stock valued at $400,000 to Mr. Khaled. Additionally, the Company granted warrants to purchase 100,000 shares of common stock to Mr. Khaled and warrants to purchase 200,000 shares of common stock to the four shareholders who contributed their stock. The fair value of the warrants on the issuance date was estimated to be $420,000 using the Black-Scholes F-21 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) SHAREHOLDERS' EQUITY (DEFICIT) option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected life of 2 years. Accordingly, compensation expense of $820,000 was recognized in the accompanying consolidated financial statements. From March 1999 through May 1999, the Company sold 326,334 shares of common stock in exchange for cash of $979,000. In April 1999, the Company issued 2,570 shares of common stock upon the cashless exercise of 25,000 warrants at an exercise price of $12.00 per share. (10) STOCK OPTIONS In June 1998, the Board of Directors approved, for future grants, 500,000 options to acquire an equivalent number of shares of common stock at an exercise price of $1 per share to certain senior management. No options were granted as of June 30, 1998. In June 1998, the Board of Directors granted 100,000 options to acquire an equivalent number of shares of common stock at an exercise price of $6 per share as consideration for legal fees. The options vest ratably as services are provided and expire on April 30, 2005. As of June 30, 1998, only a minimal amount of legal services had been provided under the agreement. During the year ended June 30, 1999, under the anti-dilution clause of the agreement, the number of options increased to 240,000 and the exercise price was decreased to $2.50 per share. As a result, compensation for the fair value of the options aggregating $479,708 was recorded. The fair value of the options on the date of repricing was estimated using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected life of 1.5 years. In June 1998, the Company granted a consultant 100,000 options to purchase an equivalent number of shares of common stock at an exercise price of $3.50 per share as compensation for services. The options vest upon the consultant achieving certain sales goals related to the sale of training courses under the ProSoft license agreement by June 1999. The options expire on June 1, 2003. As of June 30, 1998, no options had been earned under the agreement. The fair value of the options on the date of the grant was estimated to be $.59 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5.50%; volatility of 100%; and an expected life of 5 years. Subsequent to June 30, 1998, these options were canceled. In July 1998, the Board of Directors adopted the 1998 Stock Compensation Program ("Program") which consists of an Incentive Stock Option Plan, Non-Qualified Stock Option Plan, Restricted Share Plan, Employee Stock Purchase Plan, Non-Employee Director Stock Option Plan, Stock Appreciation Rights Plan and Other Stock Rights Plan. An aggregate of 1,000,000 shares were reserved for issuance under the Program. During the year ended June 30, 1999, the Company granted 998,301 options under the Program at exercise prices greater than and below the estimated market price of the Company's common stock on the date of grant ranging from $2.17 to $5.34 per share. As a result, $180,292 of compensation expense was recognized during the year ended June 30, 1999. The weighted-average fair value of options granted during the year ended June 30, 1999 under the Program was $2.07 per share. As of June 30, 1999, 1,699 options were available for F-22 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) STOCK OPTIONS (CONTINUED) future grants. The Company applies APB Opinion No. 25 in accounting for stock options granted to employees. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below for the year ended June 30, 1999: Net loss--as reported.......... $(10,487,016) Net loss--pro forma............ (13,000,791) ===========
In December 1998, the Board of Directors adopted the 1998 Stock Option Plan for Senior Executives. An aggregate of 5,000,000 shares were reserved for issuance under the Plan. As of June 30, 1999, 2,596,656 options had been granted under the Plan at an exercise prices ranging from $2.50 to $6.50 per share. Because the grant price is greater than the market prices of the Company's common stock on the date of grant, there was no intrinsic value on the date of grant. The shares begin vesting on January 1, 2000. Accordingly, compensation expense related to these stock option grants during the year ended June 30, 1999 is the same under APB 25 and SFAS 123. The weighted-average fair value of the options granted under the Plan during the year ended June 30, 1999 was $1.81 per share. As of June 30, 1999, there were 2,403,333 options available for future grants under the Plan. The following is a summary of stock option activity:
WEIGHTED AVERAGE NUMBER OF SHARES EXERCISE PRICE ---------------- ----------------- Balance at March 4, 1998.................................. -- $ -- Granted................................................... 200,000 4.75 ------------ Balance at June 30, 1998.................................. 200,000 4.75 Granted................................................... 3,734,968 3.85 Canceled.................................................. (100,000) 3.50 ------------ Balance at June 30, 1999.................................. 3,834,968 3.80 ============ =========
The following table summarizes information about shares under option at June 30, 1999:
WEIGHTED-AVERAGE WEIGHTED REMAINING WEIGHTED AVERAGE RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE PRICE - ---------------- ----------- ---------------- --------------- ----------- ------------- 2$.46 to 3.71... 1,808,636 9.01 years $ 2.56 670,930 $ 2.50 3.78 to 6.06... 1,824,406 9.53 years 4.76 212,880 4.11 6.15 to 7.75... 191,926 9.83 years 6.58 35,730 6.75 13.30.......... 10,000 9.75 years 13.30 833 13.30 --------- --------- 3,834,968 3.80 920,373 3.05 ========= ========= ========= =========
F-23 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) INCOME TAXES Income tax expense for the period March 4, 1998 (inception) through June 30, 1998 and the year ended June 30, 1999 represents the California state minimum franchise tax and is included in selling, general and administrative expenses in the accompanying consolidated statement of operations. Income tax expense attributable to loss from operations during the year ended June 30, 1999 and the period March 4, 1998 (inception) through June 30, 1998, differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to loss from operations as a result of the following:
1999 1998 ------------- ----------- Computed "expected" tax benefit.................................. $ (3,565,585) (1,554,458) Decrease (increase) in income taxes resulting from: State and local income tax benefit, net of federal effect........ (618,227) (278,196) Change in the valuation allowance for deferred tax assets........ 4,139,728 1,859,974 Other............................................................ 46,479 (26,520) ------------- ----------- Income tax expense............................................. $ 2,400 800 ============= ===========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 1999 and 1998 are presented below:
1999 1998 ------------- ----------- Deferred tax assets: Net operating loss carryforwards............................... $ 4,620,070 1,669,316 Stock compensation expense..................................... 1,128,171 179,872 Intangible assets, principally due to differences in amortization................................................. 16,902 10,290 Deferred compensation.......................................... 112,821 -- Accounts receivable principally due to allowance for doubtful accounts..................................................... 1,200 -- Accrued expenses............................................... 106,640 -- Property and equipment, principally due to differences in depreciation................................................. -- 496 ------------- ----------- Total gross deferred tax assets.............................. 5,985,804 1,859,974 Less valuation allowance..................................... (5,968,503) (1,859,974) Deferred tax liability: Property and equipment, principally due to differences in depreciation................................................. (17,301) -- ------------- ----------- Net deferred tax assets...................................... $ -- -- ============= ===========
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 F-24 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) INCOME TAXES (CONTINUED) the periods in which those temporary differences become deductible. Management considers the schedule reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $11,550,000 prior to the expiration of the carryforward period in 2014. Based on the projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences. Such potential future benefits have been fully reserved, and accordingly, there are no net deferred tax assets. As of June 30, 1999, the Company had approximately $11,550,400 and 11,548,000 of net operating loss carryforwards available for Federal and state income tax purposes, respectively, which expire between 2006 and 2018. 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. (12) LEASE COMMITMENTS The Company has noncancelable operating leases for office space which expire at various dates through July 2001. Minimum annual commitments under noncancelable operates leases are $424,700, $237,300, $135,300 and $10,000 during the years ended June 30, 2000, 2001, 2002 and 2003, respectively. All other operating leases are month-to-month arrangements. Rent expense amounted to $115,237 and $18,367 during the year ended June 30, 1999 and during the period March 4, 1998 (inception) through June 30, 1998, respectively. (13) SUBSEQUENT EVENTS In July 1999, the Board of Directors adopted the 1999 Stock Option Plan for Non-Executives. An aggregate of 2,000,000 shares were reserved for issuance under the Plan. From July 1, 1999 through August 10, 1999, the Company granted 367,266 options under the Plan at exercise prices ranging from $5.25 to $14.50 per share. The Company also granted 200,000 options under the 1998 Executive Plan in July 1999 at an exercise price of $8.18 per share. In July 1999, the Company entered into a Cable Reseller and Mall agreement with MediaOne of Colorado, Inc. (MediaOne) whereby the Company also issued to MediaOne 50,000 shares of common stock and warrants to purchase 200,000 shares of common stock. The exercise price of the warrants is dependent upon the market price of the Company's common stock on the date that the warrants are earned under certain performance criteria. From July 21, 1999 through August 18, 1999, the Company issued $503,000 of 12% senior notes payable which are due the earlier of April 30, 2000 or upon the close of a public sale of the Company's common stock and 50,300 shares of the Company's common stock in exchange for $503,000. The net proceeds were allocated to the notes payable and common stock based on their relative fair values. Under the Securities Act, the rules and regulations under the Securities Act, and the interpretations of the Commission, we may be required to offer rescission to investors in our May through September 1999 private placement. If the Company is required to rescind the May through September private placement in its entirety, the Company would be required to refund all of the gross proceeds of the May through September private placement to the investors. F-25 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (13) SUBSEQUENT EVENTS (CONTINUED) Even following the repayment of the notes, based on the Securities Act, the rule and regulations under the Securities Act, and the interpretations of the Commission, the investors in the May through September private placement may have the right to require the Company to repurchase the shares of common stock which they received in the May through September private placement if they can successfully argue that those shares were issued in lieu of a higher interest rate on those notes. (14) SUBSEQUENT EVENT--UNAUDITED From August 24, 1999 through September 24, 1999, the Company issued $3,075,500 of 12% senior notes payable which are due the earlier of April 30, 2000 or upon the close of a public sale of the Company's common stock and 307,550 shares of the Company's common stock in exchange for $3,075,500. The net proceeds were allocated to the notes payable and common stock based on their relative fair values. Under the Securities Act, the rules and regulations under the Securities Act, and the interpretations of the Commission, we may be required to offer rescission to investors in our May through September 1999 private placement. If the Company is required to rescind the May through September private placement in its entirety, the Company would be required to refund all of the gross proceeds of the May through September private placement to the investors. Even following the repayment of the notes, based on the Securities Act, the rule and regulations under the Securities Act, and the interpretations of the Commission, the investors in the May through September private placement may have the right to require the Company to repurchase the shares of common stock which they received in the May through September private placement if they can successfully argue that those shares were issued in lieu of a higher interest rate on those notes. F-26 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999
SEPTEMBER 30, 1999 ------------- ASSETS Current assets: Cash............................................................................................. $ 956,636 Accounts receivable.............................................................................. 104,687 Debt issue costs................................................................................. 439,956 Prepaid offering costs........................................................................... 617,791 Prepaid advertising.............................................................................. 300,000 Other current assets............................................................................. 22,381 ------------- Total current assets........................................................................... 2,441,451 Property and equipment, net........................................................................ 672,857 Intangible assets, net............................................................................. 1,482,942 Other assets....................................................................................... 19,864 ------------- $ 4,617,114 ============= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of notes payable (note 5)........................................................ $ 3,222,531 Convertible debentures........................................................................... 200,000 Accounts payable................................................................................. 291,597 Accrued wages and benefits....................................................................... 561,116 Accrued interest................................................................................. 157,082 Accrued liabilities.............................................................................. 866,308 Deferred revenue................................................................................. 140,450 Accrued contract losses.......................................................................... 43,337 Current portion of notes payable to related party................................................ 1,799 ------------- Total current liabilities...................................................................... 5,484,220 ------------- Shareholders' equity (deficit) (notes 6 and 10): Common stock, par value $.001 per share. Authorized 25,000,000 shares; issued and outstanding 10,322,554..................................................................................... 10,323 Additional paid-in capital....................................................................... 18,402,614 Deferred compensation............................................................................ (34,380) Stock subscription receivable (note 5)........................................................... (350,000) Accumulated other comprehensive loss............................................................. (4,656) Deficit accumulated during development stage..................................................... (18,891,007) ------------- Total shareholders' equity (deficit)........................................................... (867,106) Commitments and subsequent events (notes 12 and 13) ------------- Total liabilities and shareholders' equity (deficit)........................................... $ 4,617,114 =============
See accompanying notes to unaudited consolidated financial statements. F-27 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE PERIOD FROM THREE MONTHS THREE MONTHS MARCH 4, 1998 ENDED ENDED (INCEPTION) SEPTEMBER 30, SEPTEMBER 30, THROUGH 1999 1998 SEPTEMBER 30, 1999 -------------- ------------- ------------------ Service revenue................................................ $ 212,733 22,470 358,959 Operating expenses: License fees (note 7)........................................ -- -- 3,822,000 Depreciation and amortization................................ 132,702 23,026 402,293 Selling, general and administrative.......................... 2,882,274 1,755,147 14,649,990 -------------- ----------- -------------- Total operating expenses................................... 3,014,976 1,778,173 18,874,283 -------------- ----------- -------------- Loss from operations....................................... (2,802,243) (1,755,703) (18,515,324) Loss on sale of equity securities.............................. -- -- 54,729 Interest expense, net.......................................... 1,029,812 2,408 1,974,186 -------------- ----------- -------------- Loss before extraordinary item............................. (3,832,055) (1,812,840) (20,544,239) Extraordinary gain on extinguishment of debt................... -- -- 1,653,232 -------------- ----------- -------------- Net loss................................................... $ (3,832,055) (1,812,840) (18,891,007) ============== =========== ============== Basic and diluted extraordinary gain per share................. $ -- -- .20 ============== =========== ============== Basic and diluted loss per share............................... $ (.38) (.22) (2.26) ============== =========== ============== Weighted average common shares outstanding--basic and diluted...................................................... $ 10,017,740 8,280,801 8,372,298 ============== =========== ==============
See accompanying notes to unaudited consolidated financial statements. F-28 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
COMMON STOCK ADDITIONAL PRICE -------------------- PAID-IN DEFERRED DATE PER 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 shareholder's payment of Company debt.... 3/98 0.50 400,000 400 199,600 -- Common stock issued to acquire license..... 3/98 0.22 1,000,000 1,000 219,000 -- Common stock issued for services........... 4/98 0.22 100,000 100 21,900 -- Deferred compensation on stock issued for services................................. 4/98 -- -- -- (14,080) Amortization of deferred compensation...... 4/98--6/98 -- -- -- 1,760 Common stock issued to acquire license..... 4/98 0.22 1,900,000 1,900 416,100 -- Common stock issued for services........... 5/98 0.22 200,000 200 43,800 -- Common stock issued in exchange for shareholder's payment of Company debt.... 5/98 1.00 200,000 200 199,800 -- Sale of common stock for cash.............. 5/98--6/98 1.00 303,000 303 302,697 -- Conversion of debt to capital contribution............................. 6/98 -- -- 100,000 -- Adjustment resulting from reverse acquisition.............................. 6/98 450,000 450 (310) -- Shares issued in business acquisition...... 6/98 1.00 400,000 400 399,600 -- Conversion of debt to common stock, including interest....................... 6/98 1.00 184,000 184 185,349 -- Stock issued for deferred compensation..... 6/98 1.00 100,000 100 99,900 (100,000) Sale of common stock for cash.............. 6/98 2.00 73,000 73 145,927 -- Comprehensive loss: Net loss................................. -- -- -- -- --------- --------- Total comprehensive loss................... --------- --------- ----------- --------- Balance at June 30, 1998................... 7,510,000 7,510 2,849,163 (112,320) Sale of common stock for cash.............. 7/98--9/98 2.00 949,800 950 1,898,650 -- Exercise of warrants....................... 7/98--9/98 2.00 132,100 132 264,068 -- Warrants granted for services.............. 10/98--6/99 2.00--5.50 -- -- 2,340,720 -- Stock compensation paid by shareholders.... 11/98 2.00 -- -- 400,000 -- Stock option compensation.................. -- -- 233,211 (233,211) Amortization of deferred compensation...... -- -- -- 282,052 Forfeited stock............................ (48,000) (48) (10,512) 10,560 Capital contributed upon extinguishment of debt..................................... 12/98 -- -- 200,000 -- Subsidiary convertible common stock issued in business acquisition.................. 1/99--4/99 3.00--4.50 -- -- 1,392,858 -- Options issued for legal services.......... 2/99 5.50 -- -- 479,708 -- Warrants granted for debt issue costs...... 2/99--6/99 3.50--5.50 -- -- 775,585 -- Shares issued for debenture conversion..... 3/99--5/99 2.50 320,000 320 950,680 -- Shares issued for services................. 10/98--6/99 2.00--5.50 366,500 366 1,261,834 -- Shares issued for debt issue costs......... 3/99 4.00 30,000 30 127,470 -- Sale of common stock for cash, net......... 3/99--6/99 3.00-5.50 614,334 615 2,300,763 -- Cashless exercise of warrants.............. 4/99 2,570 3 (3) -- Shares issued for technology............... 5/99 5.00 35,000 35 174,965 -- Comprehensive loss: Net loss................................. -- -- -- -- Foreign currency translation adjustment............................. -- -- -- -- Total comprehensive loss................... --------- --------- ----------- --------- DEFICIT ACCUMULATED ACCUMULATED TOTAL STOCK DURING OTHER SHAREHOLDERS' SUBSCRIPTION COMPREHENSIVE DEVELOPMENT COMPREHENSIVE EQUITY RECEIVABLE LOSS STAGE LOSS (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 Comprehensive loss: Net loss................................. -- (4,571,936) (4,571,936) -- (4,571,936) Total comprehensive loss................... (4,571,936) ---------- ---------- --------- ---------- ----------- Balance at June 30, 1998................... -- (4,571,936) -- (1,827,583) Sale of common stock for cash.............. -- -- -- 1,899,600 Exercise of warrants....................... -- -- -- 264,200 Warrants granted for services.............. -- -- -- 2,340,720 Stock compensation paid by shareholders.... -- -- -- 400,000 Stock option compensation.................. -- -- -- -- Amortization of deferred compensation...... -- -- -- 282,052 Forfeited stock............................ -- -- -- -- Capital contributed upon extinguishment of debt..................................... -- -- -- 200,000 Subsidiary convertible common stock issued in business acquisition.................. -- -- -- 1,392,858 Options issued for legal services.......... -- -- -- 479,708 Warrants granted for debt issue costs...... -- -- -- 775,585 Shares issued for debenture conversion..... -- -- -- 951,000 Shares issued for services................. -- -- -- 1,262,200 Shares issued for debt issue costs......... -- -- -- 127,500 Sale of common stock for cash, net......... -- -- -- 2,301,378 Cashless exercise of warrants.............. -- -- -- -- Shares issued for technology............... -- -- -- 175,000 Comprehensive loss: Net loss................................. -- (10,487,016) (10,487,016) -- (10,487,016) Foreign currency translation adjustment............................. -- (3,598) -- (3,598) (3,598) ---------- Total comprehensive loss................... (10,490,614) ---------- ---------- --------- ---------- -----------
F-29 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
COMMON STOCK ADDITIONAL PRICE -------------------- PAID-IN DEFERRED DATE PER SHARE SHARES AMOUNT CAPITAL COMPENSATION ---------- ---------- --------- --------- ------------- ------------- Balance at June 30, 1999................. 9,912,304 $ 9,913 15,639,160 (52,919) Common stock issued for prepaid advertising............................ 7/99 6.00 50,000 50 299,950 -- Common stock issued for services......... 7/99 6.00 2,400 2 14,398 -- Warrants issued for services............. 8/99 -- -- -- 53,534 -- Sale of common stock for cash, net....... 8/99-9/99 6.50-7.00 357,850 358 2,384,782 -- Common stock subscribed.................. 9/99 7.00 -- -- -- -- Options granted for services............. 7/99-9/99 700 -- 5,105 -- Stock option compensation................ 7/99-9/99 -- -- 5,685 (5,685) Amortization of deferred compensation.... -- -- -- 24,224 Comprehensive loss Net loss............................... -- -- -- -- Foreign currency transaction adjustment............................. -- -- -- -- Total comprehensive loss............... --------- --------- ----------- --------- Balance at September 30, 1999............ 10,322,554 10,323 18,402,614 (34,380) ========= ========= =========== ========= DEFICIT ACCUMULATED ACCUMULATED TOTAL STOCK DURING OTHER SHAREHOLDERS' SUBSCRIPTION COMPREHENSIVE DEVELOPMENT COMPREHENSIVE EQUITY RECEIVABLE LOSS STAGE LOSS (DEFICIT) -------------- -------------- ----------- -------------- ------------- Balance at June 30, 1999................. -- (15,058,952) (3,598) (533,604) Common stock issued for prepaid advertising............................ -- -- -- 300,000 Common stock issued for services......... -- -- -- 14,400 Warrants issued for services............. -- -- -- 53,534 Sale of common stock for cash, net....... -- -- -- 2,385,140 Common stock subscribed.................. (350,000) -- -- -- (350,000) Options granted for services............. -- -- -- 5,105 Stock option compensation................ -- -- -- Amortization of deferred compensation.... -- -- -- 24,224 Comprehensive loss Net loss............................... -- (3,832,055) (3,832,055) -- (3,832,055) Foreign currency transaction adjustment............................. -- (1,058) -- (1,058) (1,058) ---------- Total comprehensive loss............... (3,833,113) ---------- ---------- --------- ---------- ----------- Balance at September 30, 1999............ (350,000) (18,891,007) (4,656) (867,106) ========= ==========
See accompanying notes to unaudited consolidated financial statements. F-30 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE PERIOD FROM THREE MONTHS THREE MONTHS MARCH 4, 1998 ENDED ENDED (INCEPTION) THROUGH SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 ------------------ ------------------ -------------------- Cash flows from operating activities: Net loss............................................ $ (3,832,055) (1,812,840) (18,891,007) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization..................... 132,703 23,025 402,294 Common stock issued for services.................. 14,400 -- 1,648,280 Amortization and write-off of license fees........ -- -- 3,822,000 Loss on sale of equity securities................. -- 54,729 54,729 Amortization of deferred compensation............. 24,224 64,260 306,276 Gain on extinguishment of debt.................... -- -- (1,635,488) Stock compensation paid by shareholders........... -- -- 400,000 Interest expense on debt converted to equity...... -- -- 255,765 Interest expense on warrants issued as debt issue costs........................................... -- -- 535,535 Amortization of debt issue costs.................. 144,631 -- 288,631 Amortization of debt discount..................... 769,081 17,744 786,825 Options and warrants issued for services.......... 5,105 65,000 2,825,533 Provision for doubtful accounts................... -- 10,886 51,876 Write-off of note receivable...................... -- 800,000 800,000 Changes in assets and liabilities: Accounts receivable............................. (60,489) (41) (112,258) Prepaid offering costs.......................... (291,904) -- (617,791) Other assets.................................... (51,089) (33,542) (71,001) Accounts payable and accrued expenses........... 886,477 831,003 2,222,520 ------------ ---------- ---------- Net cash used in operating activities......... (2,156,738) (418,192) (6,962,769) ------------ ---------- ---------- Cash flows from investing activities: Cash assumed in business acquisition.............. -- -- 8,102 Loan for notes receivable......................... -- (800,000) (905,000) Repayment of notes receivable..................... 30,000 50,000 80,000 Purchase of equity securities..................... -- (100,733) (100,733) Proceeds from sale of equity securities........... -- 46,004 46,004 Purchase of property and equipment................ (229,331) (26,124) (581,994) ------------ ---------- ---------- Net cash used in investing activities......... (199,331) (830,853) (1,453,571) ------------ ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock, net....... 1,890,269 1,899,600 6,792,629 Proceeds from exercise of warrants................ -- 231,000 264,200 Proceeds from issuance of notes payable to related parties......................................... -- -- 232,429 Proceeds from issuance of notes payable and convertible debentures.......................... 957,450 -- 3,463,450 Cash paid for debt issue costs.................... (103,428) -- (284,446) Repayment of notes payable to related parties..... -- (728,630) (1,690,630) ------------ ---------- ---------- Net cash provided by financing activities..... 2,744,291 1,401,970 9,377,632 ------------ ---------- ---------- Net increase in cash.......................... 388,222 254,597 961,292 Cash at beginning of period........................... 569,472 -- -- Effect of exchange rate changes on cash balances...... (1,058) -- (4,656) ------------ ---------- ---------- Cash at end of period................................. $ 956,636 413,022 956,636 ============ ========== ========== Supplemental schedule of noncash activities: Issuance of common stock for business acquisition... $ -- -- 400,000 Issuance of convertible stock in business acquisition....................................... -- -- 1,392,858 Accrued asset purchases............................. -- -- 27,743 Conversion of debt to common stock.................. -- -- 1,084,000 Stock issued for prepaid advertising................ (300,000) -- (300,000) Common stock issued in exchange for shareholders' payment of Company debt........................... -- -- 400,000 Capital contributed upon extinguishment of debt..... -- -- 200,000 Common stock issued for internal-use software....... -- -- 175,000 Warrants issued for debt issue costs................ 144,871 -- 868,074 Warrants issued to settle an obligation............. 53,534 -- 53,534 Stock issued for debt issue costs................... -- -- 77,500 ============ ========== ==========
See accompanying notes to unaudited consolidated financial statements. F-31 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED 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 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 September 30, 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 commenced, however, minimal revenues have been generated. The Company has relied upon private placements of its stock and issuances of debt to generate funds to meet its operating needs and plans to continue pursuing financing in this manner during the next year. However, there are no assurances that such financing will be available when and as needed to satisfy current obligations. As such, substantial doubt exists as to whether the Company will continue as a going concern. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (B) REVENUE RECOGNITION Revenue generated from consulting services is recognized as services are provided. Web-site development revenues are recognized upon completion of each project. Services billed in advance are recorded as deferred revenue and recognized when revenue is earned. (C) BUSINESS SEGMENTS AND RELATED INFORMATION Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131) establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. Is also establishes standards for related disclosure about products and services, geographic areas and major customers. It replaces the "industry segment" concept of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," with a "management approach" concept as the basis for identifying reportable segments. The Company has only one operating segment. The Company formed its wholly-owned Canadian subsidiary, StoresOnline.com, in January 1999. Prior to that time, the Company only had operations in F-32 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the United States. All revenues during the three months ended September 30, 1999 and 1998 were generated in the United States. Substantially all of the Company's long-lived assets were located in the United States at September 30, 1999. (D) INVESTMENT SECURITIES The Company accounts for investment securities in accordance with Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115 requires investments to be classified based on management's intent in one of the three categories: held-to-maturity securities, available-for-sale securities and trading securities. Held-to-maturity securities are recorded at amortized cost. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported as a separate component of shareholders' equity and comprehensive income (loss). Trading securities are recorded at market value with unrealized gains and losses reported in operations. The Company's investment securities have been classified as available-for-sale. (E) FOREIGN CURRENCY TRANSLATION The financial statements of the Company's Canadian subsidiary, StoresOnline.com, have been translated into U.S. dollars from its functional currency in the accompanying consolidated financial statements in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Balance sheet accounts of StoresOnline.com are translated at year-end exchange rates while income and expenses are translated at weighted-average exchange rates for the period. Translation gains or losses that related to StoresOnline.com's net assets are shown as a separate component of shareholders' equity (deficit) and comprehensive income (loss). There were no gains or losses resulting from realized foreign currency transactions (transactions denominated in a currency other than the entities' functional currency) during the three months ended September 30, 1999 and 1998. (F) LOSS PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period in accordance with SFAS No. 128 "Earnings Per Share". Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings (loss) per share is computed similarly to fully diluted earnings (loss) per share pursuant to Accounting Principles Board (APB) Opinion No. 15. There were 4,502,455 options and 2,127,475 warrants to purchase shares of common stock that were outstanding during the three months ended September 30, 1999 which were not included in the computation of diluted loss per share because the impact would have been antidilutive. There were 333,286 options and 890,700 warrants to purchase shares of common stock that were outstanding during the three months ended September 30, 1998 which were not included in the computation of diluted loss per share because the impact would have been antidilutive. F-33 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (G) COSTS OF START-UP ACTIVITIES Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities," the Company expenses all the costs of start-up activities as incurred. (H) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reporting of revenues and expenses during the reporting periods to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (I) RECLASSIFICATIONS Certain amounts have been reclassified to conform with current year presentation. (4) NOTES RECEIVABLE AND NOTES RECEIVABLE FROM OFFICER During the period March 4, 1998 (inception) through June 30, 1998, the Company issued a $50,000 note receivable to a customer which was repaid during the year ended June 30, 1999. In July 1998 and August 1998, the Company advanced $800,000 to an entity with which the Company was in merger discussions. Certain Company officers and directors were minor shareholders of the potential merger entity. The merger was not consummated and the advance was deemed uncollectible and written-off during the three months ended September 30, 1998. During June 1999, the Company issued its chief executive officer, Keith Freadhoff, a non-interest bearing $30,000 note receivable. The note was repaid in July 1999. (5) NOTES PAYABLE In August and September 1999, the Company obtained bridge financing whereby 12% senior notes payable and 357,850 shares of common stock were issued generating proceeds of $2,744,290, net of $803,612 of issuance costs. The senior notes payable are due the earlier of April 30, 2000 or upon the close of a public sale of the Company's common stock. The Company also granted 149,375 warrants to purchase an equivalent number of shares of common stock at an exercise price of $10 per share as additional issuance costs. The warrants are exercisable for a period of four years commencing May 18, 2000. The fair value of the warrants on the dates of issuance was estimated to be $396,500 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected life of 2 years. The net proceeds from the bridge financing were allocated to the senior notes payable and common stock based on their relative fair values. Accordingly, $957,450 was recorded as notes payable, $2,035,140 as equity, net of $555,313 of stock issuance costs, and $248,299 as debt issuance costs. Under the Securities Act, the rules and regulations under the Securities Act, and the interpretations of the Commission, we may be required to offer rescission to investors in our May through September 1999 private placement. In September 1999, the Company issued a 12% senior note payable of $500,000 and 50,000 shares of common stock valued at $350,000 stock, however, the proceeds were received in October 1999. As a result, the Company recorded a stock subscription receivable of $350,000 at September 30, 1999. The note is due the earlier of April 30, 2000 or upon the close of a public sale of the F-34 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) NOTES PAYABLE (CONTINUED) Company's common stock. Under the Securities Act, the rules and regulations under the Securities Act, and the interpretations of the Commission, we may be required to offer rescission to investors in our May through September 1999 private placement. If the Company is required to rescind the May through September private placement in its entirety, the Company would be required to refund all of the gross proceeds of the May through September private placement to the investors. Even following the repayment of the notes, based on the Securities Act, the rule and regulations under the Securities Act, and the interpretations of the Commission, the investors in the May through September private placement may have the right to require the Company to repurchase the shares of common stock which they received in the May through September private placement if they can successfully argue that those shares were issued in lieu of a higher interest rate on those notes. (6) SHAREHOLDERS' EQUITY (DEFICIT) In July 1999, the Board of Directors adopted the 1999 Stock Option Plan for Non-Executives. An aggregate of 2,000,000 shares were reserved for issuance under the Plan. During the three months ended September 30, 1999, the Company granted 555,764 options under the Plan at exercise prices ranging from $5.25 to $12.50 per share. The Company also granted 200,000 options under the 1998 Executive Plan in July 1999 at an exercise price of $8.18 per share. In July 1999, the Company entered into a Cable Reseller and Mall agreement with MediaOne of Colorado, Inc. (MediaOne) whereby the Company also issued to MediaOne 50,000 shares of common stock and warrants to purchase 200,000 shares of common stock. The exercise price of the warrants is dependent upon the market price of the Company's common stock on the date that the warrants are earned under certain performance criteria. In July 1999, the Company issued 2,400 shares of common stock valued at $14,400 for services. (7) SUBSEQUENT EVENTS In October 1999, the Company issued a 12% senior note payable of $25,000 and 2,500 shares of common stock valued at $17,500. The note is due the earlier of April 30, 2000 or upon the close of a public sale of the Company's common stock. The Company also granted 1,250 warrants valued at $3,349. The net proceeds were allocated to the senior notes payable and common stock based on their relative fair value. Under the Securities Act, the rules and regulations under the Securities Act, and the interpretations of the Commission, we may be required to offer rescission to investors in our May through September 1999 private placement. If the Company is required to rescind the May through September private placement in its entirety, the Company would be required to refund all of the gross proceeds of the May through September private placement to the investors. Even following the repayment of the notes, based on the Securities Act, the rule and regulations under the Securities Act, and the interpretations of the Commission, the investors in the May through September private placement may have the right to require the Company to repurchase the shares of common stock which they received in the May through September private placement if they can successfully argue that those shares were issued in lieu of a higher interest rate on those notes. In October 1999, the Company issued 962,444 shares of common stock upon the cashless exercise of warrants, 1,200,000 shares of common stock to three executives upon the cancelation of 1,980,000 options, and 8,000 shares of common stock upon the conversion of $20,000 of convertible debentures. In November 1999, the Company issued 270 shares of common stock upon the exercise of warrants for $270. F-35 INDEPENDENT AUDITORS' REPORT The Members Infobahn Technologies, LLC (dba Digital Genesis): We have audited the accompanying balance sheets of Infobahn Technologies, LLC (a limited liability company) (dba Digital Genesis) as of December 31, 1997 and 1996 and the related statements of operations, members' equity (deficit) and cash flows for the year ended December 31, 1997 and the period from February 2, 1996 (inception) through December 31, 1996. 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 materials respects, the financial position of Infobahn Technologies, LLC (a limited liability company) (dba Digital Genesis) as of December 31, 1997 and 1996 and the results of its operations and its cash flows for the year ended December 31, 1997 and the period from February 2, 1996 (inception) through December 31, 1996 in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California July 2,1999 F-36 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 less allowance for doubtful accounts of $0 and $1,295 as of December 31, 1997 and 1996 respectively............................................... 75,174 20,351 Other current assets.................................................................... 3,450 3,450 ---------- ---------- Total current assets.................................................................. 85,407 27,450 Property and equipment, net (note 3)...................................................... 17,755 1,999 ---------- ---------- $ 103,162 29,449 ========== ========== LIABILITIES AND MEMBERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable........................................................................ $ 19,387 11,179 Accrued expenses........................................................................ 2,398 1,955 Deferred revenue........................................................................ 37,666 25,787 ---------- ---------- Total current liabilities............................................................. 59,451 38,921 ---------- ---------- Members' equity (deficit): Members' capital........................................................................ 43,979 34,906 ---------- ---------- Accumulated deficit..................................................................... (268) (44,378) ---------- ---------- 43,711 (9,472) ---------- ---------- Total members' equity (deficit)....................................................... $ 103,162 29,449 ========== ==========
See accompanying notes to financial statements. F-37 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM FEBRUARY 2, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
1997 1996 ---------- ---------- Service revenue........................................................................... $ 499,213 142,685 ---------- ---------- Operating expenses: Selling, general and administrative..................................................... 453,675 186,994 Depreciation............................................................................ 1,428 69 ---------- ---------- Total operating expenses.............................................................. 455,103 187,063 ---------- ---------- Net income (loss)..................................................................... $ 44,110 (44,378) ========== ==========
See accompanying notes to financial statements. F-38 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) STATEMENT OF MEMBERS' EQUITY (DEFICIT) YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM FEBRUARY 2, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
TOTAL MEMBERS' MEMBERS' ACCUMULATED EQUITY CAPITAL DEFICIT (DEFICIT) ----------- ------------ ------------- Capital contribution..................................................... $ 34,906 -- 34,906 Net loss................................................................. -- (44,378) (44,378) --------- ---------- --------- Balance at December 31, 1996............................................. 34,906 (44,378) (9,472) Capital contribution..................................................... 9,073 -- 9,073 Net income............................................................... -- 44,110 44,110 --------- ---------- --------- Balance at December 31, 1997............................................. $ 43,979 (268) 43,711 ========= ========== =========
See accompanying notes to financial statements. F-39 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM FEBRUARY 2, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
1997 1996 ---------- --------- Cash flows from operating activities: Net income (loss)......................................................................... $ 44,110 (44,378) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................................................ 1,428 69 Allowance for doubtful accounts......................................................... -- 1,295 Changes in assets and liabilities: Accounts receivable................................................................... (54,823) (21,646) Other current assets.................................................................. -- (3,450) Accounts payable...................................................................... 8,208 11,179 Accrued expenses...................................................................... 443 1,955 Deferred revenue...................................................................... 11,879 25,787 ---------- --------- Net cash provided by (used in) operating activities................................. 11,245 (29,189) Cash flows from investing activities--purchase of property and equipment.................... (17,184) (2,068) Cash flows from financing activities--Member contributions.................................. 9,073 34,906 ---------- --------- Increase in cash.................................................................... 3,134 3,649 Cash at beginning of period................................................................. 3,649 -- ---------- --------- Cash at end of period....................................................................... $ 6,783 3,649 ========== =========
See accompanying notes to financial statements. F-40 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) DESCRIPTION OF COMPANY Infobahn Technologies, LLC (dba Digital Genesis) (Digital Genesis or the Company) was formed on February 2, 1996 as a California limited liability company. The Company is primarily an internet consulting company, earning revenues from consulting services, website design and development and website hosting services. The Company is also engaged in developing electronic commerce applications. (B) REVENUE RECOGNITION Consulting and website hosting revenue is recognized as services are performed. Website design and development revenue is recognized upon completion of the contract. (C) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives of the assets, five years. (D) INCOME TAXES Digital Genesis is a limited liability company taxed for Federal purposes as a partnership; therefore, the net earnings of the Company are included in the taxable income of its owners. The Company may be subject to income taxes in certain jurisdictions that impose unincorporated business or income taxes. (E) FINANCIAL INSTRUMENTS The carrying values of cash, accounts receivable, accounts payable and accrued expenses at December 31, 1997 and 1996 approximated fair value due to the short maturity of those instruments. All financial instruments are held for purposes other than trading. (F) COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130), establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The Company does not have components of other comprehensive income. Therefore, comprehensive income is the same as net income (loss) in 1997 and the period from February 2, 1996 (inception) through December 31, 1996. (G) COSTS OF START-UP ACTIVITIES Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities," the Company expenses all of the costs of start-up activities as incurred. F-41 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (H) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) CONCENTRATION OF CREDIT RISK The Company primarily provided consulting services to technology based businesses. The Company had three customers for which revenues exceeded 10% of total revenues in 1997, accounting for approximately 84% or $417,000 of total service revenue for the year ended December 31, 1997. The Company had two customers for which revenues exceeded 10% of total revenues in 1996, accounting for approximately 25% or $37,000 of total service revenue for the period from February 2, 1996 (inception) through December 31, 1996. In addition, the three customer accounted for 81% of accounts receivable at December 31, 1997. There were no customers which exceeded 10% of accounts receivable at December 31, 1996. (3) PROPERTY AND EQUIPMENT Property and equipment is stated at costs and consists of the following at December 31, 1997 and 1996:
1997 1996 --------- --------- Computer equipment......................................................... $ 19,252 2,068 Less accumulated depreciation.............................................. 1,497 69 --------- --------- $ 17,755 1,999 ========= =========
(4) OPERATING LEASES The Company leased its office facilities under noncancellable operating leases, with the option to extend under month to month terms. As of December 31, 1997, there were no future minimum commitments under noncancelable leases. Rent expense was $43,800 and $28,093 during the year ended December 31, 1997 and the period from February 2, 1996 (inception) through December 31, 1996, respectively. (5) SUBSEQUENT EVENTS On June 2, 1998, Netgateway, Inc. acquired substantially all assets and assumed substantially all liabilities of the Company in exchange for 400,000 shares of Netgateway, Inc. common stock. F-42 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) UNAUDITED BALANCE SHEETS MARCH 31, 1998 AND DECEMBER 31, 1997
1998 1997 --------- --------- ASSETS Current assets: Cash.................................................................................... $ 4,057 6,783 Accounts receivable less allowance for doubtful accounts of $1,510 and $0 as of March 31, 1998 and December 31, 1997, respectively.......................................... 14,908 75,174 Other current assets.................................................................... -- 3,450 --------- --------- Total current assets................................................................ 18,965 85,407 Property and equipment net.................................................................. 18,894 17,755 --------- --------- $ 37,859 103,162 ========= ========= LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 1,962 19,387 Accrued expenses........................................................................ 9,083 2,398 --------- --------- Total current liabilities........................................................... 11,045 21,785 Members' equity............................................................................. 26,814 81,377 --------- --------- $ 37,859 103,162 ========= =========
See accompanying notes to unaudited financial statements. F-43 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) UNAUDITED STATEMENTS OF EARNINGS AND MEMBERS' EQUITY THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997 ---------- --------- Service revenue (note 2).................................................................... $ 41,820 79,553 Operating expenses: Selling, general and administrative....................................................... 67,270 38,777 Depreciation.............................................................................. 1,113 207 ---------- --------- Total operating expenses................................................................ 68,383 38,984 ---------- --------- Net income (loss)....................................................................... (26,563) 40,569 Members' equity, beginning of period........................................................ 81,377 16,315 Member draws................................................................................ (28,000) (17,200) Members' equity, end of period.............................................................. $ 26,814 39,684 ========== =========
See accompanying notes to unaudited financial statements. F-44 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) UNAUDITED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997 ---------- --------- Cash flows from operating activities: Net income (Loss)......................................................................... $ (26,563) 40,569 Adjustments to reconcile net income(loss) to net cash provided by operating activities: Depreciation............................................................................ 1,113 207 Changes in assets and liabilities: Accounts receivable................................................................... 60,266 (33,889) Other current assets.................................................................. 3,450 3,450 Accounts payable...................................................................... (17,425) 1,344 Accrued expenses...................................................................... 6,685 1,939 ---------- --------- Net cash provided by operating activities........................................... 27,526 13,620 ---------- --------- Cash flows from investing activities--purchase of property and equipment.................... (2,252) (69) ---------- --------- Cash flows from financing activities--member draws.......................................... (28,000) (17,200) ---------- --------- Decrease in cash.................................................................... (2,726) (3,649) Cash, beginning of period................................................................... 6,783 3,649 ---------- --------- Cash, end of period......................................................................... $ 4,057 -- ========== =========
See accompanying notes to unaudited financial statements. F-45 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) NOTES TO UNAUDITED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF COMPANY Infobahn Technologies, LLC dba Digital Genesis (Digital Genesis or the Company) was formed in February 1996 as a California limited liability company. The Company is primarily an internet consulting company, earning revenues from consulting services, website design & development and web hosting. The Company is also engaged in developing eCommerce applications. REVENUE RECOGNITION Revenue generated from consulting services is recognized as services are performed. INCOME TAXES Digital Genesis is a limited liability company taxed for Federal purposes as a partnership; therefore, the net earnings of the Company are included in the taxable income of its owners. The Company may be subject to income taxes in certain jurisdictions that impose unincorporated business or income taxes. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130) establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The Company does not have components of other comprehensive income. Therefore, comprehensive income is the same as net income for the three months ended March 31, 1998 and 1997. 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 of the costs of start-up activities as incurred. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-46 INFOBAHN TECHNOLOGIES, LLC (DBA DIGITAL GENESIS) NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED) 2. CONCENTRATION OF CREDIT RISK The Company primarily provided consulting services to technology based businesses. The following customers comprised more than 10% of total revenues, individually, during the three months ended March 31, 1998 and 1997.
1998 1997 ----------- ----------- Customer A...................................................................... 17% 62% Customer B...................................................................... 37% -- Customer C...................................................................... 21% 2%
Additionally, four customers accounted for 62% of accounts receivable at March 31, 1998 and two customers accounted for 70% of accounts receivable at March 31, 1997. SUBSEQUENT EVENTS On June 2, 1998, Netgateway, Inc. acquired certain assets and liabilities of the Company, in exchange for 400,000 shares of Netgateway, Inc. common stock. F-47 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 in the United States. /s/ ALLAN HOGENSON -------------------------------------- ALLAN HOGENSON Chartered Accountant Calgary, Alberta April 19, 1999 F-48 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 Rosenval Director - --------------------------------- David Rosenval , /s/ Jordi MacDonald Director - --------------------------------- Jordi MacDonald
F-49 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-50 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-51 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-52 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-53 SPARTAN MULTIMEDIA INC. UNAUDITED BALANCE SHEETS NOVEMBER 30, 1998 AND AUGUST 31, 1998
NOVEMBER 30, AUGUST 31, 1998 1998 ------------ ---------- ASSETS Current Cash................................................................................. $ 12,245 53,075 Accounts receivable.................................................................. 695 39,042 ---------- ---------- 12,940 92,117 Capital................................................................................ 9,910 10,714 ---------- ---------- $ 22,850 102,831 ========== ========== LIABILITIES Current Accounts payable and accrued liabilities............................................. $ 11,643 30,042 Due to shareholders.................................................................. 24,030 24,030 Due to Netgateway.................................................................... 3,079 -- ---------- ---------- 38,752 54,072 ---------- ---------- SHAREHOLDERS EQUITY Share Capital.......................................................................... 147,510 147,510 Retained Deficit....................................................................... (163,412) (98,751) ---------- ---------- (15,902) 48,759 ---------- ---------- $ 22,850 102,831 ========== ==========
See accompanying notes to unaudited financial statements. F-54 SPARTAN MULTIMEDIA INC. UNAUDITED STATEMENTS OF EARNINGS AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED NOVEMBER 31, 1998 AND FOR THE PERIOD SEPTEMBER 19, 1997 (INCEPTION) THROUGH NOVEMBER 30, 1997
1998 1997 ---------- --------- Revenue...................................................................................... $ 1,808 -- Expenses Advertising and promotion.................................................................. 16,947 -- Depreciation............................................................................... 804 -- Management Fees............................................................................ 39,067 -- Office..................................................................................... 2,274 -- Postage and Delivery....................................................................... 168 -- Professional Fees.......................................................................... 105 -- Telephone.................................................................................. 1,809 -- Travel..................................................................................... 5,295 -- ---------- --------- 66,469 -- ---------- --------- Net Loss and Retained Deficit................................................................ $ (64,661) -- ========== =========
See accompanying notes to unaudited financial statements. F-55 SPARTAN MULTIMEDIA INC. UNAUDITED STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE THREE MONTHS ENDED NOVEMBER 31, 1998 AND FOR THE PERIOD SEPTEMBER 19, 1997 (INCEPTION) THROUGH NOVEMBER 30, 1997
1998 1997 ---------- --------- Operating activities Net loss................................................................................. $ (64,661) -- Item not affecting cash Depreciation........................................................................... 804 -- ---------- --------- (63,857) -- Net change in non-cash working capital balances.......................................... 23,027 -- ---------- --------- (40,830) Financing activities....................................................................... -- -- Investment activities...................................................................... -- -- ---------- --------- Decrease in cash......................................................................... (40,830) -- Cash, beginning of period 53,075 -- ---------- --------- Cash, end of period $ 12,245 -- ========== =========
F-56 SPARTAN MULTIMEDIA, INC. NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1998 AND 1997 (UNAUDITED) 1. INCORPORATION The Company was incorporated under the Alberta Business Corporation Act on September 19, 1997 and commenced operations in December of 1997. 2. SIGNIFICANT ACCOUNTING POLICIES CAPITAL ASSETS Capital assets are recorded at cost and are depreciated using the following annual rates and methods: Declining Computer Equipment.......................... 30% Balance
3. RELATED PARTY TRANSACTIONS During the three months ended November 30,1998, the Company had business transactions with its shareholders. The particulars of these transactions and balances owing from or to these shareholders were as follows: Transactions during the period: Management Fees........................................... $31,026
4. CAPITAL ASSETS
COST AMORTIZATION NET BOOK VALUE --------- ------------- --------------- Computer equipment...................................................... $ 12,049 $ 2,139 $ 9,910
5. SHARE CAPITAL Authorized........................................................ Unlimited number of no par value common shares.................... Issued............................................................ 1,666,668 common shares........................................... $ 147,510 ---------
6. 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, 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 third parties, will be fully resolved. F-57 SPARTAN MULTIMEDIA, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOVEMBER 30, 1998 AND 1997 (UNAUDITED) 7. COMMITMENTS 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-58 INDEPENDENT ACCOUNTANT'S REPORT To the Board of Directors Video Calling Card, Inc. We have audited the accompanying balance sheet of Video Calling Card, Inc. (a development stage company) as of December 31, 1997 and 1996 and the related statements of operations, stockholders' equity and cash flows for the period from inception (April 13, 1995) through December 31, 1997. 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 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 financial statements referred to above present fairly, in all material respects, the financial position of Video Calling Card, Inc. (a development stage company) at December 31, 1997 and 1996 and the results of its operations and its cash flows for the period from inception (April 13, 1995) through December 31, 1997 in conformity with generally accepted accounting principles. Ted A. Madsen, CPA January 21, 1998 Salt Lake City, Utah F-59 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET DECEMBER 31, 1997 AND 1996
1997 1996 ---------- ---------- ASSETS Current Assets Cash.................................................................................. $ 1,227 $ 783 Prepaid expenses...................................................................... -- 400 Loan receivable....................................................................... -- 2,500 ---------- ---------- Total Current Assets................................................................ 1,227 3,883 Property & Equipment, less accumulated depreciation of $352 in 1996..................... -- 3,031 Other Assets Organization costs, less accumulated amortization of $220 in 1997 and $140 in 1998.... 180 260 ---------- ---------- Total Other Assets.................................................................. 180 260 ---------- ---------- TOTAL ASSETS.............................................................................. $ 1,407 $ 8,974 ========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities Accounts payable...................................................................... $ 2,500 $ -- ---------- ---------- Total Current Liabilities........................................................... 2,500 -- Stockholders' Equity (Deficit) Common stock, authorized 25,000,000 shares at $.001 par value, issued and outstanding 500,000 shares...................................................................... 900 900 Additional paid in capital............................................................ 27,450 27,450 (Deficit) Accumulated during development stage........................................ (29,443) (21,376) ---------- ---------- Total Stockholders' Equity (Deficit)................................................ (1,093) 6,974 ---------- ---------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY.................................................. $ 1,407 $ 6,974 ========== ==========
See accountant's report and notes to financial statements. F-60 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 --------- ---------- SALES Expenses Advertising............................................................................. $ -- $ 5,875 Amortization............................................................................ 80 80 Bank charges............................................................................ 119 89 Depreciation............................................................................ -- 352 Production expenses..................................................................... -- 8,348 Professional fees....................................................................... 4,350 1,663 Rent and office expenses................................................................ 1,200 3,596 Taxes and licenses...................................................................... 100 100 --------- ---------- Total Expenses........................................................................ 5,849 19,903 --------- ---------- (LOSS) FROM OPERATIONS...................................................................... (5,849) (19,903) OTHER INCOME (EXPENSE) Interest income........................................................................... 413 -- Loss on sale of furniture & equipment..................................................... (2,631) -- --------- ---------- Total Other Income (Expense).......................................................... (2,218) -- --------- ---------- NET (LOSS).................................................................................. $ (8,067) $ (19,903) ========= ==========
See accountant's report and notes to financial statements. F-61 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss.................................................................................. $ (8,067) $ (19,803) --------- ---------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........................................................... 80 432 Loss on sale of furniture and equipment................................................. 2,631 -- (Decrease) in prepaid expenses.......................................................... 400 (400) (Decrease) in loan receivable........................................................... 2,500 (2,500) Increase (Decrease) in accounts payable................................................. 2,500 (2,000) --------- ---------- Total Adjustments......................................................................... 8,111 (4,465) --------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES................................................... 44 (24,371) --------- ---------- CASH FLOW FROM FINANCING ACTIVITIES Purchase of equipment & furniture......................................................... -- (3,383) Proceeds from the sale of equipment....................................................... 400 -- --------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES................................................... 400 (3,383) --------- ---------- Net increase (Decrease) in Cash and Equivalents........................................... 444 (27,754) Cash and Equivalents, beginning of year................................................... 783 28,537 --------- ---------- Cash and Equivalents, end of year......................................................... $ 1,227 $ 783 ========= ==========
See accountant's report and notes to financial statements F-62 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY FROM DATE OF INCEPTION (APRIL 13, 1995) TO DECEMBER 31, 1997
COMMON STOCK ---------------------- PAID IN SHARES AMOUNT CAPITAL (DEFICIT) --------- ----------- --------- ---------- Original shares issued for cash....................................... 800,000 $ 600 $ 5,400 -- Proceeds from stock offering.......................................... 300,000 $ 300 30,000 -- Stock offering costs.................................................. -- $ -- 7,950 -- Net (Loss) From the Period of Inception (April 13, 1995) Through December 31, 1995................................................... -- $ -- -- $ (1,473) --------- --------- --------- ---------- Balance December 31, 1995............................................. 900,000 $ 900 $ 27,450 $ (1,473) Net (Loss) for the Year Ended December 31, 1996....................... -- -- -- $ (19,803) --------- --------- --------- ---------- Balance December 31, 1996............................................. 900,000 $ 900 $ 27,450 $ (21,378) Net (Loss) for the Year Ended December 31, 1997....................... -- $ -- $ -- $ (8,087) --------- --------- --------- ---------- Balance December 31, 1997............................................. 900,000 $ 900 $ 27,450 $ (29,443) ========= ========= ========= ==========
See accountant's report and notes to financial statements F-63 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 1. NATURE OF BUSINESS Video Calling Card, Inc. is a development stage company that was incorporated on April 13, 1995 under the laws of the State of Nevada. A development stage company is one in which most of the activities of the business are devoted to raising capital, developing markets, and starting production. The original business purpose of the Company was to engage in the marketing of a unique promotional video to businesses in use for marketing their products or services to select prospects. In 1997 the Company sold its assets associated with the video operation. The Company is now searching for new opportunities with potential for profit. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are used by the Company in preparing and presenting its financial statements: A. INCOME TAXES Although the Company recognizes the proper accounting for deferred income taxes pursuant to SFAS 109, the Company has determined that the tax loss generated in the years ended December 31, 1997 and 1996 is available for carry forward to future years. However, a deferred tax benefit has not been included in the financial statements because there is uncertainty regarding the realization of this tax benefit in the future. B. ORGANIZATION COSTS AND AMORTIZATION At the time of incorporation the Company incurred organization costs of $400, in accordance with generally accepted accounting principles these costs are being amortized over sixty (60) months beginning April 13, 1995 C. STOCK OFFERING In order to raise capital in the State of Nevada of $30,000 the Company completed a securities offering on December 20, 1995 in which 300,000 shares of common stock were sold at $.10 per share. The net proceeds will be used for the purpose of marketing a unique new promotional video to businesses to use for marketing their products or services to select prospects. The offering costs, including selling costs, filing fees, and legal fees have been treated as a reduction in the paid in capital amounts of the corporation. F-64 INDEPENDENT ACCOUNTANT'S REPORT To the Board of Directors Video Calling Card, Inc. We have audited the accompanying balance sheet of Video Calling Card, Inc. (a development stage company) as of December 31, 1996 and 1995 and the related statements of operations, stockholders' equity and cash flows for the period from inception (April 13, 1995) through December 31, 1996. 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 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 financial statements referred to above present fairly, in all material respects, the financial position of Video Calling Card, Inc. (a development stage company) at December 31, 1996 and 1995 and the results of of its operations and its cash flows for the period from inception (April 13, 1995) through December 31, 1996 in conformity with generally accepted accounting principles. Ted A. Madsen, CPA September 12, 1997 Salt Lake City, Utah F-65 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET DECEMBER 31, 1996 AND 1995
1996 1995 ---------- --------- ASSETS Current Assets Cash................................................................................... $ 783 $ 28,537 Prepaid expenses....................................................................... 400 -- Loan receivable........................................................................ 2,500 -- ---------- --------- Total Current Assets................................................................. 3,683 28,537 Property & Equipment, less accumulated depreciation of $352 in 1996...................... 3,031 -- Other Assets Organization costs, less accumulated amortization of $140 in 1996 and $60 in 1995...... 260 340 ---------- --------- Total Other Assets................................................................... 260 340 ---------- --------- TOTAL ASSETS............................................................................... $ 6,974 $ 28,877 ========== ========= LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities Accounts payable....................................................................... $ -- $ 2,000 ---------- --------- Total Current Liabilities............................................................ -- 2,000 Stockholders' Equity Common stock, authorized 25,000,000 shares at $.001 par value, issued and outstanding 900,000 shares....................................................................... 900 900 Additional paid in capital............................................................. 27,450 27,450 (Deficit) accumulated during development stage......................................... (21,376) (1,473) ---------- --------- Total Stockholders' Equity (Deficit)................................................. 6,974 26,877 ---------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY................................................... $ 6,974 $ 28,877 ========== =========
See accountant's report and notes to financial statements. F-66 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS FOR THE PERIOD FROM INCEPTION (APRIL 13, 1995) THROUGH DECEMBER 31, 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1996
1996 1995 ---------- --------- SALES Expenses Advertising............................................................................. $ 5,675 $ -- Amortization............................................................................ 80 60 Bank charges............................................................................ 89 72 Depreciation............................................................................ 352 -- Production expenses..................................................................... 8,348 -- Professional fees....................................................................... 1,663 1,200 Rent and office expenses................................................................ 3,596 56 Taxes and licenses...................................................................... 100 85 ---------- --------- Total Expenses........................................................................ 19,903 1,473 ---------- --------- NET (LOSS) FROM OPERATIONS.................................................................. $ (19,903) $ (1,473) ========== =========
See accountant's report and notes to financial statements. F-67 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS FOR THE PERIOD FROM INCEPTION (APRIL 13, 1995) THROUGH DECEMBER 31, 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1996
1996 1995 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss................................................................................. $ (19,903) $ (1,473) ---------- --------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................................................... 432 60 (Increase) in prepaid expenses......................................................... (400) -- (Increase) in loan receivable.......................................................... (2,500) -- (Increase) in other assets............................................................. -- (400) Increase (decrease) in accounts payable................................................ (2,000) 2,000 ---------- --------- Total Adjustments........................................................................ (4,468) 1,660 ---------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................................................. (24,371) 187 ---------- --------- CASH FLOW FROM FINANCING ACTIVITIES Purchase of equipment & furniture........................................................ (3,383) -- Net proceeds from issuance of common stock............................................... -- 28,350 ---------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES.................................................. (3,383) 28,350 ---------- --------- Net increase (decrease) in cash and equivalents.......................................... (27,754) 28,537 Cash and equivalents, beginning of year.................................................. 28,537 -- ---------- --------- Cash and equivalents, end of year........................................................ $ 783 $ 28,537 ========== =========
See accountant's report and notes to financial statements F-68 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY DECEMBER 31, 1996 AND 1995
COMMON STOCK ---------------------- PAID IN ACCUMULATED SHARES AMOUNT CAPITAL (DEFICIT) --------- ----------- --------- ------------ Original shares issued for cash..................................... 600,000 $ 600 $ 5,400 -- Proceeds from stock offering........................................ 300,000 $ 300 30,000 -- Stock offering costs................................................ -- $ -- 7,950 -- Net (loss) from the period of inception (April 13, 1995) through December 31, 1995................................................. -- $ -- -- $ (1,473) --------- --------- --------- ---------- Balance December 31, 1995........................................... 900,00 $ 900 $ 27,450 $ (1,473) ========= ========= ========= ========== Net (Loss) for the Year Ended December 31, 1996..................... -- -- -- $ (19,903) --------- --------- --------- ---------- Balance December 31, 1996........................................... 900,000 $ 900 $ 27,450 $ (21,376) ========= ========= ========= ==========
See accountant's report and notes to financial statements F-69 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1. NATURE OF BUSINESS Video Calling Card, Inc. is a development stage company that was incorporated on April 13, 1995 under the laws of the State of Nevada. A development stage company is one in which most of the activities of the business are devoted to raising capital, developing markets, and starting production. The business purpose of the Company is to engage in the marketing of a unique new promotional video to businesses to use for marketing their products or services to select prospects. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are used by the Company in preparing and presenting its financial statements: A. INCOME TAXES Although the Company recognizes the proper accounting for deferred income taxes pursuant to SFAS 109, the Company has determined that the tax loss generated in the years ended December 31, 1996 and 1995 is available for carry forward to future years. However, a deferred tax benefit has not been included in the financial statements because there is uncertainty regarding the realization of this tax benefit in the future. B. ORGANIZATION COSTS AND AMORTIZATION At the time of Incorporation the Company incurred organization costs of $400. In accordance with generally accepted accounting principles these costs are being amortized over sixty (60) months beginning April 13, 1995. C. STOCK OFFERING In order to raise capital in the State of Nevada of $30,000 the Company completed a securities offering on December 20, 1995 in which 300,000 shares of common stock were sold at $.10 per share. The net proceeds will be used for the purpose of marketing a unique new promotional video to businesses to use for marketing their products or services to select prospects. The offering costs, including selling costs, filing fees, and legal fees have been treated as a reduction in the paid in capital amounts of the corporation. F-70 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED BALANCE SHEET MARCH 31, 1998 AND DECEMBER 31, 1997
1998 1997 --------- --------- ASSETS Current Assets Cash......................................................................................... $ 294 $ 1,227 --------- --------- Total Current Assets....................................................................... $ 294 $ 1,227 Other Assets Organization costs, less accumulated amortization of $240 in 1998 and $220 in 1997........................................................................... 160 180 --------- --------- Total Other Assets......................................................................... 160 180 --------- --------- TOTAL ASSETS..................................................................................... $ 454 $ 1,407 ========= =========
F-71 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED BALANCE SHEET MARCH 31, 1998 AND DECEMBER 31, 1997
1998 1997 --------- ---------- LIABILITIES & STOCKHOLDERS DEFICIT Current Liabilities Accounts payable....................................................................... $ 2,500 $ 2,500 --------- ---------- Total Current Liabilities............................................................ 2,500 2,500 Stockholders' Equity (Deficit) Common stock, authorized 25,000,000 shares at $.001 par value, issued and outstanding 900,000 shares....................................................................... 900 900 Additional paid in capital............................................................. 27,450 27,450 (Deficit) Accumulated during development stage......................................... (30,396) (29,443) --------- ---------- Total Stockholders Deficit........................................................... (2,046) (1,093) --------- ---------- TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT.................................................. $ 454 $ 1,407 ========= ==========
F-72 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997 --------- --------- SALES Expenses Amortization............................................................................... 20 20 Bank Charges............................................................................... 30 30 Professional Fees.......................................................................... 903 -- Real and office expense.................................................................... -- 400 --------- --------- Total Expenses........................................................................... 953 450 --------- --------- (LOSS) FROM OPERATIONS....................................................................... (953) (450) OTHER INCOME (EXPENSE) Loss on sale of furniture & equipment...................................................... -- (2,631) --------- --------- Total Other Income (Expense)............................................................. -- (2,631) --------- --------- NET (LOSS)................................................................................... $ (953) (3,081) ========= =========
F-73 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss..................................................................................... $ (953) $ (3,081) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................................................ 20 20 Loss on sale of furniture and equipment.................................................. -- 2,631 (Decrease) in prepaid expenses........................................................... -- 400 --------- --------- Total Adjustments............................................................................ 20 3,051 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES...................................................... (933) (30) --------- --------- CASH FLOW FROM FINANCING ACTIVITIES............................................................ Proceeds from the sale of equipment.......................................................... -- 400 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES...................................................... -- 400 --------- --------- Net Increase (Decrease) in Cash and Equivalents.............................................. (933) 370 Cash and Equivalents, beginning of year...................................................... 1,227 783 --------- --------- Cash and Equivalents, March 31st............................................................. $ 294 $ 1,153 ========= =========
F-74 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED STATEMENT OF STOCKHOLDERS' EQUITY FROM DATE OF INCEPTION (APRIL 13, 1995) TO MARCH 31, 1996
COMMON STOCK ---------------------- PAID IN SHARES AMOUNT CAPITAL (DEFICIT) --------- ----------- --------- ---------- Original shares issued for cash....................................... 600,000 $ 600 $ 5,400 $ -- Proceeds from stock offering.......................................... 300,000 $ 300 $ 30,000 $ -- Stock offering costs.................................................. -- $ -- $ 7,950 $ -- Net (Loss) From the Period of Inception (April 13, 1995) Through December 31, 1995................................................... -- $ -- $ -- $ (1,473) --------- --------- --------- ---------- Balance December 31, 1995............................................. 900,000 $ 900 $ 27,450 $ (1,473) Net (Loss) for the Year ended December 31, 1996....................... -- $ -- $ -- $ (19,903) --------- --------- --------- ---------- Balance December 31, 1996............................................. 900,000 $ 900 $ 27,450 $ (21,376) Net (Loss) for the Three Months ended March 31, 1997.................. -- $ -- $ -- $ (3,081) --------- --------- --------- ---------- Balance March 31, 1997................................................ 900,000 $ 900 $ 27,450 $ (24,457) Net (Loss) for the Nine Months ended December 31, 1997................ -- $ -- $ -- $ (4,986) --------- --------- --------- ---------- Balance December 31, 1997............................................. 900,000 $ 900 $ 27,450 $ (29,443) Net (Loss) for the Three Months ended March 31, 1995.................. -- $ -- $ -- $ (953) --------- --------- --------- ---------- Balance March 31, 1996................................................ 900 $ 900 $ 27,450 $ (30,396) ========= ========= ========= ==========
F-75 VIDEO CALLING CARD, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 1. NATURE OF BUSINESS Video Calling Card, Inc. is a development stage company that was incorporated on April 13, 1995 under the laws of the State of Nevada. A development stage company is one in which most of the activities of the business are devoted to raising capital, developing markets, and starting production. The original business purpose of the Company was to engage in the marketing of a unique promotional video to businesses to use for marketing their products or services to select prospects. In 1997 the Company sold its assets associated with the video operation. The Company is now searching for new opportunities with potential for profit. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are used by the Company in preparing and presenting its financial statements: A. INCOME TAXES Although the Company recognizes the proper accounting for deferred income taxes pursuant to SFAS 109, the Company has determined that the tax loss generated in the years ended December 31, 1997 and 1996 is available for carry forward to future years. However, a deferred tax benefit has not been included in the financial statements because there is uncertainty regarding the realization of this tax benefit in the future. B. ORGANIZATION COSTS AND AMORTIZATION At the time of incorporation the Company incurred organization costs of $400. In accordance with generally accepted accounting principles these costs are being amortized over sixty (60) months beginning April 13, 1995. C. STOCK OFFERING In order to raise capital in the State of Nevada of $30,000 the Company completed a securities offering on December 20, 1995 in which 300,000 shares of common stock were sold at $.10 per share. The net proceeds will be used for the purpose of marketing a unique new promotional video to businesses to use for marketing their products or services to select prospects. The offering costs, including selling costs, filing fees, and legal fees have been treated as a reduction in the paid in capital amounts of the corporation. F-76 INSIDE BACK COVER Graphical depictions of the present business of customers of Netgateway, the ICC Framework, supplies and customer interfaces, functional components offered by Netgateway, and customers and suppliers. Text reads as follows: "The Internet Commerce Center-TM-. Plug into the proven system that has been refined through countless applications. "Every business is now challenged by the immense opportunity of eCommerce. But what is the best way to extend an enterprise to this new way of doing business? "Every eCommerce transaction requires user interfaces. Netgateway-TM- customizes its existing software to the company's specifications. "The existing business is now electronically wrapped within the ICC-TM-. It acts as the "hub" of the system. "Now Netgateway introduces and further customizes components of the ICC-TM- that give the enterprise its unique eCommerce capability. The enterprise with the ICC-TM- can now establish links, or "spokes" to suppliers and customers with special protocols that enable entities to do business electronically." - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY THESE SHARES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL. NETGATEWAY, INC. [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 II-1 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 II-2 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. II-3 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 II-4 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 Maylena Burchmont in payment of consulting services. The certificates evidencing the warrants and any securities underlying the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On October 21, 1998, Netgateway issued warrants exercisable for an aggregate of 300,000 shares of common stock to Howard Effron in payment of consulting services. The certificates evidencing the warrants and any securities underlying the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. In connection with a Consulting and Advisory Agreement with Richard Berns, on October 21, 1998, Netgateway issued 25,000 shares of common stock in payment of advisory services. The certificates evidencing the securities underlying the units were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. In payment for merger and acquisition advisory services related to the acquisition of Spartan Multimedia, in November 1998, Netgateway issued 10,000 shares of common stock to the Chaffetz Family Trust. The certificates evidencing the securities underlying the units were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On November 20, 1998, Netgateway issued warrants exercisable for an aggregate of (i) 50,000 shares to each of Keith D. Freadhoff, Scott Beebe, Donald D. Danks, and Michael Vanderhoff and II-5 (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. This consulting agreement was terminated in June 1999 and Stock Maker returned these shares to the authorized, but unissued, common stock of Netgateway. In connection with Netgateway's then pending private offering of convertible debentures, on February 15, 1999, Netgateway issued warrants exercisable for an aggregate of (i) 129,000 shares to Dean Dumont,(ii) 12,750 shares to Todd Torneo, (iii) 3,000 shares to Tradeway Securities Group, (iv) 4,250 to John Borcich, (v) 66,800 shares to Y2K Capital, (vi) 35,000 to Roxanne Melotte, and (vii) 32,500 shares to Michael Vanderhoff. The certificates evidencing the warrants and any securities underlying the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. II-6 In payment for financial consulting services, on February 15, 1999, Netgateway issued an aggregate of 30,000 shares of common stock to two individuals. The certificates evidencing the shares of common stock were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. These shares were subsequently returned to the authorized, but unissued, common stock of Netgateway. In March 1999, Netgateway closed a private offering of $1 million principal amount of convertible debentures for gross proceeds of $1 million. The debentures are convertible into shares of common stock at the conversion price of $2.50 per share. These debentures mature December 31, 1999. The certificates evidencing debentures, as well as any shares of common stock issued upon the conversion thereof, were appropriately legended. In the opinion of Netgateway, the offer and the sale of the debentures was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. All of the investors in the offering were "accredited investors" as defined in Rule 501 under the Securities Act. On March 17, 1999, Netgateway issued warrants exercisable for an aggregate of 25,000 shares of common stock to XOOM.com, Inc. These warrants were exercisable at $12.00 per share and were exercisable on a cashless basis. The warrants were exercised in full on a cashless basis on April 14, 1999 for an aggregate of 2,570 shares of common stock. The certificates evidencing the warrants, as well as any shares of common stock issued upon the exercise thereof, were appropriately legended. In the opinion of Netgateway, the offer and the sale of the debentures was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On March 31, 1999, Netgateway issued 600 shares of common stock to Steve Jorgenson, a professional golfer, in connection with Mr. Jorgenson acting as a spokesman for Netgateway. On March 31, 1999, Netgateway approved the issuance of 5,000 shares of common stock to Gerold Czuchna and 5,000 shares of common stock to Web Walker Media Link, in connection with Mr. Czuchna performing consulting services. The certificates evidencing the shares were appropriately legended. In the opinion of Netgateway, the offer and sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On March 31, 1999, Netgateway approved the issuance of 10,000 shares of common stock to Jason E. Chaffetz and Julie Marie Chaffetz, Trustees of the Chaffetz Family Trust, udo 4/14/96, as compensation for Mr. Chaffetz's efforts in connection with the acquisition of Spartan Multimedia, Inc. The certificates evidencing the shares were appropriately legended. In the opinion of Netgateway, the offer and sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. In April 1999, Netgateway closed a private offering of 329,000 shares of its common stock. The shares were sold at the price of $3.00 per share, resulting in gross proceeds of $987,000. Each of the investors agreed to acquire the shares for investment purposes only and not with a view to distribution. The certificates evidencing the shares of common stock were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. All of the investors in the offering were "accredited investors" as defined in Rule 501 under the Securities Act. On April 1, 1999, Netgateway issued warrants exercisable for an aggregate of 5,000 shares of common stock to Andrew Glashow in order to induce such individual to make a loan to Netgateway. The certificates evidencing the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. II-7 On April 1, 1999, Netgateway issued warrants exercisable for an aggregate of 26,050 shares of common stock to Richard Berns in connection with Netgateway's convertible debenture private offering. The certificates evidencing the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On April 16, 1999, Netgateway authorized the issuance of warrants to purchase 50,000 shares of common stock of Netgateway to each of Donald Danks, Keith Freadhoff, Michael Vanderhoof and Scott Beebe, all in connection with the settlement of a dispute between Michael Khaled and Netgateway concerning the issuance of certain common stock of the corporation to Khaled. In addition, Netgateway authorized the issuance of a warrant to purchase 100,000 shares of common stock of Netgateway to Michael Khaled in connection with the settlement. The certificates evidencing the warrants were appropriately legended. In the opinion of Netgateway, the offer and sale of the warrants was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On April 26, 1999, Netgateway issued 25,000 shares of common stock to Berns Capital, L.P. for consulting services provided by Richard A. Berns. The certificates evidencing the shares were appropriately legended. In the opinion of Netgateway, the offer and sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On April 26, 1999, Netgateway issued 25,000 shares of common stock to Todd Torneo for consulting services provided by Mr. Torneo. The certificates evidencing the shares were appropriately legended. In the opinion of Netgateway, the offer and sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On April 26, 1999, Netgateway issued 25,000 shares of common stock to Joseph Py in consideration for Mr. Py making available $150,000 to Netgateway. The certificates evidencing the shares were appropriately legended. In the opinion of Netgateway, the offer and sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On April 26, 1999, Netgateway issued an aggregate of 30,000 shares of common stock in order to induce Joseph Py and Robert Ciri to make loans to Netgateway. The certificates evidencing the shares of common stock were appropriately legended. In the opinion of Netgateway, the offer and the sale of the debentures was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On May 3, 1999, Netgateway issued warrants exercisable for an aggregate of 5,000 shares of common stock to GMR for consulting services. The certificates evidencing the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On May 15, 1999, Netgateway issued to Shopping Planet 35,000 shares of common stock in connection with the acquisition by Netgateway of the technology of Shopping Planet. On May 18 and June 4, 9, and 22, 1999, Netgateway closed a private offering of an aggregate of 57.6 units, and in August and on September 24, 1999 Netgateway conducted another closing of this offering of 71.57 units, in each case each unit consisting of $50,000 principal amount of Series A 12% Senior Notes due 2000 and 5,000 shares of common stock. The notes mature on the earlier of April 30, 2000 and the date of the closing of this offering. The units were sold at the price of $50,000 per unit, resulting in gross proceeds of $6,608,500. Each of the investors agreed to acquire the shares for investment purposes only and not with a view to distribution. The certificates evidencing the securities underlying the units were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. All of the investors in the offering were "accredited investors" as defined in Rule 501 under the Securities Act. In addition, in connection with this private offering, Netgateway granted to II-8 Cruttenden Roth and the other agents responsible for placing such securities warrants exercisable for an aggregate of 147,750 shares of common stock at an exercise price of $10.00 per share. In June 1999, Netgateway issued to Nida & Maloney, a law firm, three units identical to the units described in the immediately preceding paragraph, in satisfaction of its obligation for legal fees. On June 15, 1999, Netgateway approved the issuance of 70,000 shares of common stock to Glashow Associates LLC in consideration for consulting services rendered to Netgateway, which shares were issued at the direction of Glashow Associates as follows: 30,000 shares to Andrew Glashow, 3,000 shares to Diana Glashow, 2,000 shares to Bernard Brown and 35,000 shares to Robert Ciri. In connection with the services rendered by Glashow Associates, Netgateway also approved the issuance of 150,000 warrants for the purchase of common stock in the following amounts: 37,500 to Andrew Glashow, 37,500 to Robert Ciri and 75,000 to Corporate Management Consultants, Inc. The certificates evidencing the securities were appropriately legended. In the opinion of Netgateway, the offer and sale of the securities was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On June 16, 1999, Netgateway approved the issuance of 125,000 warrants for the purchase of common stock to Howard P. Effron for consulting services provided by Mr. Effron, which warrants were issued as follows at the direction of Mr. Effron: 92,000 to Mr. Effron and 33,000 to Richard A. Berns. The certificates evidencing the shares were appropriately legended. In the opinion of Netgateway, the offer and sale of the warrants was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On July 26, 1999, Netgateway issued 50,000 shares of common stock and warrants for the purchase of up to an additional 200,000 shares of common stock to MediaOne of Colorado, Inc. in connection with the consummation of a business transaction between Netgateway and MediaOne. The certificates evidencing the securities were appropriately legended. In the opinion of Netgateway, the offer and sale of the securities was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On July 26, 1999, Netgateway issued 700 shares of common stock to Steve Jorgenson, a professional golfer, in connection with Mr. Jorgenson acting as a spokesman for Netgateway. The certificates evidencing the shares were appropriately legended. In the opinion of Netgateway, the offer and sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On July 26, 1999, Netgateway issued 28,000 warrants for purchase of common stock to Burchmont Equities Group for consulting services performed. The certificates evidencing the warrants were appropriately legended. In the opinion of Netgateway, the offer and sale of the warrants was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. In October 1999, Netgateway issued to each of Keith D. Freadhoff, its Chairman of the Board of Directors, Donald M. Corliss, its President, and David Bassett-Parkins, its Chief Financial and Chief Operating Officer, 400,000 shares of common stock, subject to forfeiture in exchange for options granted to such individuals under its existing stock option plans. In October 1999, Netgateway issued an aggregate of 962,444 shares of common stock upon the exercise on a cashless basis of an aggregate of 1,184,730 warrants then outstanding. Each of such transactions was exempt from registration under the Securities Act by virtue of the provisions of Section 4(2) and/or Section 3(b) of the Securities Act. Each purchaser of the securities described below has represented that he/she/it understands that the securities acquired may not be sold or otherwise transferred absent registration under the Securities Act or the availability of an exemption II-9 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. - ----------- 1.1** Form of Underwriting Agreement 3.1** Certificate of Incorporation 3.2** Bylaws 3.3 Certificate of Ownership and Merger 3.4 Articles of Merger 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. 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, 1998, 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
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EXHIBIT NO. --------- 10.17** Letter Agreement, dated June 3, 1998, between Netgateway and Nida & Maloney, including Terms of Retention and Legal Fee Services Option 10.18** Consulting and Advisory Agreement, dated October 20, 1998, between Burchmont Equities Group, Inc. and Netgateway 10.19** Consulting and Advisory Agreement, dated November 1, 1998, between North Coast Securities Corp. and Netgateway 10.20** Consulting Agreement, dated December 24, 1998, between Netgateway and Glashow Associates 10.21** Consulting Agreement, dated July 1, 1999, between Netgateway and Glashow Associates LLC 10.22** Amended and Restated Subordinated Secured Promissory Note, dated August 28, 1998, from Admor Memory Corp. and Netgateway, including the Security Agreement, dated as of August 28, 1998, among Admor Memory Corp., Admor Memory, Ltd. and Netgateway 10.23[R] Agreement, dated February 25, 1999, between Netgateway, Inc. and Xoom.com 10.24[R] Electronic Commerce Services Agreement, dated as of March 24, 1999, between Netgateway, Inc. and CB Richard Ellis 10.25[R] Reseller and Mall Agreement, dated as of May 20, 1999, among Netgateway, Inc., StoresOnline.com, Inc. and WirelessOne, Inc. 10.26[R] Electronic Commerce Services Agreement, dated as of June 1999, between Netgateway, Inc. and Reliant Innovations, Inc. 10.27[R] Cable Reseller and Mall Agreement, dated as of July 26, 1999, among StoresOnline.com, Inc., Netgateway, Inc. and MediaOne of Colorado, Inc. 10.28[R] Stock Purchase Agreement, dated as of July 16, 1999, between Netgateway, Inc. and MediaOne of Colorado, Inc. 10.29[R] Distributor Mall/Storefront Agreement, dated as of August 25, 1999, between Netgateway, Inc. and BuySellBid.com, Inc. 10.30[R] Joint Marketing and Promotion Agreement, dated August 25, 1999, between Netgateway, Inc. and BuySellBid.com, Inc. 10.31[R] Cable Reseller and Mall Agreement, dated as of August 30, 1999 among Netgateway, Inc., StoresOnline and B2BStores.com, Inc. 10.32[R] Electronic Commerce Services Agreement, dated as of July 28, 1999, between Netgateway, Inc. and B2BStores.com, Inc. 10.33** Form of Employment Agreement between Netgateway, Inc. and Roy W. Camblin III 10.34[R] Reseller and Mall Agreement dated as of July 27, 1999, among Frontiervision, Netgateway, Inc. and StoresOnline.com, Inc. 10.35** 1999 Stock Option Plan for Non-Executives. 10.36** Employment Agreement, dated as of November 18, 1998, between Netgateway and Luis Marcelo Povalo 10.37** Consulting Agreement, dated as of October 14, 1998, between Netgateway, Inc. and Richard A. Beras 10.38** Letter, dated December 9, 1998, from Netgateway, Inc. to Jerry Czuchan
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EXHIBIT NO. --------- 10.39** Promissory Note, dated March 15, 1999, in the principal amount of $50,000 payable to Joseph Py 10.40** Promissory Note, dated March 15, 1999, in the principal amount of $30,000 payable to Robert E. Ciri 10.41** Common Stock Purchase Warrant, dated November 20, 1998, issued to Sean Beebe 10.42** Common Stock Purchase Warrant, dated November 20, 1998, issued to Donald Danks 10.43** Common Stock Purchase Warrant, dated November 20, 1998, issued to Keith D. Freadhoff 10.44** Common Stock Purchase Warrant, dated November 20, 1998, issued to Michael V. Vanderhoof 10.45** Master Trust--Oceangate Trust, dated as of December 10, 1998, among Keith Freadhoff, as the Trustee and the Beneficiaries 10.46** Form of Individual Trust--Oceangate Trust, between Keith D. Freadhoff as Trustor, and Keith D. Freadhoff, as Trustee, for the benefit of the Beneficiary 10.47** Courseware Reproduction License Agreement, dated as of October 29, 1997, between Prosoft I-Net Solutions, Inc. and S.T.E.P.S., as amended by Amendment No. 1 to the Courseware Reproduction License Agreement, and as amended by Amendment No. 2 to the Courseware Reproduction License Agreement 10.48** Assignment of License, dated as of April 1, 1998, between S.T.E.P.S. and Netgateway, Inc. 10.49** Courseware Reproduction License Agreement, dated as of January 20, 1997, between Prosoft I-Net Solutions, Inc. and Training Resources International, Inc., as amended by Amendment No. 1 to the Courseware Reproduction License Agreement 10.50** Sublicense Agreement, dated as of March 27, 1998 between Netgateway and Training Resources International, Inc. 10.51** Settlement and Release Agreement, entered into April 19, 1999 among Prosoft Training.com (formerly Prosoft I-Net Solutions, Inc., Training Resources International, Inc., S.T.E.P.S., Netgateway, Inc., Michael Khaled, Scott Beebe and Donald Danks 10.52** Form of Employment Agreement, dated as of June 1, 1999 between Netgateway, Inc. and John Wendel 10.53 Internet Services Agreement, dated as of October 25, 1999 between Netgateway Inc. and Bergen Brudswig Drug Company 23.1 Consent of KPMG LLP 23.2** Consent of KPMG LLP 23.3 Consent of Allan Hogenson, Chartered Accountant 23.4 Consent of Ted A. Madsen, Certified Public Accountant 23.5 Consent of Brock Silverstein LLC (contained in the Opinion filed as Exhibit 5.1) 24.1** Power of Attorney 24.3** Power of Attorney of William Brock 24.4** Power of Attorney of Roy W. Camblin III 24.5** Consent of Roy W. Camblin III 24.6** Consent of James Demetriades 24.7** Consent of John Dillon
II-12 (b) Please note that certain confidential technical and commercial information has been redacted from some of the exhibits attached to this Form S-1 in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission and may be obtained in accordance with the Freedom of Information Act. Exhibits to this Form S-1 which have had confidential information redacted are indicated as follows on the exhibit list above: "[R]." Within the exhibits to this Form S-1, redacted material is indicated by the following sign where such redacted text would have appeared in the relevant exhibit: "[**REDACTED**]" - ------------------------ * To be filed by amendment. ** Previously filed. 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. (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) II-13 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. II-14 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 Pre-Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Long Beach, California on November 12, 1999. NETGATEWAY, INC. By: /s/ KEITH D. FREADHOFF ----------------------------------------- Name: Keith D. Freadhoff Title: Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ KEITH D. FREADHOFF - ------------------------------ Chairman of the Board of November 12, 1999 Keith D. Freadhoff Directors Chief Executive Officer * and Chief Information - ------------------------------ Officer (Principal November 12, 1999 Roy W. Camblin III Executive Officer) Chief Financial Officer, * Chief Operating Officer, - ------------------------------ and Director (Principal November 12, 1999 David Bassett-Parkins Financial and Accounting Officer) * - ------------------------------ President and Director November 12, 1999 Donald M. Corliss, Jr. * - ------------------------------ Director November 12, 1999 Scott Beebe * - ------------------------------ Director November 12, 1999 William Brock * - ------------------------------ Director November 12, 1999 Ronald Spire
*By: /s/ KEITH D. FREADHOFF ------------------------- Keith D. Freadhoff ATTORNEY-IN-FACT
II-15 EX-3.3 2 EXHIBIT 3.3 EXHIBIT 3.3 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE --------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF OWNERSHIP, WHICH MERGES: "NETGATEWAY, INC.", A NEVADA CORPORATION, WITH AND INTO "NETGATEWAY, INC." UNDER THE NAME OF "NETGATEWAY, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE SECOND DAY OF NOVEMBER, A.D. 1999, AT 2 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL] /s/ Edward J. Freel ----------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 0060072 DATE: 11-02-99 CERTIFICATE OF OWNERSHIP AND MERGER OF NETGATEWAY, INC., A NEVADA CORPORATION WITH AND INTO NETGATEWAY, INC., A DELAWARE CORPORATION (Pursuant to Section 253 of the Delaware General Corporation Law) NETGATEWAY, INC., a Delaware corporation (the "Corporation"), does hereby certify: FIRST: That the Corporation was incorporated on May 12, 1999 pursuant to the General Corporation Law of the State of Delaware (the "DGCL"). SECOND: That all of the outstanding shares of common stock, par value $.001 per share (the "Corporation Common Stock"), of the Corporation is owned of record by Netgateway, Inc., a Nevada corporation (the "Parent"), and the Corporation has issued and outstanding no class of capital stock other than the Corporation Common Stock. THIRD: That the Corporation, the surviving Delaware corporation, by the following resolutions of the Board of Directors thereof duly adopted by unanimous written consent without a meeting, pursuant to Section 141(f) of the DGCL, duly adopted as of October 21, 1999, determined to merge itself with the Parent so as to be the surviving corporation of such merger, in accordance with the terms, and subject to the conditions, set forth in such resolutions: WHEREAS, Netgateway, Inc., a Nevada corporation (the "Parent") is the legal and beneficial owner of all of the outstanding shares of common stock, par value $.001 per share (the "Corporation Common Stock"), of the Corporation; and WHEREAS, the Corporation Common Stock is the only issued and outstanding class of capital stock of Corporation; and WHEREAS, the Corporation desires to merge itself with the Parent so as be the surviving corporation of such merger pursuant to the provisions of Section 253 of the General Corporation Law of the State of Delaware. NOW, THEREFORE, BE IT RESOLVED, that, subject to the approval of the stockholders of the Parent, the Parent merge itself with and into the Corporation (the "Merger"), which will assume all of the obligations of the Parent. RESOLVED, that the terms and conditions of the proposed Merger are as follows: Upon the Merger becoming effective, the outstanding Corporation Common Stock, all of which had therefore been held by the Parent, shall be canceled and shall cease to be outstanding, without any payment being made in respect thereof; each share of common stock, no par value, of the Parent (the "Parent Common Stock") outstanding immediately prior to the effectiveness of the Merger shall, upon the effectiveness of the Merger, without further act or deed, be deemed to represent one share of Corporation Common Stock; upon the surrender by any stockholder of the Parent of such stockholder's certificates formerly representing outstanding shares of Parent Common Stock, the Corporation shall issue to such stockholder a stock certificate representing an equal number of shares of Corporation Common Stock; upon consummation of the Merger, the directors of Parent shall become the sole directors of the Corporation until the election and qualification of their respective successors, and the officers of the Parent shall hold such officers of the Corporation, subject to the discretion of the Board of Directors. RESOLVED, that upon the Merger becoming effective, the 1998 Stock Compensation Plan, 1998 Stock Option Plan for Executives and 1999 Stock Option Plan for Non-Executives of Parent shall be adopted as the 1998 Stock Compensation Plan, 1998 Stock Option Plan for Executives and 1999 Stock Option Plan for Non-Executives of the Corporation. RESOLVED, that, subject to the requirements of the law of the State of Delaware, the officers of the Corporation be, and each of them with full authority to act without the others hereby is, authorized and empowered to do and perform, or cause to be done and performed, all such further acts, deeds and things, and to prepare, execute and file with the appropriate authorities, or cause to be prepared, executed and filed with the appropriate authorities, all such further certificates, documents and instruments, in the name and on behalf of the Corporation and under its corporate seal if necessary, and otherwise, as the officer or officers executing the same may deem to be necessary or desirable to carry out and to effectuate the purposes of the foregoing resolutions. FOURTH: That the merger has been adopted, approved, certified, executed, and acknowledged by the Parent in accordance with the laws of the State of Nevada, the jurisdiction of the incorporation of the Parent. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed and this certificate to be executed this 23rd day of October, 1999. NETGATEWAY, INC. (NEVADA) By: /s/ Donald M. Corliss, Jr. -------------------------------- Donald M. Corliss, Jr. President ATTEST: /s/ Hanh Ngo - ------------------------- Hanh Ngo Secretary EX-3.4 3 EXHIBIT 3.4 EXHIBIT 3.4 NAME: NETGATEWAY, INC. FILE TYP/NR C 006284-1995 ST NEVADA INC ON APR 13, 1995 FOR PERPETUAL STATUS: MERGE/DISSOLVED : 11-02-99 NUMBER OF PAGES FILED: 9 PME TYPE: REGULAR PURPOSE: ALL LEGAL ACTIVITIES NAME CONSENT: 06-08-98 CAPITAL: $25,000 PAR SHRS: 25,000,000 PAR VAL: $.001 NR NO PAR SHRS: 2,500 RA NBR: 23757 LIST OF OFFICERS FOR 99 - 00 FILED ON 04-29-99 DAB RA SECRETARY OF STATE STE 3 ACCEPTED 110299 101 N CARSON ST CARSON CITY NV 89701 + 4786 PRES DONALD M. CORLISS, JR. SUITE #500 061595 300 OCEANGATE LONG BEACH CA 90802 SECT HANH NGO SUITE #500 061595 300 OCEANGATE LONG BEACH CA 90802 TRES DAVID BASSETT-PARKINS SUITE #500 061595 300 OCEANGATE LONG BEACH CA 90802 MORE OFFICERS ON LIST NAME: NETGATEWAY, INC. FILE TYP/NR C 006284-1995 11-02-99 MERGE-DISSOLUTION ARTICLES OF MERGER FILED MERGING THIS CORPORATION INTO NETGATEWAY, INC., A (DE) CORPORATION NOT QUALIFIED IN NEVADA. NEVADA SECRETARY OF STATE DESIGNATED AS AGENDA FOR SERVICE OF PROCESS. FORWARDING ADDRESS: ATTN: GENERAL COUNSEL, NETGATEWAY, INC., 300 OCEANGATE, 5TH FL., LONG BEACH, CA 90802. (3) PGS. DMF 11-02-99 RA RESOLUTION CORPORATION TRUST COMPANY OF NEVADA 6100 NEIL ROAD #500 RENO NV 89520 DMF 10-29-99 RA REMOVAL CORPORATION TRUST COMPANY OF NEVAD KFA ONE EAST FIRST STREET RENO NV 89501 KFA 04-28-99 RA RESOLUTION STANLEY K. STILWELL 7604 DELAWARE BAY DR. LAS VEGAS NV 89128 SRH 06-08-98 CHANGED NAME FROM VIDEO CALLING CARD, INC. DMF 06-08-98 COMMENTS (2) PGS. DMF FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF NEVADA ARTICLES OF MERGER NOV 02 1999 OF No. C6284-95 ----------- NETGATEWAY, INC., A NEVADA CORPORATION /s/ Dean Heller DEAN HELLER, WITH AND INTO SECRETARY OF STATE NETGATEWAY, INC., A DELAWARE CORPORATION (Pursuant to Section 92A.200 of the Nevada Revised Statutes) FIRST: The name of the surviving entity is Netgateway, Inc., and the place of its organization is the jurisdiction of the state of Delaware and the merger is permitted pursuant to Section 253 of the General Corporation Law of the State of Delaware. The name and place or organization of the entity being merged into the surviving entity is Netgateway, Inc., organized in the jurisdiction of the state of Nevada. SECOND: A plan of merger (the "Plan of Merger") has been adopted by each entity that is a party to this merger. THIRD: The Plan of Merger was adopted by unanimous consent of the shareholder of Netgateway, Inc., a Delaware corporation. FOURTH: The designation, percentage of total vote or number of votes entitled to be cast and the total number of votes or percentage of owner's interests cast for and against the Plan of Merger, by each class of owner's interest of Netgateway, Inc., a Nevada corporation entitled to vote separately on the Plan of Merger is as follows:
DESIGNATION VOTES ENTITLED TO BE CAST ----------- ------------------------- Common Stock: 8,225,400 Votes or Percentage of Owner's Interests For: 57% of the Common Stock voted for the merger pursuant to a written consent of the shareholders
DESIGNATION VOTES ENTITLED TO BE CAST ----------- ------------------------- Votes or Percentage of Owner's Against For: N/A because pursuant to a written consent of the shareholders
FIFTH: The number of votes or percentage of owner's interests cast for the Plan of Merger by the owners of each class of interests of Netgateway, Inc., a Nevada corporation was sufficient for approval by the owners of that class. SIXTH: The complete executed Plan of Merger is on file at the place of business of Netgateway, Inc., a Delaware corporation (the surviving entity) located at 300 Oceangate, 5th Floor, Long Beach, California 90802 and a copy of the Plan of Merger will be furnished by Netgateway, Inc., on request and without cost to any owner of any entity which is a party to this merger. SEVENTH: All entities party to this merger have complied with laws of their respective jurisdiction or organization concerning this merger. EIGHTH: Netgateway, Inc., designates the following address as the address to which the Nevada Secretary of State is to mail any process served on him or her against the entity: Netgateway, Inc. 300 Oceangate, 5th Floor, Long Beach, California 90802 (Attn: General Counsel). IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed and this certificate to be executed this 08th day of October, 1999. NETGATEWAY, INC. By: /s/ Donald M. Corliss, Jr. --------------------------- Donald M. Corliss, Jr. President By: /s/ Hanh Ngo --------------------------- Hanh Ngo Secretary STATE OF CALIFORNIA ) ss.: COUNTY OF LOS ANGELES ) On October 08, 1999, personally appeared before me, Donald M. Corliss, Jr. and Hanh Ngo who acknowledged that they executed the above instrument /s/ [illegible] - ----------------------------- (Notary Stamp or Seal) [seal] EX-4.2 4 EXHIBIT 4.2 EXHIBIT 4.2 NETGATEWAY, INC. COMMON STOCK CUSIP 641111 10 9 PAR VALUE $.001 SEE REVERSE FOR CERTAIN DEFINITIONS INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFIES THAT is the record holder of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.001, OF NETGATEWAY, INC. transferable on the books of the Corporation by the holder hereto in person or by duly authorized attorney upon the surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to the laws of the State of Delaware and all provisions of the Certificate of Incorporation, and the Bylaws of the Corporation all as from time to time amended (copies thereof being on file with the Secretary of the Corporation) and the holder hereof, accepting this certificate, expressly assents thereto. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated NETGATEWAY SEAL 1999 Secretary President Countersigned and Registered Colonial Stock Transfer Co. Transfer Agent and Registrar EX-5.1 5 EXHIBIT 5.1 EXHIBIT 5.1 BROCK SILVERSTEIN LLC 800 Third Avenue (212) 371-2000 21st Floor Fax (212) 371-5500 New York, New York 10022 November 10, 1999 Netgateway, Inc. 300 Oceangate 5th Floor Long Beach, California 90802 Gentlemen: You have requested our opinion in connection with certain matters relating to the registration statement on Form S-1 (File No. 333-79751) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), to register the sale of, among other things, up to 3,450,000 shares (the "Shares") of common stock, par value $.001 per share (the "Common Stock"), of Netgateway, Inc., Delaware corporation (the "Company"), by the Company, including up to 450,000 shares of Common Stock issuable solely to cover over-allotments, if any. In connection herewith, we have examined such records, documents, statutes, and decisions as we have deemed relevant. In addition, we have relied upon certificates of officers of the Company and certificates and telegrams of public officials as to certain matters relating to this opinion as we have deemed necessary for purposes hereof. Based upon, and subject to, the foregoing, we are of the opinion, as at the date hereof, that the Shares are validly authorized and legally issued, fully paid, and nonassessable. We are members of the Bar of the State of New York. The opinion expressed herein is expressly limited to the laws of the State of New York, the Federal laws of the United States of America, and the General Corporation Law of the State of Delaware. We hereby consent to the use of this opinion as Exhibit 5 to the Registration Statement and the reference to our firm in the Registration Statement under the caption "Legal Opinions." By doing so, we do not admit that we come within the category of persons whose consent is required by the Act or the rules and regulation promulgated thereunder. Very truly yours, EX-10.23 6 EXHIBIT 10.23 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." AGREEMENT This Agreement ("Agreement") made this 25th day of February, 1999 (the "Effective Date") between NETGATEWAY,INC., a Nevada corporation, with offices located at 300 Oceangate, Suite 500, Long Beach, CA 90802 (hereinafter "Netgateway") and XOOM.COM INC., a Delaware corporation, with offices located at 300 Montgomery Street, San Francisco, CA 94104 (hereinafter "XOOM.com."). Netgateway and XOOM.com may be referred to herein collectively as (the "Parties") or singularly as (a "Party"). WHEREAS, Netgateway is the provider of a unique, World Wide Web storefront building and hosting product and service ("StoresOnline"); and WHEREAS, XOOM.com is in the business of offering products and programs to its Members through its Web site on the World Wide Web; and WHEREAS, Netgateway will supply a private-labeled version of its World Wide Web storefront building and hosting products and services identified on Exhibit A hereto, (hereinafter the "Program(s)") to XOOM.com and to Xoom.com's Members; and WHEREAS, XOOM.com agrees to give Netgateway the exclusive right to provide the services and/or products as described in Exhibit A from the Effective Date hereof to its current and future Members as further described herein and subject to the terms and conditions of this Agreement. NOW, THEREFORE, for and in consideration of the mutual promises and provisions contained in this Agreement, the Parties hereto agree as follows: A. SOLICITATION AND ENROLLMENT XOOM.com will market the Programs at its sole cost and expense, through its XOOM.com Web sites, emails, and other means as agreed to by the Parties. The price and offer for the Programs shall be mutually agreed upon by the Parties prior to marketing (see Exhibit A). Netgateway will capture Subscriber information, including Subscriber name, address, telephone number and email address (for those Subscribers who agree to enroll in the Paid version of the Program, see Exhibit A) ("Subscriber Information") and transmit the "Subscriber Information" to XOOM.com at times mutually agreed. Members enrolling in a Program will become Subscribers in that Program. Enrollment in the Paid Program includes the Subscriber's understanding that their credit card will be billed, absent cancellation, for the subscription fee agreed upon and that their account will continue to automatically be billed absent cancellation for a renewal subscription term at the then current rate for the Program at the time of such renewal. B. START DATE Marketing of the Programs will commence on or about April 15, 1999. 1 C. NETGATEWAY'S RESPONSIBILITIES Netgateway shall: 1.) Bill and collect subscription fees for Paid Program subscriptions. 2.) Provide Netgateway's customary StoresOnline.com customer service that Netgateway provides to other paid subscribers, including 24/7 help desk support, to Subscribers (online customer service only shall be provided to Subscribers of the Free Program). 3.) Use reasonable commercial efforts to work with XOOM.com to customize existing Programs for XOOM.com Subscribers, as provided for in Section D. 4.) Pay commissions to XOOM.com as follows: a.) Commissions to XOOM.com for Paid Program subscriptions will be U.S. [**REDACTED**] per month for each Paid Program Subscriber enrolled by XOOM.com for as long as the Subscriber is active. b.) No commission shall be payable to XOOM.com for any Full Set Up Service purchased from Netgateway by XOOM.com Subscribers (see Exhibit A), provided that XOOM.com will be entitled to commissions in accordance with 4(a) above on any monthly subscription fees paid by subscribers who purchase the Full Set Up Service c.) In the event that Netgateway's quarterly revenue from fees paid by Paid Program Subscribers fees exceeds U.S. [**REDACTED**] Netgateway shall rebate XOOM.com U.S. [**REDACTED**] per month, per enrolled Paid Program Subscriber. The rebate shall be effective retroactively based upon Netgateway revenue received that calendar quarter, and shall be due no later than 30 days after the end of each calendar quarter. d.) Netgateway will pay XOOM.com a [**REDACTED**] commission on all net revenues received by Netgatway generated from components of the XOOM.com "Mall" (see Exhibit A). These "Mall" components include but are not limited to: - eCommerce advertisers solicited by Netgateway - Banner advertising, sold by Netgateway, on a pro rata basis as attributable to the XOOM.com "Mall" - Click through revenue from eTailer sales (need definition of eTailer) - Revenue generated from featured product sales - Any and all revenue-generating components added after the signature of this Agreement 5.) Provide XOOM.com with all End-Customer Data (as defined below) generated by Subscriber sites of both the Paid Program (unless End-Customer opts out) and the Free Program. - An End-Customer is defined as an individual making a purchase from a XOOM.com/Netgateway Subscriber's online storefront. - End-Customer Data is defined as, customer name, email address, credit card number, product purchased during transaction, and any or 2 all other data as requested by XOOM.com subject to its reasonable availability. - XOOM.com shall be the sole owner of and have exclusive marketing rights to the End-Customer Data. - Netgateway shall may use the End-Customer data for its standard statistical analysis and public reporting disclosure requirements. - XOOM.com shall ensure that all necessary and appropriate prior disclosure is made to both Subscribers and end-customers regarding the collection and use of end-customer data by XOOM.com. (See Exhibit A.) 6.) Agree during the term of this Agreement and for two (2) years after the effective date of its termination not to knowingly induce XOOM.com Members or Netgateway Subscribers to terminate their relationships with XOOM.com in favor of a XOOM.com competitor. 7.) Shall insure that the performance of the Program shall meet or exceed industry standards, shall remain competitive with substantially similar services being offered by third parties, and shall maintain Program at the same or higher level that it maintains the Program for its other partners, licensees and customers. Netgateway shall promptly respond to and remedy any errors or omissions or problems reported by XOOM.com. D. CUSTOMIZATION/PRIVATE-LABELING 1.) Netgateway will private label the Programs described in Exhibit A with the XOOM.com name and logo, subject to approval by XOOM.com, such approval not be unreasonably withheld. E. MARKETING RIGHTS XOOM.com holds all rights to the Subscriber Information and end-customer data for the term of this Agreement and two years thereafter. In the event of the termination of this Agreement, Netgateway shall receive co-ownership of Subscriber Information for Subscribers STILL ACTIVE at the end of a period of two years from the date of termination of this Agreement. F. XOOM.COM'S RESPONSIBILITIES XOOM.com shall: 1.) Actively market the Programs to its Member base by integrating information to allow Members to enroll in the Programs on the XOOM.com Web sites, its communities area, e-mail to its Customers, upsells after purchase of its products and programs and by other means as may be developed and to be mutually agreed to by the Parties. a) This marketing shall include active promotion to enroll Members as Subscribers in Free Program, to enroll Members as Subscribers in the Paid Program, upsell Subscribers in the Free Program to the Paid 3 Program (see Exhibit A), and offers promoting the Full Set Up Service (see Exhibit A). 2.) Electronically transmit newly enrolled Subscriber Information to Netgateway at mutually agreeable times and in file formats agreed to. 3.) Use best efforts to ensure that XOOM.com's Web site information contains current Program benefit information as submitted to XOOM.com by Netgateway. 4.) Use best efforts to work with Netgateway to achieve success for the Programs marketed. 7.) Expend reasonable management time to improve Subscriber enrollment rates. 8.) Agree during the term of this Agreement and for two (2) years after the effective date of its termination, not to knowingly induce then active Subscribers to enroll in a competing product or service. G. REPRESENTATIONS, WARRANTIES AND COVENANTS 1. Netgateway represents, warrants and covenants that (i.) the making of this Agreement does not violate any law, regulation or agreement to which it is a Party and that Netgateway has the authority to enter into this Agreement and to perform its obligations hereunder; (ii.) Netgateway has the right to grant the rights and licenses contemplated by this Agreement, without the need for any licenses, releases, consents, approvals or immunities not yet granted; (iii.) the content contained on the Netgateway Web Pages which is generated and/or provided by Netgateway will be of standards equivalent to that on the then current XOOM.com Membership Sites; (iv.) the content provided by, or approved by, Netgateway to be displayed on the Netgateway Web Pages (including all trademarks, tradenames and/or other intellectual property rights) and the reproduction, distribution and other use thereof as contemplated by this Agreement do not and will not infringe or misappropriate any patent, copyright, trademark, trade secret, publicity, privacy or other rights of any third person, and are not and will not be defamatory or obscene; and (v.) the representations, warranties and covenants herein shall survive the expiration and/or termination of this Agreement. 2. XOOM.com represents, warrants and covenants that (i.) the making of this Agreement does not violate any law, regulation or agreement to which it is a party and that XOOM.com has the authority to enter into this Agreement and to perform its obligations hereunder; (ii.) XOOM.com has the sole and exclusive right to grant the rights and licenses contemplated by this Agreement, without the need for any licenses, releases, consents, approvals or immunities not yet granted; (iii.) the content contained on the XOOM.com Membership Sites which is generated and/or provided by XOOM.com will be of the same high standards as the content on the current main XOOM.com site and services; (iv.) the content provided by, or approved by, XOOM.com to be displayed on the Netgateway Web Pages or otherwise on the XOOM.com Membership Sites (including all trademarks, trade names and/or other intellectual property rights) and the reproduction, distribution and other use thereof as contemplated by this 4 Agreement do not and will not infringe or misappropriate any patent, copyright, trademark, trade secret, publicity, privacy or other rights of any third person, and are not and will not be defamatory or obscene; and (v.) the representations, warranties and covenants herein shall survive the expiration and/or termination of this Agreement. H. CONFIDENTIALITY 1. Non-Disclosure Agreement. The Parties agree and acknowledge that as a result of negotiating, entering into and performing this Agreement, each Party has and will have access to certain of the other Party's Confidential Information (defined below). Confidential Information shall include Subscriber Information and End-Customer Data. Each Party also understands and agrees that misuse and/or disclosure of that information could adversely effect the other Party's business. Accordingly, the Parties agree that during the term of this Agreement, each Party shall use the other Party's Confidential Information only for purposes of this Agreement and only to the extent necessary for such purpose and shall restrict disclosure of the other Party's Confidential Information to its employees, consultants or independent contractors with a need to know and shall not disclose the other Party's Confidential Information to any third party without the prior written approval of the other Party. Notwithstanding the foregoing, it shall not be a breach of this Agreement for either Party to disclose Confidential Information of the other Party if required to do so under law or in a judicial or other governmental investigation or proceeding, provided the other Party has been given as timely prior written notice of such request for disclosure as is possible, giving such Party a reasonable opportunity to defend such request for disclosure. The recipient of a demand for disclosure shall cooperate with the Party whose Confidential Information is being sought as is reasonably necessary. 2. Confidential Information Defined. As used in this Agreement, the term "Confidential Information" only refers to information marked as confidential at the time of disclosure, including: (i.) each Party's trade secrets, business plans, strategies, methods and/or practices and other information relating to either Party that is not generally known to the public, including information about either Party's personnel, products, customers, marketing strategies, services or future business plans. Confidential Information shall include Subscriber Information and End-Customer Data. The terms and conditions contained in this Agreement shall be considered "Confidential Information". Notwithstanding the foregoing, the term Confidential Information specifically excludes (i.) information that is now in the public domain or subsequently enters the public domain by publication or otherwise through no action or fault of the receiving Party; (ii.) information that the receiving Party receives from any third party without restriction on disclosure or use known to such Party; (iii.) information which was lawfully in the receiving Party's possession prior to the time Netgateway and XOOM.com entered into discussions regarding this Agreement; and (iv.) information independently developed by the receiving Party's employees, consultants or agents; and v.) information that was previously known to the receiving party prior to receipt from the disclosing Party. 5 I. EXCLUSIVITY During the term of this Agreement, Netgateway will be the sole and exclusive provider of services and products described in Exhibit A to XOOM.com and its Members. After termination or expiration of this Agreement, XOOM.com agrees to not itself solicit, nor to assist, nor to allow solicitation of active Subscribers by any third parties for any program competitive to the Programs. J. TERM AND TERMINATION This Agreement shall remain in effect for a period of one (1) year from the Effective Date (the "Initial Term"). Thereafter, this Agreement will automatically renew for additional consecutive one (1) year terms ("Renewal Terms") unless a written notice of intent to terminate is given to either Party by the other Party ninety (90) days prior to expiration of the then current term. The term of this Agreement includes the Initial Term and any Renewal Terms. Sections E, G, H, J, K, L, O and P shall survive the termination of this Agreement. Notwithstanding anything else to the contrary in this Agreement, if at any time during its term either XOOM.com or Netgateway breaches its obligations or responsibilities under this Agreement, the non-breaching Party may deliver to the breaching Party written notice of its intent to terminate this Agreement setting forth the nature of the breach. Termination will be effective thirty (30) days after acknowledged delivery of the termination notice to the breaching Party unless the breach is cured within such thirty (30) day period. Either party may terminate this Agreement: (1) if the other party files a petition for bankruptcy, becomes insolvent, or makes an assignment for the benefit of its creditors, or a receiver is appointed for the other party or its business; (2) upon the occurrence of a material breach of a material provision of this Agreement by the other party if such breach is not remedied within thirty (30) days after written notice is received by the breaching party identifying the matter constituting the material breach; (3) by mutual consent of the parties. In the event of termination, XOOM.com and Netgateway will continue to offer those Subscribers enrolled prior to the effective date of termination continuing access to benefits in any Program or any mutually developed program in which they are enrolled. Netgateway will continue billing Subscribers for Program memberships after termination, absent cancellation by the Subscriber or Netgateway, and XOOM.com will continue to receive commissions on Program subscriptions billed, as provided for in this Agreement in item (C)(4.)(a.), for a period of two (2) years after the termination or expiration of this Agreement. K. INDEMNIFICATION 1. Netgateway's Indemnification. Netgateway hereby agrees to indemnify XOOM.com, its officers, directors, employees and servants against any claim and 6 hold all of the foregoing harmless from any liabilities, penalties, damages, costs, reasonable attorneys' fees or other expenses of any nature whatsoever excluding consequential damages, resulting from (i.) claims with respect to Netgateway Programs marketed by XOOM.com, (ii.) any claim that any content of Netgateway's Web pages provided by Netgateway, for use on the XOOM.com Membership Sites (including without limitation logos, domain name and/or trademark) infringes any third party proprietary rights, or otherwise subjects XOOM.com to liability to any third party with respect to the copy contained therein and/or (iii.) any claim from its or its agents performance or failure to perform its obligations under the terms and conditions of this Agreement. 2. XOOM.com's Indemnification. XOOM.com shall indemnify Netgateway, its officers, directors, employees and servants against any claim and hold all of the foregoing harmless from any liabilities, penalties, damages, costs, reasonable attorney's fees or other expenses of any nature whatsoever excluding consequential damages resulting from (i) any claim that any aspect of the content of XOOM.com's Membership Sites, including the Netgateway Web pages, which was provided by XOOM.com, in conjunction with the XOOM.com Membership Sites infringes any U.S. patent, copyright, license, trade secret (including without limitation logos, domain name and/or trademark) or infringes any third party proprietary rights, or otherwise subjects Netgateway to liability to any third party and/or (iii.) any claim resulting from its or its agents performance or failure to perform its obligations under the terms and conditions of this Agreement (iv) any claims arising out of the Subscriber Information or End Customer Data by or through XOOM.com (v) any claim arising out of the XOOM.com Web site or business operations (vi) any claim arising out of misrepresentation of the Netgateway products or services by XOOM.com. 3. Within five (5) business days after receipt by a Party of a notice of any demand, claim or circumstances which, with the lapse of time or otherwise, would or might give rise to a claim or the commencement (or threatened commencement) of any action, proceeding or investigation (an "Asserted Liability") that may result in any claim for which a Party is entitled to indemnification under this Agreement (a "Claim"), the Party entitled to indemnification (the "Indemnified Party"), shall promptly give notice thereof (the "Claims Notice") to the Party obligated to provide indemnification pursuant to this Agreement (the "Indemnifying Party"); provided however, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under Section K. (1) or (2) hereof, except to the extent that the Indemnifying Party is actually prejudiced by such failure to give notice. The Claims Notice shall describe the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary and to the extent feasible) of the Claim that has been or may be suffered by the Indemnified Party. (i.) The Indemnifying Party may elect to compromise or defend, at its own expense and by its own counsel, any Asserted Liability. If the Indemnifying Party elects to compromise or defend such Asserted Liability, it shall within thirty (30) days (or sooner, if the nature of the 7 Asserted Liability so requires) notify the Indemnified Party of its intent to do so, and the Indemnified Party shall reasonably cooperate, at the sole expense of the Indemnifying Party, in the compromise of, or defense against, such Asserted Liability. (ii.) If the Indemnifying Party elects not to compromise or defend the Asserted Liability, fails to notify the Indemnified Party of its election as herein provided or contests its obligations to indemnify under this Agreement, the Indemnified Party may itself pay, compromise or defend such Asserted Liability and notify in writing the Indemnifying Party of its election to do so, at the expense of the Indemnifying Party (if the Indemnifying party is found obligated to indemnify the Indemnified Party with respect to the Claim). (iii.) Subject to the limitations contained in Subparagraph 3(ii) below (on the obligations of the Indemnifying Party in respect to proposed settlements), the Indemnified Party shall have the right to employ its own counsel with respect to any Asserted Liability, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (1) the employment of such counsel shall have been authorized and agreed to in writing by the Indemnifying Party in connection with the defense of such action, or (2) such Indemnifying Party shall not have, as provided above, promptly employed counsel to take charge of the defense of such action, or (3) the Indemnified Party shall have reasonably concluded based on an opinion of its counsel and agreed to by counsel for the Indemnifying Party, if any, that there may be one or more legal defenses available to it which are different from or additional to those available to such Indemnifying Party, in any of which events such reasonable fees and expenses shall be borne by the Indemnifying Party and the Indemnifying Party shall not have the right to direct the defense of such action on behalf of the Indemnified Party in respect of such different or additional defenses. (iv.) If the Indemnifying Party chooses to defend any Claim, the Indemnified Party shall make available to the Indemnifying Party any books, records or other documents within its control that are reasonably necessary or appropriate for such defense. If the Indemnifying Party elects not to assume the defense of a Claim, it will not be obligated to pay the fees and expenses of more than one counsel for all Indemnified Parties with respect to such Claim, unless in the reasonable judgment of an Indemnified Party, and in the opinion of such Indemnified Party's counsel and agreed to by counsel for the Indemnifying Party, if any, a conflict of interest may exist between such Indemnified Party and any other of such Indemnified Parties with respect to such Claim, in which event the Indemnifying Party shall be obligated to pay the fees and expenses of such additional counsel or counsels. 8 (v.) Notwithstanding the provisions of Subparagraph 3(iv.) above, neither the Indemnifying Party nor the Indemnified Party may settle or compromise any Claim for which indemnification has been sought and is available hereunder, over the objection of the other; provided, however, that consent to settlement or compromise shall not be unreasonably withheld or delayed. If, however, the Indemnified Party refuses to consent to a bona fide offer of settlement which the Indemnifying Party wishes to accept, the Indemnified Party may continue to pursue such matter, free of any participation by the Indemnifying Party, at the sole expense of the Indemnified Party. In such event, the obligation of the Indemnifying Party to the Indemnified Party shall be equal to the lesser of (i.) the amount of the offer of settlement which the Indemnified Party refused to accept plus the costs and expenses of the Indemnified Party prior to the date the Indemnifying Party notified the Indemnified Party of the offer of settlement, or (ii.) the actual out-of-pocket amount the Indemnified Party is obligated to pay as a result of the Indemnified Party's continuing to pursue such matter. No Party will be required to consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Party of a release from all liability in respect to the Claim. 4. Where a claim for indemnification is made by Netgateway pursuant to Section K.(2), or where one is reasonably likely to occur in XOOM.com's opinion, XOOM.com may with prior written notice to Netgateway, (i.) replace some portion of the offending content with non-infringing and reasonably comparable non-offending content, (ii.) obtain a license to use or request Netgateway to promptly obtain a license to use any infringing property, and/or (iii.) if the foregoing options are not reasonably available in XOOM.com's reasonable opinion, terminate this Agreement upon ninety (90) days prior written notice to Netgateway. 5. Where a claim for indemnification is made by XOOM.com pursuant to Section K.(1), or where one is reasonably likely to occur in Netgateway's opinion, Netgateway may with prior written notice to XOOM.com, (i.) replace some portion of the offending content with non-infringing and reasonably comparable non-offending content, (ii.) obtain a license to use or request XOOM.com to promptly obtain a license to use any infringing property, and/or (iii.) if the foregoing options are not reasonably available in Netgateway's reasonable opinion, terminate the Agreement upon ninety (90) days prior written notice to XOOM.com. L. INTELLECTUAL PROPERTY XOOM.com acknowledges Netgateway's proprietary interest in and ownership of all intellectual property associated with Netgateway's Programs and Services, including, but not limited to copy, copyrights, tradenames, servicemarks, brands and trademarks hereinafter ("Intellectual Property"). 9 Neither Party shall use any of the other Party's copy, copyrighted materials, tradenames, servicemarks, brands or trademarks without the prior written consent of the other Party. It is expressly understood by each Party that Intellectual Property is proprietary to the owning Party and that nothing in this Agreement constitutes the grant of a general license for one Party to use the Intellectual Property of the other Party. Upon termination of this Agreement, any and all rights or privileges of either Party to use the other Party's Intellectual Property shall expire, and each Party shall discontinue the use of the other's Intellectual Property in connection with any business conducted unless otherwise provided for in writing and signed by authorized representatives of both Parties. M. TRANSFERABILITY This Agreement may be assigned by either Party, in whole or in part with notice and the written consent of the other Party, to (i.) an Affiliate which is defined as a subsidiary or related corporate entity whose voting stock is controlled by a Party hereto, or (ii.) a third party which acquires all or substantially all of such Party's assets and has the capability to perform all of the obligations of the assigning Party under the terms and conditions of this Agreement. A permitted assignment by a Party hereunder will not relieve such Party from obligations under the terms of this Agreement. N. AUDIT OF RECORDS Netgateway agrees to maintain adequate books and records relating to sales of the Programs. Such books and records shall be available at their place of business for inspection by XOOM.com or its representative, for the purpose of determining whether the correct amounts have been paid in accordance with the terms of this Agreement. In the event that XOOM.com or its representatives shall examine the records, documents, and materials in the possession or under the control of Netgateway with respect to the subject matter, such examination should be conducted in such manner as to not unduly interfere with the business of Netgateway and such examination should be made after reasonable prior written notice and during business hours. XOOM.com and its representatives shall not disclose to any other person, firm or corporation any information acquired as a result of any such examination, provided, however, that nothing herein contained shall be construed to prevent XOOM.com and/or its duly authorized representatives from testifying in any court of competent jurisdiction with respect to the information obtained as a result of such examination, in any action instituted to enforce the rights of either Party under the terms of this Agreement. XOOM.com shall have the right to have such books and records audited by its independent certified public accountant, upon thirty (30) days' advance notice, but no such audit may be conducted more than once in any [twelve (12) month] period. In the event that such an examination finds an underpayment/overpayment in excess of the greater of [5%] of the total amount or [$25,000] the Parties shall attempt to resolve the discrepancy within a [thirty (30)] 10 day period following the delivery of a written report by the XOOM.com's auditors setting forth the alleged discrepancy, and, if the Parties are unable to resolve the discrepancy, the dispute shall be resolved by an independent third party certified public accountant selected by the Parties' respective certified public accountants, and the decision of such third party shall be final and binding upon the Parties. Timely adjustment shall be made to correct for any underpayments/overpayments disclosed by such examination. If the result of the foregoing procedure finds an adjustment of more than $25,000 during a twelve (12) month period due to XOOM.com, Netgateway shall pay the reasonable costs of such audit. All amounts finally determined due to XOOM.com, including payment of auditing fees hereunder, shall be payable to XOOM.com and are due within five (5) business days. O. LIMITATION OF LIABILITY 1. XOOM.com shall not be liable to Netgateway for any damage arising from or related to technical defects in or failure of the XOOM.com Membership Sites, or for any indirect, consequential or punitive damages arising out of or in connection with this Agreement or the transfer or use of the XOOM.com Membership Sites other than for damages arising from XOOM.com's gross negligence or willful misconduct; however, XOOM.com shall continue to remain responsible to indemnify Netgateway from third party claims arising in connection with the above and for Claims pursuant to the provisions of Section K. 2. Netgateway shall not be liable to XOOM.com for any damage arising from or related to defects in or failure of any Program, or for any indirect, consequential or punitive damages arising out of or in connection with this Agreement, including the offering of Programs, or the development and use of the Netgateway Web Pages, other than for damages arising from Netgateway's gross negligence or willful misconduct; however, Netgateway shall continue to remain responsible to indemnify XOOM.com from third party claims arising in connection with the above and for Claims pursuant to the provisions of Section K. P. MISCELLANEOUS 1. Force Majeure. Neither Party shall be liable for any damages or have the right to terminate the Agreement for any delay or default in performing this Agreement if such delay or default is caused by conditions beyond its control, including, but not limited to, acts of God, government restrictions, wars, insurrections, strikes, floods or work stoppages; provided however, that if such delay or default shall exceed thirty (30) days, then the Party not delaying or defaulting may, so long as the delay or default continues beyond such thirty (30) day period, terminate this Agreement. All amounts due one Party to the other shall be reconciled and remitted, determined as of the effective termination date, within ten (10) business days from the end of this thirty (30) day period. The Party affected by the conditions beyond its control, shall keep the other Party fully informed on an ongoing basis concerning the matters causing the delay or default, and the prospects 11 of their ending. The foregoing shall not apply to any failure to comply with any legal requirements applicable under the terms of this Agreement. 2. Entire Agreement. This Agreement, including Exhibits A and B referred to herein, contains the entire agreement of the Parties and shall not be varied, revised, modified, amended or supplemented, except in writing of subsequent or even date, executed by each of the Parties. 3. Section Headings. Section Headings are for convenience only and are not a part of this Agreement. 4. Enforceability. If any part of this Agreement shall be held to be unenforceable, the remainder of this Agreement will nevertheless remain in full force and effect. 5. Counterparts. This Agreement may be executed in one or more counterparts which, taken together, shall constitute one and the same agreement, and either Party may execute this Agreement by signing such counterpart. 6. Public Announcement No press release, public announcement, confirmation or other information regarding this Agreement or the contents hereof or thereof shall be made by any Party without the prior written consent of the other Party, which consent shall not by unreasonably withheld. It is agreed and understood that the Parties shall work together to prepare any such press release or public announcement. Both parties agree to publicly announce the general terms of the relationship between the Parties and the launch of the Program and Services contemplated herein. The foregoing notwithstanding, if a Party is required pursuant to applicable securities laws to make such an announcement or press release, the Party shall furnish the other Party with the text of such public announcement or press release sufficiently in advance of such public announcement or press release as to afford the receiving Party a reasonable opportunity to review such public announcement or press release, and to the extent consistent with its legal disclosure obligations, modify such public announcement or press release as reasonably requested by the other Party. No Agency. Nothing in this Agreement shall be construed to constitute or appoint either Party as the agent or representative of the other Party for any purpose whatsoever, or to grant to either Party any rights or authority to assume or create any obligation or responsibility, express or implied, for or on behalf of or in the name of the other, or to bind the other in any way or manner whatsoever. Nothing herein shall be deemed to create a joint venture or partnership between the Parties. Q. NOTICES All notices under this Agreement shall be sent i.) by the U.S. mail with proper postage affixed, or ii.) by a nationally recognized overnight mail service, or iii.) 12 by facsimile acknowledged as transmitted followed by an original copy forwarded by overnight mail to the Parties at the addresses below: Netgateway, Inc.: 300 Oceangate, Suite 500 Long Beach, CA 90802 ATTN: Donald M. Corliss, Jr. XOOM.com, Inc.: 300 Montgomery Street Third Floor San Francisco, CA 94104 ATTN: Laurent Massa, CEO R. GOVERNING LAW This Agreement shall be subject to, governed by and construed under the laws of the State of California without giving effect to the principles of conflict of laws. IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day and year first above written. NETGATEWAY, INC. XOOM.COM, INC. BY: /s/ DONALD M. CORLISS, JR. BY: /s/ JANINE POPICK ------------------------------- ----------------------------- PRINT NAME: DONALD M. CORLISS, JR. PRINT NAME: JANINE POPICK ----------------------- --------------------- ITS: PRESIDENT ITS: VP-EC ------------------------------ ---------------------------- DATE: 3/8/99 DATE: 3/4/99 ----------------------------- --------------------------- 13 EXHIBIT A TO AGREEMENT BETWEEN XOOM.COM, INC. AND NETGATEWAY PROGRAM TO BE PRIVATE LABELED FOR XOOM.COM: The StoresOnline Internet storefront building and hosting product and service. This product and service provides online storefront creation and maintenance, full eCommerce features, and 24/7 help desk support, plus any features and/or benefits that shall be added to the StoresOnline product/service during the term of this Agreement. 1) A modified version of the Program shall be created for XOOM.com, the "Free Program": a) Made available for free to XOOM.com Members. b) Will accommodate a maximum of three (3) Subscriber products. c) Will include online (Internet) based customer service and support only. d) Shall include all necessary and appropriate prior disclosure regarding the collection and use of end-customer data in the Terms of Service and in the end-customer point of sale. - There will NOT be an opportunity, for either the Subscriber or the end-customer, to decline this collection and use of end-customer data. 2) A full version of the Program shall be created for XOOM.com, the "Paid Program": a) To be offered for a U.S. [**REDACTED**] monthly subscription fee. b) Shall include all features, benefits, and options currently available and any added in the future in the StoresOnline service. c) Will include full customer service and support. d) Shall include all necessary and appropriate prior disclosure regarding the collection and use of end-customer data in the Subscriber Terms of Service and in the end-customer point of sale. - There will be an opportunity for the end-customer to decline collection and use of end-customer data in the point of sale area only. 3) Full Set Up Service Netgateway offers a service whereby it will design and construct Netgateway Subscriber World Wide Web storefronts for a fee of U.S. [**REDACTED**] This is a service above and separate from the modified version of the Program and the full version of the Program. 4) Storefront "Mall" (actual name to be determined by XOOM.com) a) Netgateway will create, manage and host a XOOM.com private labeled version of its standard online "mall". 14 b) The "mall" shall feature XOOM.com Subscriber Web storefronts as well as other parties' Subscriber Web storefronts from its storefront "Mall Network." c) XOOM.com's Subscriber Web storefronts shall be included in the "Mall Network" and may appear in other parties' private labeled or cobranded "malls." d) The "mall" will include an appropriate URL (as agreed upon by both Parties). e) The "mall" will feature advertising of various third party advertisers and sponsors recruited by Netgateway. f) The "mall" shall include an appropriate search engine, commerce functionality, banner and other appropriate advertising space, and such other features as the Parties mutually agree. g) Netgateway has the right to display its logos and appropriate "Powered By" language on the "mall." h) Netgateway may, at its discretion, choose to include or not include XOOM.com's NONPAYING Subscriber Web storefronts in the XOOM.com branded "mall" and/or in the "Mall Network" made available to third party "malls" by Netgateway. 15 EXHIBIT B TO AGREEMENT BETWEEN XOOM.COM, INC. AND NETGATEWAY CERTAIN DEFINITIONS - - The XOOM.com Membership Sites shall mean all Web sites and sell pages hosted by XOOM.com. - - XOOM.com Web site(s) shall mean all XOOM.com Membership Sites - - The Netgateway Web Pages shall be the specific Web site and "sell" pages (located within the XOOM.com Membership Sites and other areas) hosted by XOOM.com and featuring Netgateway Programs. - - Members shall mean XOOM.com registered Members including, but not limited those individuals making visits to XOOM.com Web sites and those individuals who have previously purchased products and programs on the XOOM.com Web site. - - Subscribers shall mean individuals who subscribe or shall subscribe to any of the Programs as promoted by XOOM.com. 16 EX-10.24 7 EXHIBIT 10.24 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." NETGATEWAY ELECTRONIC COMMERCE SERVICES AGREEMENT THIS ELECTRONIC COMMERCE SERVICES AGREEMENT (this "Agreement") is made effective as of the Acceptance Date set forth in the initial eCommerce Services Order Form (March 24, 1999) accepted by Netgateway, a Nevada corporation ("Netgateway") and the subscriber identified below ("Subscriber"). PARTIES: SUBSCRIBER NAME: CB RICHARD ELLIS ADDRESS: 5000 BIRCH STREET SUITE 9000 NEWPORT BEACH, CA 92660 PHONE: (949)955-2015 FAX: (949)757-4392 NETGATEWAY, INC. 300 Oceangate, Suite 500 Long Beach, CA 90802 Phone: (562)308-0010 Fax: (562)308-0021 1. ELECTRONIC COMMERCE SERVICES. 1.1 eCOMMERCE SERVICES. Subject to the terms and conditions of this Agreement, during the term of this Agreement, Netgateway will, through the Netgateway Internet Commerce Center-TM- ("Netgateway ICC") provide to Subscriber the services described in the eCommerce Services Order Form(s) (the "eCOMMERCE SERVICES ORDER FORM(S)") accepted by Netgateway, or substantially similar services if such substantially similar services would provide Subscriber with substantially similar benefits (the "eCommerce Services"). All such eCommerce Services Order Forms will be incorporated herein by this reference as of the Acceptance Date set forth in each such form. Netgateway and Subscriber have mutually agreed or will mutually agree upon the detailed final specifications (the "SPECIFICATIONS") for the eCommerce Services and the development timeline therefor, all of which are or will be set forth on the attached initial eCommerce Services Order Form, marked Exhibit "A", and by this reference made a part hereof. 1.2 AVAILABILITY. ECommerce Services will be available to Subscriber for inquiry and order entry functions twenty-four (24) hours a day, seven (7) days a week. Netgateway reserves the right upon reasonable notice to Subscriber to limit or curtail holiday or weekend availability when necessary for system upgrades, adjustments, maintenance, or other operational considerations. 1.3 ENHANCEMENTS. General enhancements to existing eCommerce Services provided hereunder, as well as new features that Netgateway incorporates into its standard commerce processing system, regardless of whether they are initiated by Netgateway or developed at the request of Subscriber or other subscribers, shall be made available to Subscriber at no additional cost. Any new features or services that may be developed by Netgateway during the term of this Agreement that Netgateway intends to offer to subscribers on a limited or optional basis may, at Netgateway' option, and subject to Subscribers' acceptance, be made available to Subscriber at Netgateway's then-current prices for such new features or services. Enhancements to existing eCommerce Services requested by Subscriber that benefit only subscriber at the time such enhancements are put into service shall be billed to Subscriber at Netgateway's standard rates for programming. All enhancements to the eCommerce Services, and any new features or services introduced by Netgateway, shall remain the exclusive proprietary property of Netgateway. 1.4 TRAINING. At no cost to subscriber, Netgateway shall provide such onsite training and other assistance, as Netgateway deems necessary to assure that Subscriber's personnel are able to make effective use of the eCommerce Services. On-site training shall take place at such times and places as are mutually agreeable to the parties hereto. 1.5 SUBSCRIBER DATA. (a) SUBSCRIBER DATA. Subscriber will timely supply Netgateway, in a form acceptable to Netgateway, with all data necessary for Netgateway to perform the ongoing services to be provided hereunder. It is the sole responsibility of Subscriber to insure the completeness and accuracy of such data. (b) CONFIDENTIALITY. Netgateway acknowledges that all records, data, files and other input material relating to Subscriber are confidential and shall take reasonable steps to protect the confidentiality of such records, data, files and other materials. Netgateway will provide reasonable security safeguards to limit access to Subscriber's files and records to Subscriber and other authorized parties. (c) PROTECTION OF SUBSCRIBER FILES. Netgateway will take reasonable steps to protect against the loss or alteration of Subscriber's files, records and data retained by Netgateway, but Subscriber recognizes that events beyond the control of Netgateway may cause such loss or alteration. Netgateway will maintain backup file(s) containing all the data, files and records related to Subscriber. Subscriber's file(s), records and data shall, at no cost to Subscriber, be released to Subscriber on an occurrence that renders Netgateway unable to perform hereunder, or upon the termination of this Agreement as provided herein. (d) OWNERSHIP OF DATA. Netgateway acknowledges that all records, data, files and other input material relating to Subscriber and its customers are the exclusive property of the Subscriber. 2. FEES AND BILLING. 2.1 FEES. Subscriber will pay all fees and amounts in accordance with the eCommerce Service Provider Forms. 2.2 BILLING COMMENCEMENT. Billing for eCommerce Services indicated in the eCommerce Services Order Forms (including the eCommerce Rate, Fee Per Hit, Banner Advertising and Click Through Revenue), other than the Initial Development Fee, shall commence on the "OPERATIONAL DATE" indicated in the eCommerce Services Order Forms. The Initial Development Fee will be due and payable upon the full execution of this Agreement. In the event that Subscriber orders other eCommerce Services in addition to those listed in the initial eCommerce Services Order Form, billing for such services shall commence on the date Netgateway first provides such additional eCommerce Services to Subscriber or as otherwise agreed to by Subscriber and Netgateway in the applicable eCommerce Services Order Form. 2.3 BILLING AND PAYMENT TERMS. The billing and payment terms are set forth on the attached Exhibit "B", which by this reference is made a part hereof. 2.4 TAXES, UTILITIES AND EXCLUSIONS. All charges shall be exclusive of any federal, state or local sales, use, excise, AD VALOREM or personal property taxes levied, or any fines, forfeitures or penalties assessed in connection therewith, as a result of this Agreement or the installation or use of eCommerce Services hereunder. Any such taxes, which may be applicable will be paid by Subscriber or by Netgateway for Subscriber's account, in which case Subscriber shall reimburse Netgateway for amounts so paid. Netgateway shall provide burstible at 1 megabit per second capacity bandwith for Subscriber's website at no additional charge. Netgateway is not responsible for providing connectivity to Subscriber's offices. 3. SUBSCRIBER'S OBLIGATIONS. 3.1 COMPLIANCE WITH LAW AND RULES AND REGULATIONS. Subscriber agrees that Subscriber will comply at all times with all applicable laws and regulations and Netgateway's general rules and regulations relating to its provision of eCommerce Services, currently included herein as Section 10, which may be updated and provided by Netgateway to Subscriber from time to time ("RULES AND REGULATIONS"). Subscriber acknowledges that Netgateway exercises no control whatsoever over the content contained in or passing through the Subscriber's web site or mall ("ECOMMERCE CENTERS"), and that it is the sole responsibility of Subscriber to ensure that the information it transmits and receives complies with all applicable laws and regulations. 3.2 ACCESS AND SECURITY. Subscriber will be fully responsible for any charges, costs, expenses (other than those included in the eCommerce Services), and third party claims that may result from its use of, or access to, the Netgateway Internet Commerce Center-TM-, including, but not limited to, any unauthorized use or any access devices provided by Netgateway hereunder. 3.3 NO COMPETITIVE SERVICES. Subscriber shall not use any eCommerce services that provide catalogue functions or content management combined with transaction support, (credit card or business to business credits and debits), during the term of this Agreement. 3.4 INSURANCE. (a) MINIMUM LEVELS. Subscriber will keep in full force and effect during the term of this Agreement: (i) comprehensive general liability insurance in an amount not less than $5 million per occurrence for bodily injury and property damage; (ii) employer's liability insurance in an amount not less than $1 million per occurrence; and (iii) workers' compensation insurance in an amount not less than that required by applicable law. Subscriber also agrees that it will be solely responsible for ensuring that its agents (including contractors and subcontractors) maintain, other insurance at levels no less than those required by applicable law and customary in Subscriber's industries. (b) CERTIFICATES OF INSURANCE. Prior to the Operational Date, Subscriber will furnish Netgateway with certificates of insurance which evidence the minimum levels of insurance set forth above, and will notify Netgateway in writing in the event that any such insurance policies are cancelled. (c) NAMING NETGATEWAY AS AN ADDITIONAL INSURED. Subscriber agrees that prior to the Operational Date, Subscriber will cause its insurance provider(s) to name Netgateway as an additional insured and notify Netgateway in writing of the effective date thereof. 4. CONFIDENTIAL INFORMATION. 4.1 CONFIDENTIAL INFORMATION. Each party acknowledges that it will have access to certain confidential information of the other party concerning the other party's business, plans, customers, technology, and products, including the terms and conditions of this Agreement ("CONFIDENTIAL INFORMATION"). Confidential Information will include, but not be limited to, each party's propriety software and Customer information. Each party agrees that it will not use in any way, for its own account or the account of any third party, except as expressly permitted by this Agreement, nor disclose to any third party Revised - NetGateway (1 year) 032399 Page 1 NETGATEWAY CONFIDENTIAL AND PROPRIETARY (rev 2/99) (except as required by law or to that party's attorneys, accountants and other advisors as reasonably necessary), any of the other party's Confidential Information and will take reasonable precautions to protect the confidentiality of such information. 4.2 EXCEPTIONS. Information will not be deemed Confidential Information hereunder if such information: (i) is known to the receiving party prior to receipt from the disclosing party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (ii) becomes known (independently of disclosure by the disclosing party) to the receiving party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (iii) becomes publicly known or otherwise ceases to be secret or confidential, except through a breach of this Agreement by the receiving party; or (iv) is independently developed by the receiving party. 5. REPRESENTATIONS AND WARRANTIES. 5.1 WARRANTIES BY SUBSCRIBER. (a) SUBSCRIBER'S BUSINESS. Subscriber represents and warrants that: (i) Subscriber's services, products, materials, data, and information used by Subscriber in connection with this Agreement as well as Subscriber's and its permitted customers' and users' use of the eCommerce Services (collectively, "SUBSCRIBER'S BUSINESS") does not as of the Operational Date, and will not during the term of this Agreement, operate in any manner that would violate any applicable law or regulation. (ii) Subscriber owns or has the right to use all material contained in the Subscriber's web site, including all text, graphics, sound, video, programming, scripts, and applets; and (iii) The use, reproduction, distribution, and transmission of the web site, or any information or materials contained in it does not (A) infringe or misappropriate any copyright, patent, trademark, trade secret, or any other proprietary rights of a third party; or (B) constitute false advertising, unfair competition, defamation, an invasion of privacy, or violate a right of publicity. (b) RULES AND REGULATIONS. Subscriber has read the Rules and Regulations (Section 10 below) and represents and warrants that Subscriber and Subscriber's Business are currently in full compliance with the Rules and Regulations, and will remain so at all times during the term of this Agreement. (c) BREACH OF WARRANTIES. In the event of any breach, or reasonably anticipated breach, of any of the foregoing warranties, in addition to any other remedies available at law or in equity, Netgateway will have the right immediately in Netgateway's reasonable discretion, to suspend any related eCommerce Services if deemed reasonably necessary by Netgateway to prevent any harm to Netgateway or its business. 5.2 WARRANTIES AND DISCLAIMERS BY NETGATEWAY. (a) NO OTHER WARRANTY. THE ECOMMERCE SERVICES ARE PROVIDED ON AN "AS IS" BASIS, AND SUBSCRIBER'S USE OF THE ECOMMERCE SERVICES IS AT ITS OWN RISK. NETGATEWAY DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL OTHER EXPRESS AND/OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT AND TITLE, AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE. NETGATEWAY DOES NOT WARRANT THAT THE ECOMMERCE SERVICES WILL BE UNINTERRUPTED, ERROR-FREE, OR COMPLETELY SECURE. (b) DISCLAIMER OF ACTIONS CAUSED BY AND/OR UNDER THE CONTROL OF THIRD PARTIES. NETGATEWAY DOES NOT AND CANNOT CONTROL THE FLOW OF DATA TO OR FROM NETGATEWAY'S INTERNET COMMERCE CENTERS AND OTHER PORTIONS OF THE INTERNET. SUCH FLOW DEPENDS IN LARGE PART ON THE PERFORMANCE OF INTERNET SERVICES PROVIDED OR CONTROLLED BY THIRD PARTIES. AT TIMES, ACTIONS OR INACTIONS CAUSED BY THESE THIRD PARTIES CAN PRODUCE SITUATIONS IN WHICH NETGATEWAY'S SUBSCRIBERS' CONNECTIONS TO THE INTERNET (OR PORTIONS THEREOF) MAY BE IMPAIRED OR DISRUPTED. ALTHOUGH NETGATEWAY WILL USE COMMERCIALLY REASONABLE EFFORTS TO TAKE ACTIONS IT DEEMS APPROPRIATE TO REMEDY AND AVOID SUCH EVENTS, NETGATEWAY CANNOT GUARANTEE THAT THEY WILL NOT OCCUR. ACCORDINGLY, NETGATEWAY DISCLAIMS ANY AND ALL LIABILITY RESULTING FROM OR RELATED TO SUCH EVENTS. 6. LIMITATIONS OF LIABILITY. 6.1 EXCLUSIONS. IN NO EVENT WILL NETGATEWAY BE LIABLE TO SUBSCRIBER, ANY REPRESENTATIVE, OR ANY THIRD PARTY FOR ANY CLAIMS ARISING OUT OF OR RELATED TO THIS AGREEMENT, SUBSCRIBER'S BUSINESS OR OTHERWISE, AND ANY LOST REVENUE, LOST PROFITS, REPLACEMENT GOODS, LOSS OF TECHNOLOGY, RIGHTS OR SERVICES, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, LOSS OF DATA, OR INTERRUPTION OR LOSS OF USE OF SERVICE OR SUBSCRIBER'S BUSINESS, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE. 6.2 LIMITATIONS. NETGATEWAY, ITS AFFILIATES, EMPLOYEES, OFFICERS AND AGENTS SHALL NOT BE LIABLE TO SUBSCRIBER OR TO ANY THIRD PARTY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR INTERRUPTIONS OF SERVICE DUE TO MECHANICAL ELECTRICAL OR WIRE DEFECTS OR DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR OTHER CAUSES OVER WHICH NETGATEWAY, ITS AFFILIATES, EMPLOYEES, OFFICERS, OR AGENTS AGAINST WHOM LIABILITY IS SOUGHT, HAVE NO REASONABLE CONTROL, OR FOR LOSS OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS STATEMENTS, ERRORS OF FACTS, OMISSIONS, OR ERRORS IN THE TRANSMISSION OR DELIVERY OF ECOMMERCE SERVICES, OR ANY DATA PROVIDED AS A PART OF THE ECOMMERCE SERVICES PURSUANT TO THIS AGREEMENT, EXCEPT TO THE EXTENT CAUSED BY THE GROSS NEGLIGENCE OR WILLFULL MISCONDUCT OF NETGATEWAY. IN ADDITION, IN NO EVENT SHALL NETGATEWAY BE LIABLE TO SUBSCRIBER OR TO ANY THIRD PARTY FOR SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL LOSSES OR DAMAGES WHICH SUBSCRIBER OR SUCH THIRD PARTY MAY INCUR OR EXPERIENCE ON ACCOUNT OF ENTERING INTO OR RELYING ON THIS AGREEMENT OR UTILIZING THE NETGATEWAY ECOMMERCE SERVICES, REGARDLESS OF WHETHER NETGATEWAY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES ARE CAUSED, IN WHOLE OR IN PART, BY THE NEGLIGENCE OF NETGATEWAY. 6.3 MAXIMUM LIABILITY. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NETGATEWAY'S MAXIMUM AGGREGATE LIABILITY TO SUBSCRIBER RELATED TO OR IN CONNECTION WITH THIS AGREEMENT WILL BE LIMITED TO THE TOTAL AMOUNT PAID BY SUBSCRIBER TO NETGATEWAY HEREUNDER FOR THE PERIOD CONSISTING OF THE PRIOR [**REDACTED**] CALENDAR [**REDACTED**] 6.4 TIME FOR MAKING CLAIMS. ANY SUIT OR ACTION BY SUBSCRIBER AGAINST NETGATEWAY, ITS AFFILIATES, OFFICERS, DIRECTORS, AGENTS EMPLOYEES, SUCCESSORS OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL BE COMMENCED WITHIN [**REDACTED**] OF THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF NETGATEWAY'S LIABILITY SET FORTH IN SECTION 6 OR ELSEWHERE IN THIS AGREEMENT. 6.5 SUBSCRIBER'S INSURANCE. Subscriber agrees that it will not pursue any claims against Netgateway for any liability Netgateway may have under or relating to this Agreement until Subscriber first makes claims against Subscriber's insurance provider(s) and such insurance provider(s) finally resolve(s) such claims, provided, however, that this provision shall not apply to the extent that conflicts with Subscriber's current insurance. 6.6 BASIS OF THE BARGAIN; FAILURE OF ESSENTIAL PURPOSE. Subscriber acknowledges that Netgateway has set its prices and entered into this Agreement in reliance upon the limitations of liability and the disclaimers of warranties and damages set forth herein, and that the same form an essential basis of the bargain between the parties. The parties agree that the limitations and exclusions of liability and disclaimers specified in this Agreement will survive and apply even if found to have failed of their essential purpose. 7. INDEMNIFICATION. 7.1 NETGATEWAY'S INDEMNIFICATION OF SUBSCRIBER. Netgateway will indemnify, defend and hold Subscriber harmless from and against any and all costs, liabilities, losses, and expenses (including, but not limited to, reasonable attorneys' fees) (collectively, "LOSSES") resulting from any claim, suit, action, or proceeding (each, an "ACTION") brought against Subscriber alleging the infringement of any third party registered U.S. copyright or issued U.S. patent resulting from the provision of eCommerce Services pursuant to this Agreement (but excluding any infringement contributorily caused by Subscriber's Business). 7.2 SUBSCRIBER'S INDEMNIFICATION OF NETGATEWAY. Subscriber will indemnify, defend and hold Netgateway, its affiliates and customers harmless from and against any and all Losses resulting from or arising out of Subscriber's breach of any provision of this Agreement or any Action brought against Netgateway, its directors, employees, affiliates or Subscribers alleging with respect to the Subscriber's Business: (a) infringement or misappropriation of any intellectual property rights; (b) defamation, libel, slander, obscenity, pornography, or violation of the rights of privacy or publicity; (c) spamming, or any other offensive, harassing or illegal conduct or violation of the Rules and Regulations; or, (d) any violation of any other applicable law or regulation, provided, however, that, Subscriber's indemnification shall not extend to acts by third parties, so long as such acts are not the result of or allowed by the act or omission of Subscriber. 7.3 NOTICE. Each party will provide the other party, prompt written notice of the existence of any such event of which it becomes aware, and an opportunity to participate in the defense thereof. 8. DISPUTE RESOLUTION. 8.1 PROCEDURES. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is most knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this Paragraph 8 are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "dispute" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement, other than as provided in paragraph 8.5 below, may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (a) The complaining party's representative will notify the other party's representative in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (b) In the event that such matter remains unresolved thirty (30) days after the delivery of the complainant party's written notice, a senior representative of each party shall meet Page 2 or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (c) In the event that the meeting or conference specified in (b) above does not resolve such matter, the senior officer of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (d) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with paragraph 8.2 below. 8.2 BINDING ARBITRATION. Except as provided in paragraph 8.5 below, any dispute arising under this Agreement shall, after utilizing the procedures in paragraph 8.1, be resolved by final and biding arbitration in Los Angeles, California, before a single arbitrator selected by, and in accordance with the rules of commercial arbitration of, the American Arbitration Association or as otherwise provided in Paragraph 11.6. Each party shall bear its own costs in the arbitration, including attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. 8.3 ARBITRATOR'S AUTHORITY. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. 8.4 ENFORCEMENT OF ARBITRATOR'S AWARD. Any Party may apply to a court of general jurisdiction to enforce an arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including responsible attorneys' fees. 8.5 ACCESS TO COURTS. Notwithstanding the provisions of paragraphs 8.1 and 8.2 above, any action by Netgateway to enforce its rights under Paragraphs 10.3 of this Agreement or to enjoin any infringement of the same by Subscriber may, at Netgateway election, be commenced in the state of federal courts of Los Angeles, California, and Subscriber consents to personal jurisdiction and venue in such courts for such actions. 9. TERM AND TERMINATION. 9.1 TERM. This Agreement will be effective on the date first above written and will terminate three (3) years (the "Initial Term") from the date Subscriber begins processing live data through Netgateway ICC-TM-, unless earlier terminated according to the provisions of this Section 9. This Agreement will automatically renew for an additional term of three (3) years unless a party hereto elects not to so renew and notifies the other party in writing of such election by a date, which is six (6) months prior to the lapse of the Initial Term. 9.2 TERMINATION. Either party will have the right to terminate this Agreement if: (i) the other party breaches any material term or condition of this Agreement and fails to cure such breach within thirty (30) days after receipt of written notice of the same, except in the case of failure to pay fees, which must be cured within five (5) days after receipt of written notice from Netgateway; (ii) the other party becomes the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors; (iii) the other party becomes the subject of an involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within sixty (60) days of filing; or after the first six (6) months, upon giving sixty (60) days prior written notice. 9.3 TERMINATION WITHOUT CAUSE AFTER SIX (6) MONTHS. The Subscriber has the right to terminate this agreement without cause after Six (6) Months with thirty (30) day notice. 9.4 NO LIABILITY FOR TERMINATION. Neither party will be liable to the other for any termination or expiration of this Agreement in accordance with its terms. 9.5 EFFECT OF TERMINATION. Upon the effective date of expiration or termination of this Agreement: (a) Netgateway will immediately cease providing the eCommerce Services; (b) any and all payment obligations of Subscriber under this Agreement will become due immediately; and (c) within thirty (30) days after such expiration or termination, each party will return all Confidential Information of the other party in its possession at the time of expiration or termination and will not make or retain any copies of such Confidential Information except as required to comply with any applicable legal or accounting record keeping requirement. 9.6 SURVIVAL. The following provisions will survive any expiration or termination of the Agreement: Sections 2,3,4,5,6,7,8,9 and 10. 10. USE OF eCOMMERCE SERVICES - RULES AND REGULATIONS. 10.1 PROPRIETARY SYSTEMS. Subscriber acknowledges that the software systems utilized by Netgateway in the provision of eCommerce Services hereunder, including all enhancements thereto, and all screens and formats used in connection therewith are the exclusive proprietary property of Netgateway, and Subscriber shall not publish, disclose, display, provide access to or otherwise make available any Netgateway eCommerce software or products thereof, or any screens, formats, reports or printouts used, provided, produced or supplied from or in connection therewith, to any person or entity other than an employee of Subscriber without the prior written consent of, and on terms acceptable to Netgateway, which consent shall not be unreasonably withheld; provided, however, that Subscriber may disclose to a govermental or regulatory agency or to customers of Subscriber any information expressly prepared and acknowledge in writing by Netgateway as having been prepared for disclosure to such governmental or regulatory agency or to such customers. Neither party shall disclose Subscriber's use of eCommerce Services in any advertising or promotional materials without the prior written consent to such use, and approval of such materials, by the other. 10.2 USE OF SERVICES PERSONAL TO SUBSCRIBER. Subscriber agrees that it will use the services provided hereunder only in connection with its eCommerce business, and it will not, without the express written permission of Netgateway, sell, lease, or otherwise provide or make available eCommerce Services to any third party. 10.3 SURVIVAL OF OBLIGATIONS. The obligations of this paragraph 10 shall survive termination of this Agreement. Subscriber understands that the unauthorized publication or disclosure of any of Netgateway Software or copies thereof, or the unauthorized use of eCommerce Service would cause irreparable harm to Netgateway for which there is no adequate remedy at law. Subscriber therefore agrees that in the event of such unauthorized disclosure or use, Netgateway may, at its discretion and at Subscriber's expense, terminate this Agreement, obtain immediate injunctive relief in a court of competent jurisdiction, or take such other steps as it deems necessary to protect its rights. If Netgateway, in its reasonable, good faith judgement, determines that there is a material risk of such unauthorized disclosure or use, it may demand immediate assurances, satisfactory to Netgateway, that there will be no such unauthorized disclosure or use. In the absence of such assurance, Netgateway may immediately terminate this Agreement and take such other steps as it deems necessary. The rights of Netgateway hereunder are in addition to any other remedies provided by law. 11. MISCELLANEOUS PROVISIONS. 11.1 FORCE MAJEURE. Except for the obligation to pay money, neither party will be liable for any failure or delay in its performance under this Agreement due to any cause beyond its reasonable control, including act of war, acts of God, earthquake, flood, embargo, riot, sabotage, labor shortage or dispute, governmental act or failure of the Internet, provided that the delayed party: (a) gives the other party prompt notice of such cause, and (b) uses its reasonable commercial efforts to correct promptly such failure or delay in performance. In the event that Netgateway is unable to complete the development required for any of the phases contemplated herein due to reasons set forth in this Section 11.1, Subscriber's payment obligation shall be suspended, provided, however, that this sentence shall not change the timing of any payments required for such development. 11.2 NO LEASE. This Agreement is a services agreement and is not intended to and will not constitute a lease of any real or personal property. Subscriber acknowledges and agrees that (i) it has been granted only a license to use Netgateway's ICC and any equipment provided by Netgateway in accordance with this Agreement, (ii) Subscriber has not been granted any real property interest in the Netgateway's ICC, and (iii) Subscriber has no rights as a tenant or otherwise under any real property or landlord/tenant laws, regulations, or ordinances. 11.3 MARKETING. Subscriber agrees that Netgateway may refer to Subscriber by trade name and trademark, and may briefly describe Subscriber's Business, in Netgateway's marketing materials and web site. Subscriber hereby grants Netgateway a license to use any Subscriber trade names and trademarks solely in connection with the rights granted to Netgateway pursuant to this Section 11.3. 11.4 GOVERNMENT REGULATIONS. Subscriber will not export, re-export, transfer, or make available, whether directly or indirectly, any regulated item or information to anyone outside the U.S. in connection with this Agreement without first complying with all export control laws and regulations which may be imposed by the U.S. Government and any country or organization of nations within whose jurisdiction Subscriber operates or does business. 11.5 NON-SOLICITATION. During the period beginning on the Operational Data and ending on the first anniversary of the termination or expiration of this Agreement in accordance with its terms, Subscriber agrees that it will not, and will ensure that its affiliates do not, directly or indirectly, solicit or attempt to solicit for employment any persons employed by Netgateway during such period. 11.6 GOVERNING LAW; DISPUTE RESOLUTION, SEVERABILITY; WAIVER. This Agreement is made under and will be governed by and construed in accordance with the laws of the State of California (without regard to that body of law controlling conflicts of law) and specifically excluding from application to this Agreement that law known as the United Nations Convention on the International Sales of Goods. Any dispute relating to the terms, interpretation or performance of this Agreement (other than claims for preliminary injunctive relief or other pre-judgment remedies) will be resolved at the request of either party through binding arbitration. Arbitration will be conducted in Los Angeles County, California, under the rules and procedures of the Judicial Arbitration and Mediation Society ("JAMS"). The parties will request that JAMS appoint a single arbitrator possessing knowledge of online services agreements; however the arbitration will proceed even it such a person is unavailable. In the event any provision of this Agreement is held by a tribunal of competent jurisdiction to be contrary to the law, the remaining provisions of this Agreement will remain in full force and effect. The waiver of any breach or default of this Agreement will not constitute a waiver of any subsequent breach or default, and will not act to amend or negate the rights of the waiving party. 11.7 ASSIGNMENT; NOTICES. Subscriber may not assign its rights or delegate its duties under this Agreement either in whole or in part without the prior written consent of Netgateway, except that Subscriber may assign this Agreement in whole as part of a corporate reorganization, consolidation, merger, or sale of substantially all of its assests. Any attempted assignment or delegation without such consent will be void. Netgateway may assign this Agreement in whole or part. This Agreement will bind and inure to the Revised - NetGateway (1year) 032399 NETGATEWAY CONFIDENTIAL AND PROPRIETARY (rev 2/99) Page 3 benefit of each party's successors and permitted assigns. Any notice or communication required or permitted to be given hereunder may be delivered by hand, deposited with an overnight courier, sent by confirmed facsimile, or mailed by registered or certified mail, return receipt requested, postage prepaid, in each case to the address of the receiving party indicated on the signature page hereof, or at such other address as may hereafter be furnished in writing by either party hereto to the other. Such notice will be deemed to have been given as of the date it is delivered, mailed or sent, whichever is earlier. 11.8 RELATIONSHIP OF PARTIES. Netgateway and Subscriber are independent contractors and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise or agency between Netgateway and Subscriber. Neither Netgateway nor Subscriber will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent, except as otherwise expressly provided herein. 11.9 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement, including all documents incorporated herein by reference, constitutes the complete and exclusive agreement between the parties with respect to the subject matter hereof, and supersedes and replaces any and all prior or contemporaneous discussions, negotiations, understandings and agreements, written and oral, regarding such subject matter. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. Subscriber's and Netgateway's authorized representatives have read the foregoing and all documents incorporated therein and agree and accept such terms effective as of the date first above written. SUBSCRIBER Signature: /s/ Craig T. Stevens Signature: /s/ Craig T. Stevens --------------------- ---------------------- Print Name: Craig T. Stevens Print Name: Craig T. Stevens --------------------- ---------------------- Title: Sr. Managing Director --------------------- NETGATEWAY Signature: /s/ Keith D. Freadhoff Signature: /s/ Keith D. Freadhoff ---------------------- ---------------------- Print Name: Keith D. Freadhoff Print Name: Keith D. Freadhoff ---------------------- ---------------------- Title: CEO ---------------------- Page 4 EXHIBIT "A" SPECIFICATIONS AND TIME LINE See attached initial eCommerce Services Order Form. Page 1 EXHIBIT "B" BILLING AND PAYMENT TERMS Netgateway shall invoice Subscriber monthly in advance of the provision of Internet Commerce Services, and payment of such fees will be due within thirty (30) days of the date of each Netgateway invoice. All payments will be made in U.S. dollars. Late payments hereunder will accrue interest at a rate of one and one-half percent (1 1/2%) per month, or the highest rate allowed by applicable law, whichever is lower. If in its reasonable judgment Netgateway determines that Subscriber is not creditworthy or is otherwise not financially secure, Netgateway may, upon prior written notice to Subscriber, modify the payment terms to require full payment before the provision of eCommerce Services or other assurances to secure Subscriber's payment obligations hereunder. Page 1 APPENDIX A - DESCRIPTION OF WORK PHASES 1 & 2 MARCH 24, 1999 PHASE I - OUTLINE CBRE VENDOR INTEGRATION Netgateway will invite companies which have existing contracts with CBRE to participate in the CBRE Purchasing and CBRE Tenant Purchasing programs. Each vendor will be contacted via phone to initiate the process and determine the appropriate party(s) to work with at each vendor organization. A vendor startup kit will describe the programs and offer a "vendor worksheet" which will be completed and returned to Netgateway in order to initiate the vendor integration process. Depending on the capabilities of the vendor and the complexity of their ordering requirements, one or more follow-up sessions may be necessary via phone or face-to-face to complete the requirements gathering for a particular vendor. Each vendor will be integrated according to a time frame dictated by the complexity of its integration requirements. Upon establishing the final requirements documentation for a particular vendor, Netgateway will provide CBRE an implementation schedule for that vendor. Each vendor will be implemented into the system according to established contract terms regarding items such as: / / Pricing / / Discount schedules (if any) / / Shipping methods (if specified) / / Blanket purchase orders (if applicable) Also, vendor specific ordering requirements will be integrated into the CBRE Employee and Tenant offerings including items such as: / / Shipping methods and shipping/handling rates / / Taxation / / Discount schedules / / Specific order information required on each order (i.e. "order header" items) / / Support for backorder and partial shipments / / Import of current CBRE ship-to locations in vendor database / / Support for product varieties such as - size, color, style, finish type, capture text fields for imprinting or other use / / Special instructions, requested delivery date, ship-to location for each product ordered VENDOR STARTUP KIT After initial phone contact with each vendor, a vendor startup kit will be supplied to each of CBRE's contract vendors. This standard packet will be submitted to CBRE for approval before initiating the vendor contact process. The kit will consist of: / / Cover letter / / Vendor startup worksheet / / Brief vendor question and answer sheet with expected common questions and answers / / Contact information 1 of 7 VENDOR PARTICIPATION / INTEGRATION OPTIONS Phase I of the CBRE offering will enable vendors to integrate their business using one of two methods as described below. VENDOR INTEGRATION - OPTION 1 / / Scheduled product catalog updating via file transfer / / Order submission file transfer on timed basis / / Order status file transfer on timed basis / / All file formats will be standard Netgateway ICC in this phase VENDOR INTEGRATION - OPTION 2 / / Catalog submitted once via flat file, spreadsheet, or MS Access database / / Changes made via secured area of site allowing vendor to maintain product catalog / / Email sent to vendor with order information, link to secured order processing section of site allowing for order status updates by vendor 2 of 7 CBRE EMPLOYEE ACCESS The system will be implemented to serve the purchasing needs of the CBRE North American offices according to existing vendor contracts. Authorized CBRE employees will have access via an Internet web-based application providing order capabilities and order status/customer service ability according to each vendor's specific integration into the system. PURCHASING WORKFLOW CBRE employees will be presented an easy to use, streamlined interface for purchasing items from the participating vendors. The diagram below demonstrates a sample user session. [FLOW CHART] 3 of 7 EMPLOYEE ACCESSIBILITY In order to use the system, there are certain minimum requirements at each CBRE office and intended employees must be equipped with a base level of computing technology. / / Location requirements - Each location must have telecommunications capabilities, at the very least a standard, reliable telephone connection. Locations with local area networks may optionally provision Internet access via third party ISP services with full time, LAN connected access. / / Computing requirements - - Internet Connection - Either LAN connected Internet access as described above, or individual PC access via dedicated or on-demand circuit (dial up). Acceptable base connectivity will be via standard 56k modem to reliable third party ISP. - Web browser - Microsoft Internet Explorer v4 or above, Netscape Navigator v4 or above. - Computer - Any PC or Macintosh computer equipped to minimum standards required by above web browsers. SYSTEM ADMINISTRATION A secured, "System Administration" module will be accessible via web-based interface, allowing CBRE authorized personnel to control certain aspects of the employee purchasing system. Capabilities will include: / / Secure, web based access / / Ability to create new system access user accounts / / Ability to define an account as "administrator" which will authorize access to this section / / Review all open and history orders processed by the system / / Define system inactivity time-out value (in minutes) to expire user sessions if inactive / / Disable system access to everyone but administrators / / Disable a particular vendor store to everyone but administrators PURCHASING RULES When CBRE employees initiate an ordering session in the system, rules are applied to that session based on defined settings for both CBRE and the vendors. The listing below describes rules that will be enforced during an ordering session. / / Rules applied according to user and group profiles as created in CBRE system administration / / Vendor order information requirements applied as needed to fulfill contract and vendor specific ordering issues / / Pre-defined and/or restricted ship-to location by user / / Ability to apply blanket purchase order numbers to a vendor order / / Automatic generation of a purchase order number (incrementing number) for orders to any or all vendors / / Specify delivery required date if vendor accepts such request / / Pricing calculated according to vendor requirements and contract terms / / Taxation applied according to vendor requirements / / Shipping methods and cost applied according to vendor requirements PRODUCT NAVIGATION The application will be capable of locating products and ordering products through a streamlined process. One method for locating product will be to "browse" or navigate to a product using a display of either product categories or vendor names. This hierarchical method of navigation is the easiest way for users to locate products when unsure which specific product to purchase. 4 of 7 SEARCH A flexible search mechanism will allow customers to quickly locate products according to information entered. The search mechanism will be prominently displayed on the web page in order to ensure quick access to the function. The CBRE system search will enable the user to query the product catalog information including: / / Product name / / Product description / / Product "keywords" / / Product number / / Model number / / Manufacturer name PRODUCT DETAIL The system will accommodate complex product detail in order to provide complete information necessary to order products and to allow for product specific selections (varieties such us: size, color, etc.) as required to complete an order. Product detail will include the items: / / Small and large product photos / / Product name / / Product number / / Manufacturer / / Product brief description / / Product detailed description / / Product additional detail/specs - Available for download, MS Word or PDF format (application or viewer required) / / Product variants such as color, size, finish, imprint text, etc. as required by vendor ORDER PROCESSING Completion of orders will occur after products have been selected from various categories or vendors. A completed order will be presented to the buyer for verification before final submission. If the buyer selects products from multiple vendors, the orders will be displayed separately and appropriate information will be prompted for each vendor. Common order elements between vendors such as ship-to address will default to the first vendor order in the batch in order to prevent re-keying information while still allowing modifications if necessary. Order completion and processing will be applied according to both CBRE and vendor defined rules for ordering. Key elements of order processing include: / / "shopping cart" - this is a listing of currently selected items a user wishes to purchase / / Order Header information - this information is equal to common fields typically found at the beginning of a paper purchase order form - Order number (or PO number) - Shipping address - Billing address - Vendor name - Attention to: delivery notice - Other items as required by CBRE and vendor / / Pricing - item pricing is displayed in the shopping cart and on order confirmations and totals / / Quantity - each line item in an order will display quantity ordered / / Per vendor sub totals - which will include all merchandise, taxes, and shipping / / Per vendor / / Shipping Methods / / Payment terms 5 of 7 CUSTOMER SERVICE This section of the application will provide 7X24 access to order status, including shipping tracking information if provided by the vendor. The user will also be able to request customer support via email concerning any particular order or address any other issue as required. / / Order status - will display a summary listing of all open (not shipped) orders / / Order history - will allow for historical viewing of orders for specified time / / Order detail - clicking on an individual order from the open order status or history sections will display the complete order detail including all line items HELP TEXT FOR EACH SECTION Each primary section of the CBRE application will have help text to explain the basic elements of each page. DOCUMENTATION Netgateway will develop customized documentation for users of the Phase I system which will include regular users of the system (those who purchase products) and administrators. The documentation will be provided in limited printed copies and in digital format for reproduction as needed by CBRE. REPORTING Basic reporting features included in Phase I will include: / / Order status / / Order history / / Administrative reports including all orders / / Site "hit" reports showing system usage CBRE TENANT AND LEASING CLIENT ACCESS CBRE's Tenants and Leasing Clients will have the capability to order products and service from existing contract vendors who are integrated into the system. The functionality provided to them will mirror the CBRE Employee system with the exception of: / / Different design elements such as graphics / / Text tailored to specifics of program offered to Tenants / / Purchases can be made via credit card and processed through the vendor's account / / If vendor permits, purchases can be charged to Tenant's vendor account / / Tenant does not have Administrative capabilities / / Tenant store can have a separate "front end" web site describing the program offering PHASE II - OUTLINE CBRE VENDOR INTEGRATION ADDITIONAL INTEGRATION CAPABILITY Scheduled product catalog update Real time pricing and availability Real time order status ADDITIONAL INTEGRATION CAPABILITY EDI integration for catalog, order submission, order status 6 of 7 CBRE EMPLOYEE ACCESS PERSONALIZATION CAPABILITIES / / Create standard purchase lists/configurations - per personal account, per group / / Frequent purchases ONLINE QUOTATIONS FOR ITEMS AS DESIGNATED BY VENDOR The vendor will have the capability to place products in the system that will be handled via online quote. PURCHASE APPROVAL WORKFLOW A basic workflow system will enable rules to be defined for individual or group that will mandate a specified manager's approval before the purchase is forwarded to the vendor. The manager will be notified via email with a link to the purchase request in the CBRE system. The manager can approve or deny the request. Approval or denial will trigger an email to the person submitting the purchase request. Purchase requests can be triggered by: / / Employee purchases above defined spending limit for order / / Employee purchases beyond current budget / / All purchases for a specific employee or group can be trapped for approval if defined in administration ENHANCED SEARCH Provides for complex searching including restricting search fields and specifying "and, or, not" search rules. BUDGET TRACKING AND REPORTING This functionality provides both a cost containment capability by preventing purchase beyond budget (if desired) and as a reporting tool. Key elements include: / / Track budgets by "groups" or individuals defined in administration / / Deny purchases or route to manager if spending is beyond budget SYSTEM ADMINISTRATION ENHANCEMENTS / / Define and manage user groups - Add, delete, modify groups - Define which vendors a group can shop from - Define groups as "budget/accounting centers" for reporting purposes / / Define group access to certain products / / Define group (budget center) budgets / / Review user activity reports including: current users in system, specify user system activity: last time used / / User password expirations - Define default password expiration schedule (days) - Force password expiration at next login session for individual or group CBRE TENANT AND LEASING CLIENT ACCESS The Phase II Tenant and Client Access system will include all of the enhancement features of the Phase II CBRE Employee Access system with the exception of: / / No budget tracking or group definition / / Limited administration capabilities to allow purchasing workflow approval only 7 of 7 NETGATEWAY ECOMMERCE SERVICES ORDER FORM SUBSCRIBER NAME: CB RICHARD ELLIS FORM DATE: MARCH 24, 1999 FORM NO.: 001 GENERAL INFORMATION: 1. By submitting this eCommerce Services Order Form ("Form") to Netgateway, Subscriber hereby places an order for the eCommerce Services described herein pursuant to the terms and conditions of the Internet Data Center Services Agreement between Subscriber and Netgateway (the "ECS AGREEMENT"). 2. Billing, with the exception of Development Fees, will commence on the Operational Date set forth below or the date that Subscriber first begins to process transactions through the Netgateway Internet Commerce Center, whichever occurs first. 3. Netgateway will provide the eCommerce Services pursuant to the terms and conditions of the ECS Agreement, which incorporates this Form. The terms of this Form supersede, and by accepting this Form Netgateway hereby rejects, any conflicting or additional terms provided by Subscriber in connection with Netgateway's provision of the eCommerce Services. If there is a conflict between this Form and any other Form provided by Customer and accepted by Exodus, the Form with the latest date will control. 4. Netgateway will not be bound by or required to provide eCommerce Services pursuant to this Form or the ECS Agreement until each is signed by an authorized representative of Netgateway. SUBSCRIBER HAS READ, UNDERSTANDS AND HEREBY SUBMITS THIS ORDER. Submitted By: /s/ Craig T. Stevens Operational Date: June 1, 1999 ------------------------ (AUTHORIZED SIGNATURE) Print Name: Craig T. Stevens ------------------------ Title: SR Managing Director ------------------------ NETGATEWAY ACCEPTANCE /s/ Keith D. Freadhoff Date: 3/24/99 - ---------------------------------- ------------------------------- (AUTHORIZED SIGNATURE: Keith D. Freadhoff NETGATEWAY ECOMMERCE SERVICES ORDER FORM SUBSCRIBER NAME: CB RICHARD ELLIS FORM DATE: MARCH 24, 1999 FORM NO.: 001 TERMS: 1. The initial development fee for Phases I and II, descriptions of which are attached hereto as Exhibits A and B, will be [**REDACTED**] due and payable upon submission of this Order Form. 2. The development fee for Phase III will be [**REDACTED**] due and payable five (5) days prior to commencement of the Phase III development. 3. The Development timeline and Phase specification to be pursuant to the mutual agreement of the parties. 4. ICC Commerce Rate (Transaction Rate). Netgateway transaction fee to be as follows: The [**REDACTED**] of total transaction revenues each month. [**REDACTED**] of all transaction revenues in excess of the [**REDACTED**] each month. For purposes hereof, transaction revenues shall mean all revenues generated from transactions processed through the Netgateway infrastructure which are related to Subscriber or Subscriber's mall. 5. Fee Per Hit. Netgateway to receive [**REDACTED**] per hit (as that term is customarily understood in the industry), up to a maximum [**REDACTED**] per month. 6. Netgateway to receive [**REDACTED**] percent of advertising and [**REDACTED**] percent of the click-through revenue [**REDACTED**] CBRE receives from the advertiser placed on the subscriber mall or web site. This fee will not apply to advertising for divisions of subscriber. 7. Netgateway to receive [**REDACTED**] percent of advertising and [**REDACTED**] percent of the click-through revenue for Netgateway placed ads placed on the Subscriber mall or web site, provided, however, that Subscriber may reject an advertiser or click-through relationship. Subscriber's Initials CTS ----------- Page 2 Advertising and click-through revenue shall be determined and defined based on the various advertising and click-through contracts obtained with respect to Subscriber's eCommerce Services. Copies of such contracts will be provided to Subscriber. 8. Development Timeline. - ECS Agreement to be signed by March 24, 1999. - Design of Specifications to be completed by April 9, 1999 - Phase I Implementation June 1, 1999 9. Description of Phases. See Attached Schedule 1. 10. Both parties are public companies and be affected by the manner or content of public announcements concerning this relationship. Neither party shall make any public announcement of this Agreement or of the relationship they have entered into without the prior written consent of the other. Neither party may unreasonable withhold this consent. SCHEDULE 1 DESCRIPTION OF PHASES PHASE I The specifications for Phase I will be determined by the mutual agreement of Netgateway and CBRE, but shall in general include the following:(1) [**REDACTED**] Tie-in other CBRE divisions that have products/services to sell via the Internet into the CBRE e-commerce backbone. The parties will mutually agree upon a standard set of specifications (the "STANDARD"). Netgateway will be entitled to charge reasonable development fees for any such tie-ins that exceed the Standard. - --------------- (1) In general, those Vendors having pre-existing connectivity or who are ready to connect (estimated to be between 5 and 6 vendors) will be connected first. Vendors without connectivity will be connected in Phase II, however such vendors will be eligible to have bulletin board sites set up. Such sites will not have dynamic information exchange. Phase I is projected to span 2 months and be completed by June 1, 1999. Subscriber's Initials CTS ----------- Page 3 [**REDACTED**] Subscriber's Initials CTS ----------- Page 4 EX-10.25 8 EXHIBIT 10.25 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." STORESONLINE.COM RESELLER AND MALL AGREEMENT Wireless One THIS RESELLER AND MALL AGREEMENT (the "AGREEMENT") is made and entered into as of the date set forth on the Addendum attached hereto and by this reference made a part hereof (the "ADDENDUM"), between and among STORESONLINE.COM, INC., a California corporation, and NETGATEWAY, a Nevada corporation , on the one hand (collectively, "STORESONLINE"), and the Reseller identified on the Addendum, on the other hand ("RESELLER"). R E C I T A L S A. Reseller is an established business entity, engaged in the business of providing high speed wireless Internet access, data transmission and telephone services and analog wireless multichannel subscription television programming services primarily in small to mid-size markets (the "Systems") in the southern and southeastern United States. B. StoresOnline owns, operates and maintains an Internet storefront-building services package comprised of certain services delivered through StoresOnline's proprietary software, the standard features of which are more particularly described on the Addendum (the "SERVICES"). C. The Services are delivered through the Internet and shall be made available through a private, branded electronic exchange to be developed for Reseller. D. StoresOnline desires to (i) sell and license the Services to Reseller for Reseller's own use and for resale and sublicense to end-user customers or, with the written permission of StoresOnline, to other resellers and (ii) develop an on-line electronic shopping mall to be branded around Reseller's name, brand and image (as further described herein, the "Mall"). AGREEMENT NOW, THEREFORE, on the basis of the foregoing recitals, and in consideration of the mutual promises contained herein, the receipt and sufficiency of which is hereby acknowledged, the parties hereto covenant and agree as follows: 1. SERVICES. a. SCOPE OF AGREEMENT. This Agreement covers (i) the purchase, licensing and sale of the Services and (ii) the design and development of the Mall pursuant to and in accordance with the terms and conditions set forth on the Addendum. b. LICENSE GRANT; SALE OF SERVICES. StoresOnline grants to Reseller, subject to the terms and conditions of this Agreement, the non-exclusive right and license to resell and sublicense (in the case of software products), the Services to Reseller's end-user customers or, with the written permission of StoresOnline, to other resellers. In the case of software products, Reseller acknowledges that such software is and will remain proprietary to StoresOnline, is copyrighted and that Reseller acquires no right, title or interest in or to any such software by this Agreement. Reseller agrees to sublicense the Services hereunder to its end-user customers or to other resellers, as the case may be, pursuant to the terms hereof and the Standard License Agreement Terms set forthon Exhibit "A" hereto, and to cause each of its customers or other resellers to sublicense the Services pursuant to such terms, which terms, in the case of a reseller, shall be deemed accepted upon store set-up, and in the case of end-user customers, shall be accepted electronically as part of the storefront registration process described below. c. PRODUCT NAME. It is expressly agreed that the ownership and all right, title and interest in and to the Services and any trademark, trade name, patent or copyright relating to the Services is and will remain vested solely in StoresOnline; PROVIDED, HOWEVER, that as permitted by this Agreement, Reseller may use any existing or future trademark, trade name, patent or copyright relating to the Services, such use to be limited to promoting, selling, installing or maintaining the Services; and PROVIDED, FURTHER, that as permitted by this Agreement, the Services may be branded around Reseller's name, brand and image. Reseller shall use its best efforts during the term of this Agreement to protect StoresOnline's trademarks, trade names, patents and copyrights, but shall not be required to instigate legal action against third parties for any infringement thereof. Reseller shall notify StoresOnline of any infringement as soon as practicable after becoming aware of any such infringement. Reseller shall not use, directly or indirectly, in whole or in part, StoresOnline's name or any other trade name or trademark that is owned or used by StoresOnline in connection with any product other than StoresOnline's products, without the prior written consent of StoresOnline. d. MALL DEVELOPMENT. StoresOnline shall develop the Mall in accordance with the terms and conditions set forth herein and on the Addendum. The Mall shall be branded around Reseller'name, brand and image and shall link to the Reseller's branded StoresOnline solution. The Mall will include an appropriate URL address, four to six featured products and stores from various Reseller and third party advertisers, additional Reseller and non-Reseller advertiser stores and products catalogued with text references, and links to top-tier eCommerce sites. The Mall will also include an appropriate search engine, commerce functionality, banner and other appropriate advertising space and such other features as the parties shall mutually agree. The Mall will be capable of cataloguing stores independently or in conjunction with all other malls that belong to the StoresOnline electronic mall network. 2. TERM OF AGREEMENT. The term of this Agreement shall commence as of the execution hereof and continue for an initial term of two (2) years. Such term shall automatically be extended for additional one-year terms thereafter unless either party notifies the other, not less than thirty (30) days prior to the expiration of the applicable term, of its intention not to renew this Agreement. a. Notwithstanding the foregoing, this Agreement may be terminated in accordance with the provisions of Section 10. b. Termination of this Agreement shall not relieve either party of any obligations incurred prior to termination, including outstanding delivery and payment obligations and other contractual commitments herein or mutually agreed to by the parties from time to time in writing. The obligations set forth in Sections 3d, 6b, 8, 10a, 12c, 12e, 12f and 12h are expressly intended to survive termination of this Agreement. 3. PRICES AND TAXES. a. PRICES FOR SERVICES . StoresOnline shall charge Reseller the one-time Store Set-up Price set forth on the Addendum for each of Reseller's customers. StoresOnline shall also charge Reseller the applicable Monthly Base Wholesale Price set forth on the Addendum. The pricing set forth in the Addendum is contingent upon Reseller's agreement to sell the Services only in the Tier designated in the Addendum. In the event that Reseller sells outside the Tier during the term of this Agreement, all Services from the commencement of this Agreement shall be charged retroactively at the Default Rate set forth in the Addendum. b. PRICE ADJUSTMENTS FOR SERVICES. The prices for the Services are subject to change by StoresOnline at any time, and shall become effective ninety (90) days after the date of written notification of such change to Reseller, provided, however, that StoresOnline shall not increase the Monthly Base Wholesale Price more than ten percent (10%) per annum during any applicable term of this Agreement. c. RETAIL PRICES FOR SERVICES. On or before the first day of each month, Reseller shall provide StoresOnline with a list of the Reseller prices charged for each class of Accounts or for each Account (as hereinafter defined). d. PRICES FOR MALL DEVELOPMENT; MALL REVENUE SPLIT. All prices for Mall design, development and operation provided hereunder shall be as set forth on the Addendum. It is anticipated that the Mall will generate multiple revenue streams. Reseller and StoresOnline shall split the net revenue generated from all such revenue sources on a [**REDACTED**] basis. Such revenue sources to be split shall include, but are not limited to: (1) eCommerce advertisers provided by StoresOnline, ii) the pro rata share of Mall banner advertising attributable to Reseller, (iii) click-through revenue from eTeller sales; and (iv) revenue generated from featured product sales. The parties hereto shall mutually agree to pricing in the event advertising space is sold on a straight-buy basis. e. TAXES. All prices for any services or products supplied hereunder are exclusive of any federal, state or local sales, use, excise, AD VALOREM or personal property taxes levied, or any fines, forfeitures or penalties assessed in connection therewith, as a result of this Agreement or the installation or use of services or products hereunder (collectively, but exclusive of taxes based on StoresOnline's income, "Taxes"). Reseller or Reseller's customer shall pay any and all such Taxes, or StoresOnline may, to the extent required by applicable law, pay such Taxes for Reseller's account or Reseller's customer's account, in which case Reseller shall be obligated to reimburse StoresOnline for amounts so paid. Any such Taxes which are so paid by StoresOnline will be invoiced to and paid by Reseller in the manner set forth in Section 6 below. 4. FORECASTS. Within thirty (30) days of execution of this Agreement, Reseller shall provide StoresOnline with a written, non-binding forecast of Reseller's projected purchases of Services for the following twelve (12) calendar months, with projected Account quantities to be identified by month. Such forecast shall be updated quarterly by Reseller to set forth forecasts for each subsequent twelve (12) month period. 5. CUSTOMER ACCOUNTS. a. CUSTOMER ACCOUNT REGISTRATION PROCESS. The Services provided hereunder include an online registration process that Reseller and its customers will use to establish storefront accounts with StoresOnline (the "Accounts"). In order to establish an Account, Reseller's customers must complete an on-line registration process in accordance with the terms set forth on the StoresOnline website. At the option of the customer, registration may also be completed non-electronically. The general terms and conditions for the use of Accounts shall be posted from time to time on the StoresOnline web site, or in the event that StoresOnline establishes an electronic exchange for Reseller, such information will be posted on Reseller's exchange. The terms and conditions as posted shall, in all events and at all times, be binding upon the Reseller and its customers which establish Accounts. The terms and conditions governing such Accounts may be amended or canceled, from time to time, upon thirty (30) days prior electronic notice to Reseller. To establish an Account, Reseller's customers must provide credit card information and authorize the payment of fees for Services on a monthly basis in advance. b. CONTINUATION OF CUSTOMER ACCOUNTS. Continuation of each Account is subject to the timely payment of the monthly fees associated with such Account, and failure to do so shall constitute grounds for StoresOnline to cancel and terminate an Account. 6. BILLING AND PAYMENT TERMS. a. INVOICING FOR SERVICES.. In the event Reseller requests that StoresOnline invoice Reseller's customers directly, StoresOnline shall electronically invoice Reseller's customers and directly charge against the credit card accounts provided by such customers for that purpose during the registration process on a monthly basis for the retail price of the Services charged by Reseller. All fees due from customers shall be paid in advance and are due on the first day of each month. In preparing the invoices and charging against the applicable credit cards, StoresOnline shall use the most recent Reseller retail prices provided to StoresOnline by Reseller pursuant to Section 3c hereof for the Accounts invoiced. b. PAYMENT AND COLLECTION FOR SERVICES. . StoresOnline shall collect the monthly fees set by Reseller from Reseller's customers and, after deducting any monthly fees and expenses to which it is entitled hereunder, shall remit the balance to Reseller on a monthly basis, together with a statement setting forth the amounts collected, the amounts deducted and the total amount remitted. In the event payment is not received by StoresOnline within the specified time (net of 15 days), an additional late charge of one and one half percent (1.5%) of the past due amount will be assessed for each thirty (30) days outstanding, prorated on a daily basis. All payments for Services shall be made in United States dollars. c. DIRECT RESELLER BILLING FOR SERVICES. In the event that Reseller chooses to bill its customers directly for the Services, Reseller shall remit directly to StoresOnline the applicable monthly wholesale price (per storefront). All such fees shall be paid in advance and are due on the first day of each month. d. BILLING FOR MALL RELATED CHARGES; ADVERTISING AND RELATED REVENUES. StoresOnline shall invoice Reseller directly for all charges due hereunder in connection with the design, development and operation of the Mall, which charges shall be payable in full in advance. All revenues generated from the Mall (including advertising and related revenues) which are to required to be split between StoresOnline and Reseller pursuant to paragraph 3(d) hereof shall be invoiced and collected by StoresOnline. StoresOnline shall thereafter forward all amounts due, if any, to Reseller (net 30 days) at the address provided on the signature page hereto, together with a statement setting forth the total revenue amounts collected, the amounts thereof payable to Reseller and the total amount remitted. 7. REAL TIME PAYMENT PROCESSING. In the event that a customer wishes to use the StoresOnline real-time credit card payment processing option, such customer must establish a customer account with an FDIC network bank and must open an account with a participating credit-card processor. 8. DISCLAIMER OF WARRANTIES AND LIMITATIONS OF LIABILITY. a. DISCLAIMER OF WARRANTY. EXCEPT AS SPECIFICALLY PROVIDED HEREIN, THERE ARE NO, AND STORESONLINE EXPRESSLY DENIES, REJECTS AND DISCLAIMS ANY, WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTIES OF THE CORRECTNESS, ACCURACY, PRECISION, TIMELINESS OR COMPLETENESS OF ANY INFORMATION OR SERVICES PROVIDED HEREUNDER. b. LIMITATION OF LIABILITY. STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES AND AGENTS SHALL NOT BE LIABLE TO RESELLER OR TO ANY THIRD PARTY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR INTERRUPTIONS OF SERVICE DUE TO MECHANICAL ELECTRICAL OR WIRE DEFECTS OR DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR OTHER CAUSES OVER WHICH STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES OR AGENTS AGAINST WHOM LIABILITY IS SOUGHT, HAVE NO REASONABLE CONTROL, OR FOR LOSS OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS STATEMENTS, ERRORS OF FACTS, OMISSIONS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF THE SERVICES, OR ANY DATA PROVIDED AS A PART OF THE SERVICES PURSUANT TO THIS AGREEMENT, EXCEPT TO THE EXTENT CAUSED BY THE NEGLIGENCE OR WILLFUL MISCONDUCT OF STORESONLINE. IN ALL CASE ARISING FROM EVENTS OCCURRING DURING THE TERM OF THIS AGREEMENT, WHETHER BASED UPON TORT, CONTRACT, WARRANTY, INDEMNITY, CONTRIBUTION OR OTHERWISE, DAMAGES SHALL BE LIMITED TO, AND RESELLER AGREES NOT TO MAKE ANY CLAIMS OR CLAIMS EXCEEDING TWENTY FIVE THOUSAND DOLLARS ($25,000), REGARDLESS OF HOW MANY CLAIMS RESELLER MAY HAVE; PROVIDED, HOWEVER, THAT THE DOLLAR LIMITATION SET FORTH IN THIS SENTENCE SHALL NOT APPLY TO MONIES DUE TO RESELLER IN CONNECTION WITH ANY OF RESELLER'S ACCOUNTS ESTABLISHED PURSUANT TO THIS AGREEMENT. IN ADDITION, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER OR TO ANY THIRD PARTY FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES WHICH THE OTHER PARTY OR SUCH THIRD PARTY MAY INCUR OR EXPERIENCE ON ACCOUNT OF ENTERING INTO OR RELYING ON THIS AGREEMENT OR UTILIZING THE SERVICES, REGARDLESS OF WHETHER SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES ARE CAUSED, IN WHOLE OR IN PART, BY THE NEGLIGENCE OF THE OTHER PARTY. C. TIME FOR MAKING CLAIMS. ANY SUIT OR ACTION BY RESELLER AGAINST STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES, AGENTS, SUCCESSORS OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL BE COMMENCED WITHIN TWO (2) YEARS OF THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF STORESONLINE'S LIABILITY SET FORTH IN THIS PARAGRAPH 8 OR ELSEWHERE IN THIS AGREEMENT NOR THE INFRINGEMENT OBLIGATIONS OF STORESONLINE SET FORTH IN PARAGRAPH 8d. D. INFRINGEMENT. StoresOnline will indemnify and hold Reseller harm- less from and against any claim by third parties pertaining to the infringement of U.S. copyrights, trademarks or patents arising solely from Reseller's use of any of computer programs or software products utilized by StoreOnline to provide the Services as authorized hereunder, provided that such computer programs or software products have not been altered, revised or modified by Reseller in a manner that causes the alleged infringement, and further provided that: (i) Reseller promptly notifies StoresOnline in writing of such claim; (ii) StoresOnline will have sole control of the defense of any action on such claim and of all negotiations for its settlement or compromise; (iii) Reseller cooperates with StoresOnline in every reasonable way to facilitate the settlement or defense of such claim; and (iv) should such Services become or, in StoresOnline's opinion, be likely to become, the subject of an infringement claim, Reseller will permit StoresOnline, at StoresOnline's expense, to (1) procure for Reseller the right to continue using such Services, or (2) replace or modify the same to become functionally equivalent yet non-infringing, or (3) upon the failure of (1) and (2) above, terminate, without penalty, Reseller's use of the affected Services, in which event StoresOnline will refund to Reseller on a pro-rata basis any prepaid amounts related thereto. Notwithstanding the foregoing, StoresOnline shall not be liable to indemnify Reseller for any claims of infringement by third parties relating in any manner to the contents of the Mall or any of the third party merchants' storefronts contained therein provided by Reseller or any of its end-user customers. e. DISCLAIMER. THE WARRANTIES AND CONDITIONS SET FORTH HEREIN AND THE OBLIGATIONS AND LIABILITIES OF STORESONLINE HEREUNDER ARE IN LIEU OF, AND BUYER HEREBY WAIVES, ALL EXPRESS AND IMPLIED WARRANTIES AND CONDITIONS, INCLUDING, WITHOUT LIMITATION, THOSE OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 9. DOCUMENTATION AND TRAINING. Provided that Reseller has met the minimum performance standards set forth elsewhere in this Agreement, StoresOnline shall, on a semi-annual basis, provide free-of-charge a one (1) day training program for employees designated by Reseller at the Reseller corporate headquarters. Additional training by StoresOnline shall be made available to Reseller at StoresOnline's standard rates. All expenses of the trainees under this Section 9 shall be borne solely by Reseller. 10. DEFAULT. a. RESELLER'S DEFAULT. The failure by Reseller to make any payment required hereunder or a material breach by Reseller of its obligations hereunder shall constitute an event of default by Reseller. Upon the occurrence of an event of default, StoresOnline shall provide Reseller with written notice specifying the nature of such default. If Reseller has not cured such default within thirty (30) days after receipt of such notice, StoresOnline may, at its sole discretion, terminate this Agreement and/or seek any other available remedies available at law or in equity; PROVIDED, HOWEVER, that the cancellation of this Agreement shall not prevent Reseller from reselling the Services (and sublicensing the software component thereof) previously paid for by Reseller and sublicenses previously granted by Reseller pursuant hereto shall not be affected by such termination. b. STORESONLINE'S DEFAULT. A material breach by StoresOnline of its obligations hereunder shall constitute an event of default by StoresOnline. Upon the occurrence of an event of default by StoresOnline, Reseller shall provide StoresOnline with written notice specifying the nature of such default. If StoresOnline fails to cure such default within thirty (30) days after receipt of such notice, Reseller may, at its sole option, terminate this Agreement. c. INSOLVENCY. Except for the pending Chapter 11 bankruptcy proceeding of Reseller, the commencement of any proceeding (voluntary or involuntary) in bankruptcy or insolvency by or against either party hereto, or the appointment (with or without the party's consent) of an assignee for the benefit of creditors or a receiver with respect to either party hereto shall constitute an event of default hereunder, and the non-defaulting party may elect to terminate this Agreement immediately. 11. DISPUTE RESOLUTION. a. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is most knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this Paragraph 11 are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "DISPUTE" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement, other than as provided in subparagraph e. below, may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (1) The complaining party will notify the other party in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (2) In the event that such matter remains unresolved for thirty (30) days after the delivery of the complaining party's written notice, a senior representative (vice president or above) of each party shall meet or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (3) In the event that the meeting or conference specified in (2) above does not resolve such matter, a senior officer (senior vice-president or above) of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (4) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with subparagraph b. below. b. Except as provided in subparagraph e. below, any dispute arising under this Agreement shall, after utilizing the procedures in subparagraph a., be resolved by final and binding arbitration in Long Beach, California, before a single arbitrator selected by, and in accordance with, the rules of commercial arbitration of the American Arbitration Association. Each party shall bear its own costs in the arbitration, including attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. c. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. d. Either party may apply to a court of general jurisdiction to enforce a arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including reasonable attorneys' fees. e. Notwithstanding the provisions of subparagraphs a. and b. above, any action by StoresOnline to enforce its rights under Paragraph 12e of this Agreement or to enjoin any infringement of the same by Reseller may, at StoresOnline's election, be commenced in the state or federal courts of California, and Reseller consents to personal jurisdiction and venue in such courts for such actions. 12. GENERAL. a. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement between StoresOnline and Reseller and supersedes all previous understandings, negotiations and proposals, whether written or oral. This Agreement may not be altered, amended or modified except by an instrument in writing signed by duly authorized representatives of each party. In the event that any one or more provisions contained in this Agreement should for any reason be held to be unenforceable in any respect, such unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed as if such unenforceable provision had not been contained herein. b. FORCE MAJEURE. Neither party shall be liable to the other for delays or failures to perform an obligation to the other hereunder if such delay or failure to perform is due to any act of God, acts of civil or military authority, labor disputes, fire, riots, civil commotion's, sabotage, war, embargo, blockage, floods, epidemics, delays in transportation, inability beyond StoresOnline's reasonable control to obtain necessary labor, materials or manufacturing facilities, or when due to governmental restrictions, including the inability of StoresOnline to obtain appropriate U.S. export license approval or the subsequent suspension of same. In the event of any such delay or failure, the parties shall have an additional period of time equal to the time lost by reason of the foregoing in which to perform hereunder. c. GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California, without regard to principles of choice of law. d. ASSIGNMENT. Reseller shall not assign this Agreement or any rights hereunder without the prior written consent of StoresOnline, which consent shall not be unreasonably withheld; provided, however, that either party may assign this Agreement to a subsidiary or affiliate corporation provided the assigning party remains wholly liable for the performance of all duties and obligations hereunder. e. DISCLOSURE OF INFORMATION. Reseller acknowledges that, in the course of purchasing Services and meeting its obligations under this Agreement, it will obtain information relating to the Services and to StoresOnline, which is of a confidential and proprietary nature ("STORESONLINE PROPRIETARY INFORMATION"). Such StoresOnline Proprietary Information may include, but is not limited to, trade secrets, know-how, inventions, techniques, processes, programs, schematics, data, customer lists, financial information and sales and marketing plans. Reseller shall at all times during the term of this Agreement and for three years after its termination, keep in confidence and trust from any person or entity all StoresOnline Proprietary Information and shall not disclose or use such StoresOnline Proprietary Information without the prior written consent of StoresOnline, unless compelled to disclose such StoresOnline Proprietary Information by judicial or administrative process (including, without limitation, in connection with obtaining the necessary approvals of this Agreement and the transactions contemplated hereby of governmental or regulatory authorities) or by other requirements of law. Upon termination of this Agreement, Reseller shall promptly return to StoresOnline all StoresOnline Proprietary Information under its control and all copies thereof. Neither party shall disclose the specific terms of this Agreement to any third parties except as may be mutually agreed or as required by law or the order of a court of competent jurisdiction. The above limitations on disclosure of StoresOnline Proprietary Information shall not apply to information which becomes publicly available through no act of Reseller, is released by StoresOnline in writing with no restrictions, is lawfully obtained by Reseller without breach of this Agreement from third parties without obligations of confidentiality, is previously known by Reseller without similar restrictions as shown by documents in its possession prior to disclosure by StoresOnline or is independently developed by Reseller. f. COMPLIANCE WITH LAW. Reseller shall comply with all applicable law the violation of which would have a material adverse effect on StoresOnline or its business, including the export control laws of the United States of America and prevailing regulations which may be issued from time to time by the United States Department of Commerce and any export control regulations of the United States and those countries involved in transactions concerning the exporting, importing and re-exporting of Services purchased under application of these terms and conditions. Reseller shall also comply with the United States Foreign Corrupt Practices Act and shall indemnify StoresOnline from violations of such act by Reseller. This provision shall survive any termination or expiration of the Agreement. g. EXERCISE OF REMEDIES. Any delay or omission by either party to exercise any right or remedy under this Agreement shall not be construed to be a waiver of any such right or remedy or any other right or remedy hereunder. h. HEADINGS. Headings contained in this Agreement are for convenience only, are not a part of this Agreement, and do not in anyway interpret, limit or amplify the scope, extent or intent of this Agreement or any of the provisions hereof. i. REGULATORY APPROVAL. Reseller warrants that the Services and the Mall, when utilized with its own products, will comply with all applicable industry and governmental standards and requirements. StoresOnline assumes no responsibility or liability for these governmental and regulatory standards or requirements, which liability and responsibility is assumed entirely by Reseller. Upon request, StoresOnline will provide copies of regulatory approvals to Reseller. k. BRANDING. StoresOnline shall have the right to place a "POWERED BY NETGATEWAY" or "POWERED BY STORESONLINE" byline in a prominent mutually agreed upon location on each storefront site and on each Mall site. l. PUBLICITY. StoresOnline (or its parent company, Netgateway, Inc.) shall have the right to inform its customers and the public that StoresOnline has entered into this Agreement with Reseller. Each party may use the other's name or the name of its customers in marketing the Services and the development of the Mall and may link to each other's websites, but neither party will perform any actions which will harm the other's or its customers name and reputation. m. NOTICES. Any notice required in connection with this Agreement shall be given in writing and shall be deemed effective upon personal delivery or three business days after deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days' advance written notice to the other party. All facsimile notices shall be confirmed by written notice mailed, as provided above, within five (5) days of the date of the facsimile is sent. Once confirmed, the notice shall be effective as of the date of the facsimile. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the date set forth in the Addendum. STORESONLINE.COM, INC., A CALIFORNIA CORPORATION NETGATEWAY, A NEVADA CORPORATION By /s/ Don M. Corliss, Jr. ---------------------------------------------------- Name: Don Corliss Their: President Address for Notices: 300 Oceangate, Suite 500 Long Beach, CA 90802 (562) 308-0010 WIRELESS ONE, INC., By /s/ Ernest D. Yates, Jr. ------------------------------- Name: Ernest D. Yates, Jr. Its: Chief Operating Officer Address for Notices: 2506 Lakeland Drive Jackson, MS 39208 Phone: (601) 936-1515 Fax: (601) 936-1517 Technical Contact: Telephone: E-mail Address: ADDENDUM ----------------------------- THIS ADDENDUM MUST BE KEPT CONFIDENTIAL IN ITS ENTIRETY. ----------------------------- NAME OF RESELLER WIRELESS ONE, INC. DATE OF AGREEMENT: MAY 20 STANDARD FEATURE SET CATALOGS - - International Currencies - - Weight Units: Kilograms, Grams, Pounds and Ounces - - Sending Methods: Internet, Fax/Mail and Phone - - Faxed Internet Orders - - Payment Methods: VISA, MasterCard, American Express, Discover and JCB - - Custom Payment Methods - - Standard Shipping Destinations: United States, Canadian Provinces and World Countries - - Custom Shipping Destinations - - Multiple Shipping Methods and Regions - - Shipping Formula Variables: Quantities Ordered, Weight and Subtotal - - Shipping Formula Functions: Minimum, Maximum and Range - - Custom Tax Rates - - Custom Survey Questions: Long Answer, Short Answer, Multiple Choice and Single Choice - - Custom Subtotal Items: Fixed, User Enterable and Optional - - Users and Passwords CATEGORIES - - Unlimited Categories - - Full Description - - Image PRODUCTS - - Base Item Number - - Description: Full Description - - Image - - Price - - Sale Price - - Unique Sale Price for Each Catalogue - - Non-Taxable Products - - Weight - - Category - - Multiple Product Options (i.e., Color, Size) - - Multiple Product Option Items (i.e., Red, Green, Blue) - - Custom Item Numbers based on Options - - Custom Pricing based on Options - - Option Conflicts - - Quantity Discounts - - Links to Related Items - - Links to other URL's - - Preview product pages - - Generated HTML code to copy and paste into existing sites - - Graphical pricing for easy integration into existing sites - - Import product information from a test-delimited file ORDERS - - E-mail notification of new orders - - Order Status - - Waybill Number and Shipper - - Custom Notes - - End-user Order Tracking - - Export Order Information STORESONLINE POINT OF SALE - - Multiple Merchant Numbers - - Automatic authorization of orders sent over the Internet - - Manual Authorizations - - Credits - - Automatic Settlement - - Freeze and Thaw Transactions STORESONLINE HOSTING - - Home Page Builder - - Unique URL - - 10 MB Free - - Virtual hosting of existing domain names - - Professionally designed templates - - Customize your own templates STORESONLINE SEARCH - - Full Text Search Engine - - Full Word Listing - - Phrase or Boolean Searching - - Re-index your site anytime - - Integrate into existing sites PRICING FOR STOREFRONT SERVICES: Up to 100 Products: Monthly Base Wholesale Price: Discount Threshold: [**REDACTED**] Suggested Retail Price: Reseller Retail Price: [**REDACTED**] Discount for Reseller: Default Retail Price: 101 to 300 Products: Monthly Base Wholesale Price: One Time Store Set-up Fee: Suggested Retail Price: Reseller Retail Price: [**REDACTED**] Up to 100 products Default Retail Price: Base Wholesale Price: Suggested Retail Price: [**REDACTED**] 301 to 1000 Products: Reseller Retail Price: Monthly Base Wholesale Price: Additional products may be Suggested Retail Price: included at $.50 per product Reseller Retail Price: [**REDACTED**] Scanning:[**REDACTED**] per image Default Retail Price: (first 10 images [**REDACTED**]) Tier: Reseller (Sells to end user customers or, with the prior written consent of StoresOnline, to other Resellers) MALL DEVELOPMENT SERVICES AND PRICES 1. DEVELOPMENT. StoresOnline shall design and develop one on-line Mall, to be branded around Reseller's name, brand and image. The Mall will be capable of cataloguing stores independently or in conjunction with other malls that belong to the StoresOnline mall network. 2. PRICING. Reseller shall pay a one-time development fee for the Mall to be developed hereunder in the amount of $[**REDACTED**], which amount shall be payable upon execution of this Agreement. Reseller shall also pay StoresOnline a monthly maintenance fee equal to [**REDACTED**] [**REDACTED**] for the duration of this Agreement. Such maintenance fee shall include ongoing marketing support, including development of Mall content, training of Reseller salespeople, development (but not printing) of Reseller branded collateral material and periodic distribution of advertising spots to promote the Mall and the Reseller branded StoresOnline service which will be updated quarterly. 3. PROMOTION. Reseller will promote the Mall with a total of 1,000 30 second spots every month jointly developed by Reseller and StoresOnline in all Systems in which it can insert advertising. In areas where Reseller does not have the ability to perform ad insertions, it will instead promote the Mall through "crawl space" listings. Reseller shall also promote the Mall and storefront locations on its homepage with banner advertisements and links provided by StoresOnline. Likewise, StoresOnline will promote the Mall and Reseller StoresOnline solution across its network of various online malls. 4. PRESS RELEASE. It is the intention of both StoresOnline and Reseller to issue a joint press release announcing this Agreement. 5. CUSTOM COMMERCE DEVELOPMENT. In the event that Reseller develops leads which purchase custom eCommerce services from StoresOnlne, StoresOnline shall compensate Reseller [**REDACTED**] percent of the initial development fee due to StoresOnline in connection with such custom solution. Revenues subject to this compensation must be pre-approved by StoresOnline. Examples of this sort of revenue include, but are not limited to, the development of a web site, mall or eCommerce presence for a customer of Reseller or one of its agents. 6. RAPID MALL DEVELOPMENT. To further develop the Mall initially, StoresOnline shall waive the Store Set-up Fee for the first 50 stores located at the Mall. EXHIBIT "A" STANDARD LICENSE AGREEMENT TERMS TO BE AGREED TO BY END-USER CUSTOMER OR OTHER RESELLER 1. LICENSE. This License allows you to use any software associated with the provision of the Services. 2. RESTRICTIONS. You may not use, copy, modify or transfer the program, or any copy, modification or merged portion, in whole or in part, except as expressly provided for in this License. If you transfer possession of any copy, modification or merged portion of the program to another party, your License is automatically terminated. 3. TERM. The License is effective until terminated. You may terminate it at any other time by notifying Reseller of your intent to do so. The License will also terminate upon the occurrence of certain events set forth elsewhere in this Agreement. Upon such termination, you agree to destroy the program together with all copies, modifications and merged portions in any form. 4. EXPORT LAW ASSURANCES. You agree that neither the pogrom nor any direct product thereof is being or will be shipped, transferred or re-exported, directly or indirectly, into any country prohibited by the US Export Administration Act and the regulations thereunder or will be used for any purpose prohibited by the Act. 5. LIMITED WARRANTY. The program is provided "AS IS" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of merchantability and fitness for a particular purpose. The full text of the warranty is provided in the user manual. 6. LIMITED LIABILITY. In no event will StoresOnline be liable to you for any damages, including any lost profits, lost savings or other incidental or consequential damages arising out of the use of inability to use such program even if StoresOnline has been advised of the possibility of such damages, or for any claim by any other party. 7. GENERAL. If you are a Government end-user, this License conveys only "RESTRICTED RIGHTS," and in its use, disclosure and duplication are subject to Federal Acquisition Regulations, subparagraph (c)(1)(11) 52.227-7013. (See U.S. Government End-User provisions in manual.) This License will be construed under the laws of the State of California, except for that body of law dealing with conflicts of law. If any provision of the License shall be held by a court of competent jurisdiction to be contrary to law, that provisions shall be enforced to the maximum extent permissible, and the remaining provisions of this License shall remain in full force and effect. EX-10.26 9 EXHIBIT 10.26 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." NETGATEWAY ELECTRONIC COMMERCE SERVICES AGREEMENT THIS ELECTRONIC COMMERCE SERVICES AGREEMENT (this "AGREEMENT") is made effective as of the Acceptance Date set forth in the initial eCommerce Services Order Form (May __, 1999) accepted by Netgateway, a Nevada corporation ("NETGATEWAY"), and the subscriber identified below ("SUBSCRIBER"). PARTIES: SUBSCRIBER NAME: RELIANT INNOVATIONS, INC., (A DIVISION OF MMDI, INC.) ADDRESS: 1100 S. POWER LINE ROAD , SUITE 109 DEERFIELD BEACH, FL 33442 PHONE: (954) 246-8200 FAX: (954) 246-8201 NETGATEWAY 300 Oceangate, Suite 500 Long Beach, CA 90802 Phone: (562) 308-0010 Fax: (562) 308-0021 1. ELECTRONIC COMMERCE SERVICES. 1.1 ECOMMERCE SERVICES. Subject to the terms and conditions of this Agreement, during the term of this Agreement, Netgateway will, through the Netgateway Internet Commerce Center-TM- ("NETGATEWAY ICC"), provide to Subscriber the services described in the eCommerce Services Order Form(s) (the "ECOMMERCE SERVICES ORDER FORM(S)") accepted by Netgateway, or substantailly similar services if such substantailly similar services would provide Subscriber with substantially similar benefits (the "ECOMMERCE SERVICES"). All such eCommerce Services Order Forms will be incorporated herein by this reference as of the Acceptance Date set forth on each such form. Netgateway and Subscriber have mutually agreed or will mutually agree upon the detailed final specifications (the "SPECIFICATIONS") for the eCommerce Services and the development timeline therefor, all of which are or will be set forth on the attached initial eCommerce Services Order Form attached hereto as Exhibit "A", and by this reference made a part hereof. 1.2 AVAILABILITY. ECommerce Services will be available to Subscriber for inquiry and order entry functions twenty-four (24) hours a day, seven (7) days a week. Netgateway reserves the right upon reasonable notice to Subscriber to limit or curtail holiday or weekend availability when necessary for system upgrades, adjustments, maintenance or other operational considerations. 1.3 ENHANCEMENTS. General enhancements to existing eCommerce Services provided hereunder, as well as new features that Netgateway incorporates into its standard commerce processing system, regardless of whether they are initiated by Netgateway or developed at the request of Subscriber or other subscribers, shall be made available to Subscriber at no additional cost. Any new features or services that may be developed by Netgateway during the term of this Agreement which Netgateway intends to offer to subscribers on a limited or optional basis may, at Netgateway's option, and subject to Subscriber's acceptance, be made available to Subscriber at Netgateway's then-current prices for such new features or services. Enhancements to existing eCommerce Services requested by Subscriber that benefit only Subscriber at the time such enhancements are put into service shall be billed to Subscriber at Netgateway's standard rates for programming. All enhancements to the eCommerce Services, and any new features or services introduced by Netgateway, shall remain the exclusive proprietary property of Netgateway. 1.4 TRAINING. At no cost to Subscriber, Netgateway shall provide such onsite training and other assistance, as Netgateway deems necessary to assure that Subscriber's personnel are able to make effective use of the eCommerce Services. On-site training shall take place at such times and places as are mutually agreeable to the parties hereto. 1.5 SUBSCRIBER DATA. (a) SUBSCRIBER DATA. Subscriber will timely supply Netgateway, in a form acceptable to Netgateway, with all data necessary for Netgateway to perform the ongoing services to be provided hereunder. It is the sole responsibility of Subscriber to insure the completeness and accuracy of such data. (B) CONFIDENTIALITY. Netgateway acknowledges that all records, data, files and other input material relating to Subscriber are confidential and shall take reasonable steps to protect the confidentiality of such records, data, files and other materials. Netgateway will provide reasonable security safeguards to limit access to Subscriber's files and records to Subscriber and other authorized parties. (c) PROTECTION OF SUBSCRIBER FILES. Netgateway will take reasonable steps to protect against the loss or alteration of Subscriber's files, records and data retained by Netgateway, but Subscriber recognizes that events beyond the control of Netgateway may cause such loss or alteration. Netgateway will maintain backup file(s) containing all the data, files and records related to Subscriber. Subscriber's file(s), records and data shall, at no cost to Subscriber, be released to Subscriber on an occurrence that renders Netgateway unable to perform hereunder, or upon the termination of this Agreement as provided herein. (d) OWNERSHIP OF DATA. Netgateway acknowledges that all records, data, files and other input material relating to Subscriber and its customers are the exclusive property of the Subscriber. 2. FEES AND BILLING. 2.1 FEES. Subscriber will pay all fees and amounts in accordance with the eCommerce Service Provider Forms. 2.2 BILLING COMMENCEMENT. The Initial Development Fee shall be due and payable in accordance with the terms set forth on the eCommerce Services Order Form. Billing for eCommerce Services indicated in the eCommerce Services Order Form (including the eCommerce Rate, Fees Per Hit, Banner Advertising Revenue and Click Through Revenue, as applicable) other than the Initial Development Fee, shall commence on the "OPERATIONAL DATE" indicated in the eCommerce Services Order Form. In the event that Subscriber orders other eCommerce Services in addition to those listed in the initial eCommerce Services Order Form, billing for such services shall commence on the date Netgateway first provides such additional eCommerce Services to Subscriber or as otherwise agreed to by Subscriber and Netgateway in the applicable eCommerce Services Order Form. 2.3 BILLING AND PAYMENT TERMS. All amounts due under this Agreement for eCommerce Services indicated in the eCommerce Services Order Form shall be payable in accordance with the Billing and Payment Terms set forth on Exhibit "B" annexed hereto, which by this reference is made a part hereof. 2.4 TAXES, UTILITIES AND EXCLUSIONS. All charges shall be exclusive of any federal, state or local sales, use, excise, AD VALOREM or personal property taxes levied, or any fines, forfeitures or penalties assessed in connection therewith, as a result of this Agreement or the installation or use of the eCommerce Services provided hereunder. Any such taxes shall be paid by Subscriber or by Netgateway for Subscriber's account, in which case Subscriber shall reimburse Netgateway for amounts so paid. Netgateway shall provide burstible at 1 megabit per second capacity bandwith for Subscriber's website at no additional charge. Should Subscriber need additional bandwidth, Netgateway shall provide or make arrangements to provide such additional bandwidth and invoice Subscriber for such excess bandwidth and/or use beyond a 1 megabit per second burstible line. Netgateway will provide traffic reports to Subscriber with respect to burstible capacity. Netgateway is not responsible for providing connectivity to Subscriber's offices. 3. SUBSCRIBER'S OBLIGATIONS. 3.1 COMPLIANCE WITH LAWS AND RULES AND REGULATIONS. Subscriber agrees that Subscriber will comply at all times with all applicable laws and regulations and Netgateway's general rules and regulations relating to its provision of eCommerce Services, currently included herein as Section 10, which may be updated and provided by Netgateway to Subscriber from time to time ("RULES AND REGULATIONS"). Subscriber acknowledges that Netgateway exercises no control whatsoever over the content contained in or passing through the Subscriber's web site, storefront or mall ("ECOMMERCE CENTERS"), and that it is the sole responsibility of Subscriber to ensure that the information it transmits and receives complies with all applicable laws and regulations. 3.2 ACCESS AND SECURITY. Subscriber will be fully responsible for any charges, costs, expenses (other than those included in the eCommerce Services), and third party claims that may result from its use of, or access to, the Netgateway Internet Commerce Center-TM-, including, but not limited to, any unauthorized use or any access devices provided by Netgateway hereunder. [**REDACTED**] 3.4 INSURANCE. (a) MINIMUM LEVELS. Subscriber will keep in full force and effect during the term of this Agreement: (i) comprehensive general liability insurance in an amount not less than $5 million per occurrence for bodily injury and property damage; (ii) employer's liability insurance in an amount not less than $1 million per occurrence; and (iii) workers' compensation insurance in an amount not less than that required by applicable law. Subscriber also agrees that it will be solely responsible for ensuring that its agents (including contractors and subcontractors) maintain, other insurance at levels no less than those required by applicable law and customary in Subscriber's industry. (b) CERTIFICATES OF INSURANCE. Prior to the Operational Date, Subscriber will furnish Netgateway with certificates of insurance which evidence the minimum levels of insurance set forth above, and will notify Netgateway in writing in the event that any such insurance policies are cancelled. (c) NAMING NETGATEWAY AS AN ADDITIONAL INSURED. Subscriber agrees that prior to the Operational Date, Subscriber will cause its insurance provider(s) to name Netgateway as an additional insured and notify Netgateway in writing of the effective date thereof. 4. CONFIDENTIAL INFORMATION. 4.1 CONFIDENTIAL INFORMATION. Each party acknowledges that it will have access to certain confidential information of the other party concerning the other party's business, plans, customers, technology and products, including the terms and conditions of this Agreement ("CONFIDENTIAL INFORMATION"). Confidential Information will include, but not be limited to, each party's proprietary software and customer information. Each party agrees that it will not use in any way, for its own account or the account of any third party, except as expressly permitted by this Agreement, nor disclose to any third party (except as required by law or to that party's attorneys, accountants and other advisors on a need to know basis), any of the other party's Confidential Information and will take reasonable precautions to protect the confidentiality of such Confidential Information. 4.2 EXCEPTIONS. Information will not be deemed Confidential Information hereunder if such information: (i) is known to the receiving party prior to receipt from the disclosing party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (ii) becomes known (independently of disclosure by the disclosing party) to the receiving party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (iii) becomes publicly known or otherwise ceases to be secret or confidential, except through a breach of this Agreement by the receiving party; or (iv) is independently developed by the receiving party. 5. REPRESENTATIONS AND WARRANTIES. 5.1 WARRANTIES BY SUBSCRIBER. (A) SUBSCRIBER'S BUSINESS. Subscriber represents and warrants that: (i) Subscriber's services, products, materials, data and information used by Subscriber in connection with this Agreement as well as Subscriber's and its permitted customers' and users' use of the eCommerce Services (collectively, "SUBSCRIBER'S BUSINESS") does not, as of the Operational Date, and will not during the term of this Agreement, operate in any manner that would violate any applicable laws or regulations. (ii) Subscriber owns or has the right to use all material contained in the Subscriber's web site, including all text, graphics, sound, video, programming, scripts and applets; and (iii) The use, reproduction, distribution and transmission of the web site, or any information or materials contained in it does not: (A) infringe or misappropriate any copyright, patent, trademark, trade secret or any other proprietary rights of a third party; or (B) constitute false advertising, unfair competition, defamation, an invasion of privacy or violate a right of publicity. (b) RULES AND REGULATIONS. Subscriber has read the Rules and Regulations (Section 10 below) and represents and warrants that Subscriber and Subscriber's Business are currently in full compliance with the Rules and Regulations, and will remain so at all times during the term of this Agreement. (c) BREACH OF WARRANTIES. In the event of any breach, or reasonably anticipated breach, of any of the foregoing warranties, in addition to any other remedies available at law or in equity, Netgateway will have the right immediately in Netgateway's reasonable discretion, to suspend any related eCommerce Services if deemed reasonably necessary by Netgateway to prevent any harm to Netgateway or its business. 5.2 WARRANTIES AND DISCLAIMERS BY NETGATEWAY. (a) NO OTHER WARRANTY. THE ECOMMERCE SERVICES ARE PROVIDED ON AN "AS IS" BASIS, AND SUBSCRIBER'S USE OF THE ECOMMERCE SERVICES IS AT ITS OWN RISK. NETGATEWAY DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL OTHER EXPRESS AND/OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT AND TITLE, AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICE. NETGATEWAY DOES NOT WARRANT THAT THE ECOMMERCE SERVICES WILL BE UNINTERRUPTED, ERROR-FREE OR COMPLETELY SECURE. (b) DISCLAIMER OF ACTIONS CAUSED BY AND/OR UNDER THE CONTROL OF THIRD PARTIES. NETGATEWAY DOES NOT AND CANNOT CONTROL THE FLOW OF DATA TO OR FROM NETGATEWAY'S INTERNET COMMERCE CENTER AND OTHER PORTIONS OF THE INTERNET. SUCH FLOW DEPENDS IN LARGE PART ON THE PERFORMANCE OF INTERNET SERVICES PROVIDED OR CONTROLLED BY THIRD PARTIES. AT TIMES, ACTIONS OR INACTIONS CAUSED BY THESE THIRD PARTIES CAN PRODUCE SITUATIONS IN WHICH NETGATEWAY'S SUBSCRIBERS' CONNECTIONS TO THE INTERNET (OR PORTIONS THEREOF) MAY BE IMPAIRED OR DISRUPTED. ALTHOUGH NETGATEWAY WILL USE COMMERCIALLY REASONABLE EFFORTS TO TAKE ACTIONS IT DEEMS APPROPRIATE TO REMEDY AND AVOID SUCH EVENTS, NETGATEWAY CANNOT GUARANTEE THAT THEY WILL NOT OCCUR. ACCORDINGLY, NETGATEWAY DISCLAIMS ANY AND ALL LIABILITY RESULTING FROM OR RELATED TO SUCH EVENTS. 6. LIMITATIONS OF LIABILITY. 6.1 EXCLUSIONS. IN NO EVENT WILL NETGATEWAY BE LIABLE TO SUBSCRIBER, ANY REPRESENTATIVE OR ANY THIRD PARTY FOR ANY CLAIMS ARISING OUT OF OR RELATED TO THIS AGREEMENT, SUBSCRIBER'S BUSINESS OR OTHERWISE, AND ANY LOST REVENUE, LOST PROFITS, REPLACEMENT GOODS, LOSS OF TECHNOLOGY, RIGHTS OR SERVICES, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, LOSS OF DATA, OR INTERRUPTION OR LOSS OF USE OF SERVICE OR SUBSCRIBER'S BUSINESS, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE. 6.2 LIMITATIONS. NETGATEWAY, ITS AFFILIATES, EMPLOYEES, OFFICERS AND AGENTS SHALL NOT BE LIABLE TO SUBSCRIBER OR TO ANY THIRD PARTY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR INTERRUPTIONS OF SERVICE DUE TO MECHANICAL ELECTRICAL OR WIRE DEFECTS OR DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR OTHER CAUSES OVER WHICH NETGATEWAY, ITS AFFILIATES, EMPLOYEES, OFFICERS, OR AGENTS AGAINST WHOM LIABILITY IS SOUGHT, HAVE NO REASONABLE CONTROL, OR FOR LOSS OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS STATEMENTS, ERRORS OF FACTS, OMISSIONS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF ECOMMERCE SERVICES, OR ANY DATA PROVIDED AS A PART OF THE ECOMMERCE SERVICES PURSUANT TO THIS AGREEMENT, EXCEPT TO THE EXTENT CAUSED BY THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF NETGATEWAY. IN ADDITION, IN NO EVENT SHALL NETGATEWAY BE LIABLE TO SUBSCRIBER OR TO ANY THIRD PARTY FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES WHICH SUBSCRIBER OR SUCH THIRD PARTY MAY INCUR OR EXPERIENCE ON ACCOUNT OF ENTERING INTO OR RELYING ON THIS AGREEMENT OR UTILIZING THE NETGATEWAY ECOMMERCE SERVICES, REGARDLESS OF WHETHER NETGATEWAY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES ARE CAUSED, IN WHOLE OR IN PART, BY THE NEGLIGENCE OF NETGATEWAY. 6.3 MAXIMUM LIABILITY. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NETGATEWAY'S MAXIMUM AGGREGATE LIABILITY TO SUBSCRIBER RELATED TO OR IN CONNECTION WITH THIS AGREEMENT WILL BE LIMITED TO THE TOTAL AMOUNT PAID BY SUBSCRIBER TO NETGATEWAY HEREUNDER FOR THE PERIOD CONSISTING OF THE PRIOR [**REDACTED**]. 6.4 TIME FOR MAKING CLAIMS. ANY SUIT OR ACTION BY SUBSCRIBER AGAINST NETGATEWAY, ITS AFFILIATES, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, SUCCESSORS OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL BE COMMENCED WITHIN [**REDACTED**] OF THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF NETGATEWAY'S LIABILITY SET FORTH IN SECTION 6 OR ELSEWHERE IN THIS AGREEMENT. 6.5 SUBSCRIBER'S INSURANCE. Subscriber agrees that it will not pursue any claims against Netgateway for any liability Netgateway may have under or relating to this Agreement until Subscriber first makes claims against Subscriber's insurance provider(s) and such insurance provider(s) finally resolve(s) such claims. 6.6 BASIS OF THE BARGAIN; FAILURE OF ESSENTIAL PURPOSE. Subscriber acknowledges that Netgateway has set its prices and entered into this Agreement in reliance upon the limitations of liability and the disclaimers of warranties and damages set forth herein, and that the same form an essential basis of the bargain between the parties. The parties agree that the limitations and exclusions of liability and disclaimers specified in this Agreement will survive and apply even if found to have failed of their essential purpose. 7. INDEMNIFICATION. 7.1 NETGATEWAY'S INDEMNIFICATION OF SUBSCRIBER. Netgateway will indemnify, defend and hold Subscriber harmless from and against any and all costs, liabilities, losses and expenses (including, but not limited to, reasonable attorneys' fees) (collectively, "LOSSES") resulting from any claim, suit, action or proceeding (each, an "ACTION") brought against Subscriber alleging the infringement of any third party registered U.S. copyright or issued U.S. patent resulting from the provision of eCommerce Services pursuant to this Agreement (but excluding any infringement contributorily caused by Subscriber's Business). 7.2 SUBSCRIBER'S INDEMNIFICATION OF NETGATEWAY. Subscriber will indemnify, defend and hold Netgateway, its affiliates and customers harmless from and against any and all Losses resulting from or arising out of Subscriber's breach of any provision of this Agreement or any Action brought against Netgateway, its directors, employees, affiliates or Subscribers alleging with respect to the Subscriber's Business: (a) infringement or misappropriation of any intellectual property rights; (b) defamation, libel, slander, obscenity, pornography or violation of the rights of privacy or publicity; (c) spamming, or any other offensive, harassing or illegal conduct or violation of the Rules and Regulations; or, (d) any violation of any other applicable law or regulation. 7.3 NOTICE. Each party will provide the other party, prompt written notice of the existence of any such indemnifiable event of which it becomes aware, and an opportunity to participate in the defense thereof. 8. DISPUTE RESOLUTION. 8.1 PROCEDURES. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is most knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this Paragraph 8 are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "DISPUTE" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement, other than as provided in paragraph 8.5 below, may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (a) The complaining party's representative will notify the other party's representative in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (b) In the event that such matter remains unresolved thirty (30) days after the delivery of the complainant party's written notice, a senior representative of each party shall meet or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (c) In the event that the meeting or conference specified in (b) above does not resolve such matter, the senior officer of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (d) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with paragraph 8.2 below. 8.2 BINDING ARBITRATION. Except as provided in paragraph 8.5 below, any dispute arising under this Agreement shall, after utilizing the procedures in paragraph 8.1, be resolved by final and binding arbitration in Los Angeles, California, before a single arbitrator selected by, and in accordance with, the rules of commercial arbitration of the American Arbitration Association or as otherwise provided in Paragraph 11.6. Each party shall bear its own costs in the arbitration, including reasonable attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. 8.3 ARBITRATOR'S AUTHORITY. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. 8.4 ENFORCEMENT OF ARBITRATOR'S AWARD. Any party may apply to a court of general jurisdiction to enforce an arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including reasonable attorneys' fees. 8.5 ACCESS TO COURTS. Notwithstanding the provisions of paragraphs 8.1 and 8.2 above, any action by Netgateway to enforce its rights under Paragraphs 10.1 or 10.3 of this Agreement or to enjoin any infringement of the same by Subscriber may, at Netgateway's election, be commenced in the state or federal courts of Los Angeles, California, and Subscriber consents to personal jurisdiction and venue in such courts for such actions. 9. TERM AND TERMINATION. 9.1 TERM. This Agreement will be effective on the date first above written and will terminate thirty (30) months ("INITIAL TERM") from the date Subscriber begins processing live data through Netgateway ICC-TM-, unless earlier terminated according to the provisions of this Section 9. This Agreement will automatically renew for an additional term of three (3) years unless a party hereto elects not to so renew and notifies the other party in writing of such election by a date, which is six (6) months prior to the lapse of the Initial Term. 9.2 TERMINATION. Either party will have the right to terminate this Agreement if: (i) the other party breaches any material term or condition of this Agreement and fails to cure such breach within thirty (30) days after receipt of written notice of the same, except in the case of failure to pay fees, which failure must be cured within five (5) days after receipt of written notice from Netgateway; (ii) the other party becomes the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors; or (iii) the other party becomes the subject of an involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors, if such petition or proceeding is not dismissed within sixty (60) days of filing. 9.3 NO LIABILITY FOR TERMINATION. Neither party will be liable to the other for any termination or expiration of this Agreement in accordance with its terms. 9.4 EFFECT OF TERMINATION. Upon the effective date of expiration or termination of this Agreement: (a) Netgateway shall immediately cease providing eCommerce Services; (b) any and all payment obligations of Subscriber under this Agreement shall become due immediately; and (c) within thirty (30) days after such expiration or termination, each party shall return all Confidential Information of the other party in its possession at the time of expiration or termination and shall not make or retain any copies of such Confidential Information, except as required to comply with any applicable legal or accounting record keeping requirements. 9.5 SURVIVAL. The following provisions shall survive any expiration or termination of the Agreement: Sections 2, 3, 4, 5, 6, 7, 8, 9 and 10. 10. USE OF ECOMMERCE SERVICES -- RULES AND REGULATIONS. 10.1 PROPRIETARY SYSTEMS. Subscriber acknowledges that the software systems utilized by Netgateway in the provision of eCommerce Services hereunder, including the Netgateway ICC-TM-, all enhancements thereto and all screens and formats used in connection therewith, are the exclusive proprietary property of Netgateway, and Subscriber shall not publish, disclose, display, provide access to or otherwise make available any Netgateway eCommerce software or products thereof, or any screens, formats, reports or printouts used, provided, produced or supplied from or in connection therewith, to any person or entity other than an employee of Subscriber without the prior written consent of, and on terms acceptable to, Netgateway, which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that Subscriber may disclose to a governmental or regulatory agency or to customers of Subscriber any information expressly prepared and acknowledged in writing by Netgateway as having been prepared for disclosure to such governmental or regulatory agency or to such customers. Neither party shall disclose Subscriber's use of eCommerce Services in any advertising or promotional materials without the prior written consent to such use, and approval of such materials, by the other. 10.2 USE OF SERVICES PERSONAL TO SUBSCRIBER. Subscriber agrees that it will use the services provided hereunder only in connection with its eCommerce business, and it will not, without the express written permission of Netgateway, sell, lease or otherwise provide or make available eCommerce Services to any third party. 10.3 SURVIVAL OF OBLIGATIONS. The obligations of this Section 10 shall survive termination of this Agreement. Subscriber understands that the unauthorized publication or disclosure of any of Netgateway' software or copies thereof, or the unauthorized use of eCommerce Services would cause irreparable harm to Netgateway for which there is no adequate remedy at law. Subscriber therefore agrees that in the event of such unauthorized disclosure or use, Netgateway may, at its discretion and at Subscriber's expense, terminate this Agreement, obtain immediate injunctive relief in a court of competent jurisdiction, or take such other steps as it deems necessary to protect its rights. If Netgateway, in its reasonable, good faith judgment, determines that there is a material risk of such unauthorized disclosure or use, it may demand immediate assurances, satisfactory to Netgateway, that there will be no such unauthorized disclosure or use. In the absence of such assurance, Netgateway may immediately terminate this Agreement and take such other actions as it deems necessary. The rights of Netgateway hereunder are in addition to any other remedies provided by law. 11. MISCELLANEOUS PROVISIONS. 11.1 FORCE MAJEURE. Except for the obligation to pay money, neither party will be liable for any failure or delay in its performance under this Agreement due to any cause beyond its reasonable control, including act of war, acts of God, earthquake, flood, embargo, riot, sabotage, labor shortage or dispute, governmental act or failure of the Internet, provided that the delaying party: (a) gives the other party prompt notice of such cause, and (b) uses its reasonable commercial efforts to correct promptly such failure or delay in performance. 11.2 NO LEASE. This Agreement is a services agreement and is not intended to, and will not constitute, a lease of any real or personal property. Subscriber acknowledges and agrees that: (i) it has been granted only a license to use Netgateway's ICC-TM- and any equipment provided by Netgateway in accordance with this Agreement, (ii) Subscriber has not been granted any real property interest in the Netgateway's ICC-TM-, and (iii) Subscriber has no rights as a tenant or otherwise under any real property or landlord/tenant laws, regulations or ordinances. 11.3 MARKETING. Subscriber agrees that Netgateway may refer to Subscriber by trade name and trademark, and may briefly describe Subscriber's business, in Netgateway's marketing materials and web site. Subscriber hereby grants Netgateway a license to use any Subscriber trade names and trademarks solely in connection with the rights granted to Netgateway pursuant to this Section 11.3. 11.4 GOVERNMENT REGULATIONS. Subscriber will not export, re-export, transfer or make available, whether directly or indirectly, any regulated item or information to anyone outside the U.S. in connection with this Agreement without first complying with all export control laws and regulations which may be imposed by the U.S. Government and any country or organization of nations within whose jurisdiction Subscriber operates or does business. 11.5 NON-SOLICITATION. During the period beginning on the Operational Data and ending on the first anniversary of the termination or expiration of this Agreement in accordance with its terms, Subscriber agrees that it will not, and will ensure that its affiliates do not, directly or indirectly, solicit or attempt to solicit for employment any persons employed by Netgateway during such period. 11.6 GOVERNING LAW; DISPUTE RESOLUTION, SEVERABILITY; WAIVER. This Agreement is made under and will be governed by and construed in accordance with the laws of the State of California (without regard to that body of law controlling conflicts of law) and specifically excluding from application to this Agreement that law known as the United Nations Convention on the International Sale of Goods. Any dispute relating to the terms, interpretation or performance of this Agreement (other than claims for preliminary injunctive relief or other pre-judgment remedies) will be resolved at the request of either party through binding arbitration. Arbitration will be conducted in Los Angeles County, California, under the rules and procedures of the Judicial Arbitration and Mediation Society ("JAMS"). The parties will request that JAMS appoint a single arbitrator possessing knowledge of online services agreements; PROVIDED, HOWEVER, the arbitration will proceed even if such a person is unavailable. In the event any provision of this Agreement is held by a tribunal of competent jurisdiction to be contrary to the law, the remaining provisions of this Agreement will remain in full force and effect. The waiver of any breach or default of this Agreement will not constitute a waiver of any subsequent breach or default, and will not act to amend or negate the rights of the waiving party. 11.7 ASSIGNMENT; NOTICES. Subscriber may not assign its rights or delegate its duties under this Agreement either in whole or in part without the prior written consent of Netgateway, except that Subscriber may assign this Agreement in whole as part of a corporate reorganization, consolidation, merger or sale of substantially all of its assets. Any attempted assignment or delegation without such consent will be void. Netgateway may assign this Agreement in whole or part. This Agreement will bind and inure to the benefit of each party's successors and permitted assigns. Any notice or communication required or permitted to be given hereunder may be delivered by hand, deposited with an overnight courier, sent by confirmed facsimile, or mailed by registered or certified mail, return receipt requested, postage prepaid, in each case to the address of the receiving party indicated on the signature page hereof, or at such other address as may hereafter be furnished in writing by either party hereto to the other. Such notice will be deemed to have been given as of the date it is delivered, mailed or sent, whichever is earlier. 11.8 RELATIONSHIP OF PARTIES. Netgateway and Subscriber are independent contractors and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise or agency between Netgateway and Subscriber. Neither Netgateway nor Subscriber will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent, except as otherwise expressly provided herein. 11.9 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement, including all documents incorporated herein by reference, constitutes the complete and exclusive agreement between the parties with respect to the subject matter hereof, and supersedes and replaces any and all prior or contemporaneous discussions, negotiations, understandings and agreements, written and oral, regarding such subject matter. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. Subscriber's and Netgateway's authorized representatives have read the foregoing and all documents incorporated therein and agree and accept such terms effective as of the date first above written. SUBSCRIBER Signature: /s/ Donald Resnick Signature: ------------------------ ----------------------- Print Name: Donald Resnick Print Name: ------------------------ ----------------------- Title: CEO 6/6/99 ------------------------ NETGATEWAY Signature: /s/ Donald M. Corlss Jr. Signature: ------------------------ ----------------------- Print Name: Donald M. Corliss Jr. 6/11/99 Print Name: ------------------------ ----------------------- Title: PRESIDENT ------------------------ EXHIBIT "A" ELECTRONIC COMMERCE SERVICES ORDER FORM NETGATEWAY ECOMMERCE SERVICES ORDER FORM Subcriber Name: Reliant Innovations, Inc. Form Date: June 6, 1999 Form No.: 001 GENERAL INFORMATION: 1. By submitting this eCommerce Services Order Form ("FORM") to Netgateway, Subscriber hereby places an order for the eCommerce Services described herein pursuant to the terms and conditions of the Electronic Commerce Services Agreement between Subscriber and Netgateway prefixed hereto (the "ECS AGREEMENT"). 2. Billing, with the exception of Development Fees, will commence on the Operational Date set forth below or the date that Subscriber first begins to process transactions through the Netgateway Internet Commerce Center, whichever occurs first. 3. Netgateway will provide the eCommerce Services pursuant to the terms and conditions of the ECS Agreement, which incorporates this Form. The terms of this Form supersede, and by accepting this Form, Netgateway hereby rejects, any conflicting or additional terms provided by Subscriber in connection with Netgateway's provision of the eCommerce Services. If there is a conflict between this Form and any other Form provided by Customer and accepted by Subscriber, the Form with the latest date shall control. 4. Netgateway will not be bound by or required to provide eCommerce Services pursuant to this Form or the ECS Agreement until each is signed by an authorized representative of Netgateway. SUBSCRIBER HAS READ, UNDERSTANDS AND HEREBY SUBMITS THIS ORDER. Submitted By: /s/ Donald Resnick Operational Date: 8-31-99 -------------------- ---------------------- (AUTHORIZED SIGNATURE) Print Name: Donald Resnick -------------------- Title: CEO 6/6/99 -------------------- NETGATEWAY ACCEPTANCE /s/ Donald M. Corliss Jr. Date: 6-11-99 - ----------------------------------- -------------------------------- (AUTHORIZED SIGNATURE: Donald M. Corliss Jr. NETGATEWAY ECOMMERCE SERVICES ORDER FORM ------------------------- THIS ENTIRE ORDER FORM MUST BE KEPT CONFIDENTIAL ------------------------- SUBSCRIBER NAME: RELIANT INNOVATIONS, INC. FORM DATE: June 6, 1999 FORM NO.: 001 TERMS: 1. DEVELOPMENT FEE. The initial development fee for Phases I, II and III shall be $30,000, and shall be due and payable in full upon submission of this Order Form. 2. PHASE SPECIFICATIONS. Phase specifications shall be as determined pursuant to the mutual agreement of the parties. 3. ICC COMMERCE RATE. Netgateway transaction fees shall be based upon the following schedule: QUARTERLY GROSS SALES REVENUE TRANSACTION FEE RATE ----------------------------- -------------------- $ 0 TO $1,000,000 [**REDACTED**] 1,000,000 TO 2,000,000 2,000,000 and over For purposes hereof, sales revenue shall mean all revenues generated from transactions processed through the Netgateway Internet Commerce Center which are related to Subscriber. 4. FEE PER HIT. Netgateway to receive $.0015 per hit (as that term is customarily understood in the industry), up to a maximum of $1,500.00 per month. 5. BANNER ADVERTISING REVENUE. Netgateway to receive [**REDACTED**] of banner advertising revenue from ads placed by Subscriber and [**REDACTED**] of banner advertising revenue from ads placed by Netgateway on Subscriber's web site or mall. Netgateway reserves the right to increase the [**REDACTED**] fee for banner advertisements placed by Subscriber to a mutually agreed upon level in the event that the cost of maintaining such ads, including a small profit margin, increases beyond [**REDACTED**] of the total revenue generated by such ads. 6. CLICK-THROUGH REVENUE. Netgateway to receive [**REDACTED**] of the click through revenue generated from advertisers placed by Subscriber and [**REDACTED**] of click through revenue from advertisers placed by Netgateway on Subscriber's web site or mall. Netgateway reserves the right to increase the [**REDACTED**] fee for click through revenue generated by advertisers placed by Subscriber to a mutually agreed upon level in the event that the cost of maintaining such ads, including a small profit margin, increases beyond [**REDACTED**] of the total revenue generated by such ads. 7. Development Timeline: - ECS Agreement to be signed by May 31, 1999 - Design of Specifications to be completed by June 4, 1999 - Phase I Implementation by August 31, 1999 8. Description of Phases. See attached Schedule 1. 9. One of the parties are public companies and can be affected by the manner or content of public announcements concerning this relationship. Neither party shall make any public announcement of this Agreement or of the relationship they have entered into without the prior written consent of the other. SUBSCRIBER'S INITIALS DR ----------- SCHEDULE 1 DESCRIPTION OF PHASES PHASE I The specifications for Phase I will be determined by the mutual agreement Netgateway and Reliant Innovations, but shall in general include a web site containing company information and shall be capable of eCommerce transactions to be fulfilled by Reliant Innovations. PHASE II The specifications for Phase II will be determined by the mutual agreement of Netgateway and Reliant Innovations, but shall generally increase the feature set of the web site described in Phase I. These additional features will include connectivity to a primary and secondary fulfillment partner of Reliant Innovations. The Phase II site will have the capability to transmit and receive transactions and information surround sales, order placement, order tracking, shipping confirmations, product pricing and product availability to and from Reliant Innovations primary and secondary fulfillment partners. PHASE II The specifications for Phase III will be determined by the mutual agreement of Netgateway and Reliant Innovations, but shall generally include a program to increase the feature set of the web site described in Phases I and II. These additional features will include the ability to host 'virtual auctions' on Reliant Innovations' web site for reseller and end user clients. SUBSCRIBER'S INITIALS DR ----------- EXHIBIT "B" BILLING AND PAYMENT TERMS The Initial Development Fee hereunder shall be due and payable in full upon execution of this Agreement. Netgateway shall invoice Subscriber monthly in advance of the provision of Internet Commerce Services, and payment of such fees shall be due and payable in full within thirty (30) days of the date of each Netgateway invoice. Late payments hereunder shall accrue interest at a rate of one and one-half percent (1 1/2%) per month, or the highest rate allowed by applicable law, whichever is lower. If, in its reasonable judgment, Netgateway determines that Subscriber is not creditworthy or is otherwise not financially secure, Netgateway may, upon prior written notice to Subscriber, modify the payment terms to require full payment before the provision of eCommerce Services or other assurances to secure Subscriber's payment obligations hereunder. All payments made pursuant to this Agreement shall be made in U.S. dollars. EX-10.27 10 EXHIBIT 10.27 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." STORESONLINE.COM CABLE RESELLER AND MALL AGREEMENT MediaOne of Colorado, Inc. THIS CABLE RESELLER AND MALL AGREEMENT (the "AGREEMENT") is made and entered into as of the date set forth on the Addendum attached hereto and by this reference made a part hereof (the "ADDENDUM"), between and among STORESONLINE.COM, INC., a California corporation, and NETGATEWAY, a Nevada corporation, on the one hand (collectively, "STORESONLINE"), and the Reseller identified on the Addendum, on the other hand ("RESELLER"). R E C I T A L S - - - - - - - - A. Reseller is an established business entity, engaged in the business of providing high speed Internet access, data transmission and cable television programming services throughout the United States. B. StoresOnline is a provider of turnkey electronic commerce services which: (i) develops, manages, maintains and hosts online electronic shopping malls and (ii) owns, operates and maintains an Internet storefront-building services package comprised of certain services delivered through StoresOnline's proprietary software, the standard features of which are more particularly described on the Addendum (collectively, the "SERVICES"). C. The Services are delivered through the Internet and may be made available through a private, branded electronic exchange to be developed for Reseller. D. StoresOnline desires to: (i) sell and license the Services to Reseller for Reseller's resale and sublicense to end-user customers or, with the written permission of StoresOnline, to other resellers and (ii) develop, manage, maintain and host one or more on-line malls to be branded around Reseller's name, brand and image (each, a "Mall" and collectively, the "Malls"). E. Reseller desires to purchase and license the Services for resale to end-user customers and shall use its unique resources to promote the Services as hereinafter set forth. AGREEMENT NOW, THEREFORE, on the basis of the foregoing recitals, and in consideration of the mutual promises contained herein, the receipt and sufficiency of which is hereby acknowledged, the parties hereto covenant and agree as follows: 1. SERVICES. a. SCOPE OF AGREEMENT. This Agreement covers (i) the purchase, licensing, promotion and sale of the Services and (ii) the design and development of the Malls, all in accordance with the terms and conditions set forth herein and on the Addendum. b. LICENSE GRANT; SALE OF SERVICES. StoresOnline grants to Reseller, subject to the terms and conditions of this Agreement, the non-exclusive right and license to resell and sublicense (in the case of software products), the Services to Reseller's end-user customers or, with the written permission of StoresOnline, to other resellers. In the case of software products, Reseller acknowledges that such software is and will remain proprietary to StoresOnline, is copyrighted and that Reseller acquires no right, title or interest in or to any such software by this Agreement. Reseller agrees to sublicense the Services hereunder pursuant to the Standard License Agreement Terms set forth on Exhibit A hereto, and to cause each of its customers or other resellers to sublicense the Services pursuant to such terms, which terms, in the case of a reseller, shall be accepted upon store set-up and, in the case of an end-user customer, shall be accepted as part of the storefront registration process described below. c. PRODUCT NAME. It is expressly agreed that the ownership and all right, title and interest in and to the Services and any trademark, trade name, patent or copyright relating to the Services is and will remain vested solely in StoresOnline; PROVIDED, HOWEVER, that as permitted by this Agreement, Reseller may use any existing or future trademark, trade name, patent or copyright relating to the Malls and/or the Services, such use to be limited to promoting, selling, installing or maintaining the Malls and/or the Services; and PROVIDED, FURTHER, that as permitted by this Agreement, the Services may be branded around Reseller's name, brand and image. Reseller shall use commercially reasonable efforts during the term of this Agreement to protect StoresOnline's trademarks, trade names, patents and copyrights, but shall not be required to instigate legal action against third parties for any infringement thereof. Reseller shall notify StoresOnline of any infringement as soon as practicable after becoming aware of any such infringement. Reseller shall not use, directly or indirectly, in whole or in part, StoresOnline's name or any other trade name or trademark that is owned or used by StoresOnline in connection with any product other than StoresOnline's products, without the prior written consent of StoresOnline. d. RESELLER BRANDING. It is expressly understood and agreed that the ownership and all right, title and interest in and to any trademark, trade name, patent or copyright owned by Reseller or any end-user customer hereunder is and will remain vested solely in Reseller or such end-user customer, as applicable; PROVIDED, HOWEVER, that as permitted by this Agreement, StoresOnline may use any existing or future trademark, trade name, patent or copyright owned by Reseller or such end-user customers, such use to be limited to developing, managing, maintaining and hosting the Malls and/or the Services. e. MALL DEVELOPMENT. StoresOnline shall develop, manage, maintain and host the Malls in accordance with the terms and conditions set forth herein and on the Addendum. The Malls shall be branded around Reseller's name, brand and image and shall link to the Reseller's branded StoresOnline solution. The Malls will include appropriate URL addresses, four to six featured products and stores from various Reseller and third party advertisers, additional Reseller and non-Reseller advertiser stores and products catalogued with text references, and links to top-tier eCommerce sites. The Malls will also include an appropriate search engine, commerce functionality, banner and other appropriate advertising space and such other features as the parties shall mutually agree. The Malls will be capable of cataloguing stores independently or in conjunction with all other Malls developed hereunder, if any, as well as other malls which belong to the StoresOnline electronic mall network. Reseller agrees and understands that the storefronts of its end-user customers may be placed in one or more electronic malls developed and/or operated by StoresOnline (in addition to the Malls). e. RESELLER ONLINE STORE. StoresOnline shall develop, manage, maintain and host an online store for Reseller linked to the Malls that may contain up to fifty products (the "Online Store"). StoresOnline shall update the Online Store content on a monthly basis as reasonably instructed by Reseller and as is deemed mutually reasonable by both parties. The Online Store shall be accessible and fully functional within ten (10) business days of the date on which Reseller provides StoresOnline with all of the information required by StoresOnline to complete the Online Store, including but not limited to, all initial content for the Online Store. 2. TERM OF AGREEMENT. The term of this Agreement shall commence as of September 1, 1999 and continue for an initial term of two (2) years. Such term may be extended for additional one-year terms thereafter with the affirmative written consent of the parties hereto, such consent to be given not less than sixty (60) days prior to the expiration of the applicable term. a. Notwithstanding the foregoing, this Agreement may be terminated in accordance with the provisions of Section 10. b. Termination of this Agreement shall not relieve either party of any obligations incurred prior to termination, including outstanding delivery and payment obligations and other contractual commitments herein or mutually agreed to from time to time by the parties in writing. The obligations set forth in Sections 3d, 6b, 8, 10a, 12c, 12e, 12f and 12h are expressly intended to survive termination of this Agreement. Upon termination of this Agreement, each party (i) shall promptly return to the other party all Proprietary Information (as hereinafter defined) as provided in Section 12.e hereof; (ii) render a final accounting to the other party of all amounts due and owing hereunder, and any requisite payments in connection therewith, within ninety (90) days of such termination; and (iii) shall cooperate with and provide reasonable assistance to the other party during a transition period of ninety (90) days. 3. PRICES AND TAXES. a. PRICES FOR SERVICES. Pursuant to the terms of this Agreement, StoresOnline shall be entitled to receive from Reseller: (i) the one-time Store Set-up Price set forth on the Addendum for each of Reseller's end-user customers which establishes a storefront pursuant hereto; and (ii) the applicable Monthly Base Wholesale Price set forth on the Addendum for each active storefront designated as such by Reseller. b. [RESERVED]. c. RETAIL PRICES FOR SERVICES. On or before the first day of each month, Reseller shall provide StoresOnline with a list of the Reseller prices charged for each class of Accounts or for each Account (as hereinafter defined). d. PRICES FOR MALL DEVELOPMENT; MALL REVENUE SPLIT. All prices for Mall design, development and operation provided hereunder shall be as set forth on the Addendum. It is anticipated that the Malls will generate multiple revenue streams. Reseller and StoresOnline shall split the net revenue generated from all such revenue sources on a [**REDACTED**] basis. Such revenue sources to be split shall include, but are not limited to: (i) eCommerce advertisers provided by StoresOnline; (ii) the pro rata share of Mall banner advertising to which Reseller is entitled for participating in the Netgateway Online Mall network partners banner advertising program, and (iii) click-through revenue from eTailer sales in the Malls. The parties hereto shall mutually agree to pricing in the event advertising space is sold on a straight-buy basis, and such revenues shall be split equally between the two parties. For purposes of this Section 3.d, "net revenue" shall mean gross revenues received from all existing and future revenue streams generated by the Malls less any contractual fees, commissions and other charges due from StoresOnline to third parties in connection with the generation of such revenues, including, but not limited to, commission fees for banner advertising placements and affiliate sales programs. e. TAXES. All prices for any services or products supplied hereunder are exclusive of any federal, state or local sales, use, excise, AD VALOREM or personal property taxes levied, or any fines, forfeitures or penalties assessed in connection therewith, as a result of this Agreement or the installation or use of services or products hereunder (collectively, but exclusive of taxes based upon StoresOnline's income, "Taxes"). Reseller or Reseller's customers, as applicable, shall pay any and all such Taxes, or StoresOnline may pay such Taxes for Reseller's account or Reseller's customers' account, in which case Reseller shall be obligated to reimburse StoresOnline for amounts so paid. Any such Taxes which are charged to or payable by StoresOnline will be invoiced to and paid by Reseller in the manner set forth in Section 6 below. In the event that Reseller directly invoices its customers pursuant to paragraph 6.c hereof, Reseller shall be solely responsible for the collection and payment of any such Taxes. 4. PROMOTION. StoresOnline shall produce two thirty-second television commercials promoting the Malls and the Services. Reseller, at its sole expense, shall cablecast the commercials produced by Storesonline a combined minimum of five hundred times per broadcast month, per broadcast market, in each broadcast market where the Malls are fully functional, and shall continue to cablecast such commercials for the term of this Agreement. 5. CUSTOMER ACCOUNTS. a. CUSTOMER ACCOUNT REGISTRATION PROCESS. The Services provided hereunder include an online or non-electronic registration process that Reseller's customers will use to establish storefront accounts with StoresOnline (the "ACCOUNTS"). In order to establish an Account, Reseller's customers must complete the registration process in accordance with the terms set forth by StoresOnline. The general terms and conditions for the use of Accounts shall be posted from time to time on the Mall sites, or in the event that StoresOnline establishes an electronic exchange for Reseller, such information will be posted on Reseller's exchange. The terms and conditions as posted shall, in all events and at all times, be binding upon the Reseller and its customers who establish Accounts. The terms and conditions governing such Accounts may be amended from time to time by StoresOnline in its sole discretion. b. CONTINUATION OF CUSTOMER ACCOUNTS. Continuation of each customer Account is subject to the timely payment of the monthly fees associated with such Accounts, and failure to do so shall constitute grounds for StoresOnline to cancel and terminate an Account. c. USE OF CUSTOMER INFORMATION. The parties hereto agree that the use of end-user customer and shopper data by either party shall be prohibited without the mutual consent of both parties. The manipulation, collection or evaluation of any such data shall be for the internal use and purposes of the parties only. In no event shall such information be resold, leased or otherwise transferred to any third parties. Upon termination of this Agreement, the parties shall cooperate in the use or disposal of all such information. This provision and the restrictions contained herein shall survive termination of this Agreement. 6. BILLING AND PAYMENT TERMS. a. [RESERVED]. b. [RESERVED]. c. DIRECT RESELLER BILLING FOR SERVICES. Reseller shall invoice its customers directly for the Services provided hereunder. Reseller shall remit directly to StoresOnline on a monthly basis all applicable Store Set-up fees and the Monthly Wholesale Retail Price for each active storefront in the Malls as determined by Reseller. All such fees shall be paid in advance and are due on the first day of each month. d. BILLING FOR MALL RELATED CHARGES; ADVERTISING AND RELATED REVENUES. All revenues generated from the Malls (including advertising and related revenues) which are required to be split between StoresOnline and Reseller pursuant to paragraph 3(d) hereof shall be invoiced and collected by StoresOnline. StoresOnline shall thereafter forward all amounts due, if any, to Reseller (net 30 days) at the address provided on the signature page hereto, together with a statement setting forth the total amount collected, the amounts payable to Reseller and the total amount remitted. 7. REAL TIME PAYMENT PROCESSING. In the event that a customer wishes to use the StoresOnline real-time credit card payment processing option, such customer must establish a customer account with an FDIC network bank and must open an account with a participating credit-card processor. 8. DISCLAIMER OF WARRANTIES AND LIMITATIONS OF LIABILITY. a. DISCLAIMER OF WARRANTY. EXCEPT AS SPECIFICALLY PROVIDED HEREIN, THERE ARE NO, AND STORESONLINE EXPRESSLY DENIES, REJECTS AND DISCLAIMS ANY WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTIES OF THE CORRECTNESS, ACCURACY, PRECISION, TIMELINESS OR COMPLETENESS OF ANY INFORMATION OR SERVICES PROVIDED HEREUNDER. b. LIMITATION OF LIABILITY. STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES AND AGENTS SHALL NOT BE LIABLE TO RESELLER OR TO ANY THIRD PARTY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR INTERRUPTIONS OF SERVICE DUE TO MECHANICAL ELECTRICAL OR WIRE DEFECTS OR DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR OTHER CAUSES OVER WHICH STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES OR AGENTS AGAINST WHOM LIABILITY IS SOUGHT, HAVE NO REASONABLE CONTROL, OR FOR LOSS OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS STATEMENTS, ERRORS OF FACTS, OMISSIONS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF THE SERVICES, OR ANY DATA PROVIDED AS A PART OF THE SERVICES PURSUANT TO THIS AGREEMENT, EXCEPT TO THE EXTENT CAUSED BY THE NEGLIGENCE OR WILLFUL MISCONDUCT OF STORESONLINE. IN ALL CASES ARISING FROM EVENTS OCCURRING DURING THE TERM OF THIS AGREEMENT, WHETHER BASED UPON TORT, CONTRACT, WARRANTY, INDEMNITY, CONTRIBUTION OR OTHERWISE, DAMAGES SHALL BE LIMITED TO, AND RESELLER AGREES NOT TO MAKE ANY CLAIM OR CLAIMS EXCEEDING TWENTY-FIVE THOUSAND DOLLARS ($25,000.00), REGARDLESS OF HOW MANY CLAIMS RESELLER MAY HAVE; PROVIDED, HOWEVER, THAT THE DOLLAR LIMITATION SET FORTH IN THIS SENTENCE SHALL NOT APPLY TO MONIES DUE TO RESELLER IN CONNECTION WITH ANY OF THE ACCOUNTS ESTABLISHED PURSUANT TO THIS AGREEMENT. IN ADDITION, IN NO EVENT SHALL STORESONLINE BE LIABLE TO RESELLER OR TO ANY THIRD PARTY FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES WHICH RESELLER OR SUCH THIRD PARTY MAY INCUR OR EXPERIENCE ON ACCOUNT OF ENTERING INTO OR RELYING ON THIS AGREEMENT OR UTILIZING THE SERVICES, REGARDLESS OF WHETHER STORESONLINE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES ARE CAUSED, IN WHOLE OR IN PART, BY THE NEGLIGENCE OF STORESONLINE. c. TIME FOR MAKING CLAIMS. ANY SUIT OR ACTION BY RESELLER AGAINST STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES, AGENTS, SUCCESSORS OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL BE COMMENCED WITHIN TWO (2) YEARS OF THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF STORESONLINE'S LIABILITY SET FORTH IN THIS PARAGRAPH 8 OR ELSEWHERE IN THIS AGREEMENT. d. DISCLAIMER. THE WARRANTIES AND CONDITIONS SET FORTH HEREIN AND THE OBLIGATIONS AND LIABILITIES OF STORESONLINE HEREUNDER ARE IN LIEU OF, AND BUYER HEREBY WAIVES, ALL EXPRESS AND IMPLIED WARRANTIES AND CONDITIONS, INCLUDING, WITHOUT LIMITATION, THOSE OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT. IN NO EVENT SHALL STORESONLINE'S LIABILITY FOR ANY CLAIM ASSERTED BASED ON A VIOLATION OF WARRANTY OR CONDITION EXCEED THE AMOUNT PAID BY RESELLER TO STORESONLINE FOR THE AFFECTED ITEM OF SERVICES. e. INFRINGEMENT. StoresOnline shall indemnify and hold Reseller harmless from and against any claims by third parties pertaining to the infringement of U.S. copyrights, trademarks or patents arising solely from Reseller's use of any of computer programs or software products utilized by StoreOnline to provide the Services as authorized hereunder, provided that such computer programs or software products have not been altered, revised or modified by Reseller in a manner that causes the alleged infringement, and further provided that: (i) Reseller promptly notifies StoresOnline in writing of such claim; (ii) StoresOnline shall have sole control of the defense of any action on such claim and of all negotiations for its settlement or compromise; (iii) Reseller cooperates with StoresOnline in every reasonable way to facilitate the settlement or defense of such claim; and (iv) should such Services become or, in StoresOnline's opinion, be likely to become, the subject of an infringement claim, Reseller shall permit StoresOnline, at StoresOnline's expense, to (1) procure for Reseller the right to continue using such Services, or (2) replace or modify the same to become functionally equivalent yet non-infringing, or (3) upon the failure of (1) and (2) above, terminate, without penalty, Reseller's use of the affected Services, in which event StoresOnline shall refund to Reseller on a pro-rata basis any prepaid amounts related thereto. Notwithstanding the foregoing, StoresOnline shall not be liable to indemnify Reseller for any claims of infringement by third parties relating in any manner to the contents of the Malls or any of the third party merchants' storefronts contained therein provided by Reseller or any of its end-user customers. f. INDEMNIFICATION. Each party, its directors, officers, affiliates, employees and agents shall indemnify and hold harmless the other party, its directors, officers, affiliates, employees and agents, from and against any and all third party claims of up to twenty-five thousand dollars ($25,000) for any loss or damage resulting or arising solely from circumstances or events reasonably within the control of the indemnifying party; PROVIDED, HOWEVER, that the claim limitation set forth in the preceding sentence shall not apply to monies due to the indemnified party pursuant to the terms of this Agreement. 9. [RESERVED]. 10. DEFAULT. a. RESELLER'S DEFAULT. The failure by Reseller to make any payment required hereunder or a material breach by Reseller of its obligations hereunder shall constitute an event of default by Reseller. Upon the occurrence of an event of default, StoresOnline shall provide Reseller with written notice specifying the nature of such default. If Reseller has not cured such default within thirty (30) days after receipt of such notice, StoresOnline may, at its sole discretion, terminate this Agreement and/or seek any other available remedies available at law or in equity; PROVIDED, HOWEVER, that the cancellation of this Agreement shall not prevent Reseller from reselling the Services (and sublicensing the software component thereof) previously paid for by Reseller and sublicenses previously granted by Reseller pursuant hereto shall not be affected by such termination. b. STORESONLINE'S DEFAULT. The failure by StoresOnline to make any payment required hereunder or a material breach by StoresOnline of its obligations hereunder shall constitute an event of default by StoresOnline. Upon the occurrence of an event of default by StoresOnline, Reseller shall provide StoresOnline with written notice specifying the nature of such default. If StoresOnline fails to cure such default within thirty (30) days after receipt of such notice, Reseller may, at its sole option, terminate this Agreement and/or seek any other available remedies available at law or in equity. c. INSOLVENCY. The commencement of any proceeding (voluntary or involuntary) in bankruptcy or insolvency by or against either party hereto, or the appointment (with or without the party's consent) of an assignee for the benefit of creditors or a receiver with respect to either party hereto shall constitute an event of default hereunder, and the non-defaulting party may elect to terminate this Agreement immediately. 11. DISPUTE RESOLUTION. a. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is most knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this Paragraph 11 are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "DISPUTE" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement, other than as provided in subparagraph e. below, may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (1) The complaining party will notify the other party in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (2) In the event that such matter remains unresolved for thirty (30) days after the delivery of the complaining party's written notice, a senior representative of each party shall meet or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (3) In the event that the meeting or conference specified in (2) above does not resolve such matter, the senior officer of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (4) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with subparagraph b. below. b. Except as provided in subparagraph e. below, any dispute arising under this Agreement shall, after utilizing the procedures in subparagraph a., be resolved by final and binding arbitration in Long Beach, California, before a single arbitrator selected by, and in accordance with, the rules of commercial arbitration of the American Arbitration Association. Each party shall bear its own costs in the arbitration, including attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. c. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. d. Either party may apply to a court of general jurisdiction to enforce a arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including reasonable attorneys' fees. e. Notwithstanding the provisions of subparagraphs a. and b. above, any action by StoresOnline to enforce its rights under Paragraph 12e of this Agreement or to enjoin any infringement of the same by Reseller may, at StoresOnline's election, be commenced in the state or federal courts of California, and Reseller consents to personal jurisdiction and venue in such courts for such actions. 12. GENERAL. a. ENTIRE AGREEMENT; AMENDMENT; SEVERABILITY. This Agreement, the Stock Purchase Agreement and the Warrant Agreement, each dated of even date herewith, constitute the entire agreement between StoresOnline and Reseller and supersede all previous understandings, negotiations and proposals, whether written or oral. This Agreement may not be altered, amended or modified except by an instrument in writing signed by duly authorized representatives of each party. In the event that any one or more provisions contained in this Agreement should for any reason be held to be unenforceable in any respect, such unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed as if such unenforceable provision had not been contained herein. b. FORCE MAJEURE. Notwithstanding anything contained herein to the contrary, neither party shall be liable to the other for delays or failures to perform an obligation to the other hereunder if such delay or failure to perform is due to any act of God, acts of civil or military authority, labor disputes, fire, riots, civil commotion's, sabotage, war, embargo, blockage, floods, epidemics, delays in transportation, inability beyond StoresOnline's reasonable control to obtain necessary labor, materials or manufacturing facilities, or when due to governmental restrictions, including the inability of StoresOnline to obtain appropriate U.S. export license approval or the subsequent suspension of same. In the event of any such delay or failure, the parties shall have an additional period of time equal to the time lost by reason of the foregoing in which to perform hereunder. c. GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California, without regard to principles of choice of law. d. ASSIGNMENT. Reseller shall not assign this Agreement or any rights hereunder without the prior written consent of StoresOnline, which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that Reseller may assign this Agreement or any rights hereunder to a successor or affiliate corporation. StoresOnline may assign this Agreement to a subsidiary or affiliate corporation. e. DISCLOSURE OF INFORMATION. Each party hereto acknowledges that, in the course of meeting its obligations under this Agreement, it will obtain information relating to the other party, which is of a confidential and proprietary nature ("PROPRIETARY INFORMATION"). Such Proprietary Information may include, but is not limited to, trade secrets, know-how, inventions, techniques, processes, programs, schematics, data, customer lists, financial information and sales and marketing plans. Each party shall at all times during the term of this Agreement and for three years after its termination, keep in confidence and trust from any person or entity, all Proprietary Information of the other party and shall not disclose or use such Proprietary Information without the prior written consent of the party which owns such Proprietary Information, unless compelled to disclose such Proprietary Information by judicial or administrative process (including, without limitation, in connection with obtaining the necessary approvals of this Agreement and the transactions contemplated hereby of governmental or regulatory authorities) or by other requirements of law. Upon termination of this Agreement, each party shall promptly return to the other party all Proprietary Information under itscontrol and all copies thereof. Neither party shall disclose the specific terms of this Agreement to any third parties except as may be mutually agreed or as required by law or the order of a court of competent jurisdiction. The above limitations on disclosure of Proprietary Information shall not apply to information which becomes publicly available through no act of the disclosing party, is released by the owning party in writing with no restrictions, is lawfully obtained by the disclosing party without breach of this Agreement from third parties without obligations of confidentiality, is previously known by the disclosing party without similar restrictions as shown by documents in its possession prior to disclosure or is independently developed by the disclosing party. f. COMPLIANCE WITH LAW. Reseller shall comply with all applicable law the violation of which would have a material adverse effect on StoresOnline or its business, including, without limitation, the export control laws of the United States of America and prevailing regulations which may be issued from time to time by the United States Department of Commerce and any export control regulations of the United States and those countries involved in transactions concerning the exporting, importing and re-exporting of Services purchased under application of these terms and conditions. Reseller shall also comply with the United States Foreign Corrupt Practices Act and shall indemnify StoresOnline from violations of such act by Reseller. This provision shall survive any termination or expiration of the Agreement. g. EXERCISE OF REMEDIES. Any delay or omission by either party to exercise any right or remedy under this Agreement shall not be construed to be a waiver of any such right or remedy or any other right or remedy hereunder. h. LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES DUE TO FAILURE TO PERFORM ITS OBLIGATIONS HEREUNDER. i. HEADINGS. Headings contained in this Agreement are for convenience only, are not a part of this Agreement, and do not in anyway interpret, limit or amplify the scope, extent or intent of this Agreement or any of the provisions hereof. j. REGULATORY APPROVAL. Reseller warrants that the Services and the Malls, when utilized with its own products, will comply with all applicable industry and governmental standards and requirements. StoresOnline assumes no responsibility or liability for these governmental and regulatory standards or requirements, which liability and responsibility is assumed entirely by Reseller. Upon request, StoresOnline will provide copies of regulatory approvals to Reseller. k. STORESONLINE BRANDING. StoresOnline shall have the right to place a "POWERED BY NETGATEWAY" or "POWERED BY STORESONLINE" byline in a prominent mutually agreed upon location on each storefront site and on each Mall site. l. PUBLICITY. StoresOnline (or its parent company, Netgateway, Inc.) shall have the right to inform its customers and the public that StoresOnline has entered into this Agreement with Reseller. Each party may use the other's name or the name of its customers in marketing the Services and the development of the Malls and may link to each other's websites, but neither party will perform any actions which will harm the other's or its customers name and reputation. m. NOTICES. Any notice required in connection with this Agreement shall be given in writing and shall be deemed effective upon personal delivery or three business days after deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days' advance written notice to the other party. All facsimile notices shall be confirmed by written notice mailed, as provided above, within five (5) days of the date of the facsimile is sent. Once confirmed, the notice shall be effective as of the date of the facsimile. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the date set forth herein. STORESONLINE.COM, INC., A CALIFORNIA CORPORATION By /s/ Donald M. Corliss Jr. --------------------------------------------------- Name: Donald M. Corliss Jr. ------------------------------------------ Its: Authorized Agent NETGATEWAY, A NEVADA CORPORATION By /s/ Donald M. Corliss Jr. ------------------------------------------------------ Name: Donald M. Corliss Jr. ------------------------------------------ Its: President Address for Notices: 300 Oceangate, Suite 500 Long Beach, CA 90802 (562) 308-0010 MEDIAONE OF COLORADO, INC. By /s/ Edward H. Dunbar, Jr. ------------------------------------------------- Name: Edward H. Dunbar, Jr. ------------------------------------------ Its: V.P. ------------------------------------------ Address for Notices: 188 Inverness Drive West, 6th Floor Englewood, CO 80112 Address: Telephone: (303) 858-3000 Facsimile: (303) 858-3487 E-mail Address: StoresOnline Sales Representative: Alex Chaffetz Company URL: Mediaone.com Technical Contact: Telephone: E-mail Address: ADDENDUM NAME OF RESELLER: MEDIAONE OF COLORADO, INC. TYPE ENTITY: CORPORATION DATE OF AGREEMENT: JULY 26, 1999 -- STANDARD FEATURE SET Description of Reseller's Business: High speed Internet access, data transmission and cable television programming services. CATALOGS - - International Currencies - - Weight Units: Kilograms, Grams, Pounds and Ounces - - Sending Methods: Internet, Fax/Mail and Phone - - Faxed Internet Orders - - Payment Methods: VISA, MasterCard, American Express, Discover and JCB - - Custom Payment Methods - - Standard Shipping Destinations: United States, Canadian Provinces and World Countries - - Custom Shipping Destinations - - Multiple Shipping Methods and Regions - - Shipping Formula Variables: Quantities Ordered, Weight and Subtotal - - Shipping Formula Functions: Minimum, Maximum and Range - - Custom Tax Rates - - Custom Survey Questions: Long Answer, Short Answer, Multiple Choice and Single Choice - - Custom Subtotal Items: Fixed, User Enterable and Optional - - Users and Passwords CATEGORIES - - Unlimited Categories - - Full Description - - Image PRODUCTS - - Base Item Number - - Description: Full Description - - Image - - Price - - Sale Price - - Unique Sale Price for Each Catalogue - - Non-Taxable Products - - Weight - - Category - - Multiple Product Options (i.e., Color, Size) - - Multiple Product Option Items (i.e., Red, Green, Blue) - - Custom Item Numbers based on Options - - Custom Pricing based on Options - - Option Conflicts - - Quantity Discounts - - Links to Related Items - - Links to other URL's - - Preview product pages - - Generated HTML code to copy and paste into existing sites - - Graphical pricing for easy integration into existing sites - - Import product information from a test-delimited file ORDERS - - E-mail notification of new orders - - Order Status - - Waybill Number and Shipper - - Custom Notes - - End-user Order Tracking - - Export Order Information STORESONLINE POINT OF SALE - - Multiple Merchant Numbers - - Automatic authorization of orders sent over the Internet - - Manual Authorizations - - Credits - - Automatic Settlement - - Freeze and Thaw Transactions STORESONLINE HOSTING - - Home Page Builder - - Unique URL - - 10 MB Free - - Virtual hosting of existing domain names - - Professionally designed templates - - Customize your own templates STORESONLINE SEARCH - - Full Text Search Engine - - Full Word Listing - - Phrase or Boolean Searching - - Re-index your site anytime - - Integrate into existing sites PRICING FOR STOREFRONT SERVICES: Up to 100 Products: Additional products or additional design work with respect to any Monthly Base Wholesale Price: [**REDACTED**] storefronts may be included at StoresOnline's standard hourly 101 to 300 Products: rates for such work. Monthly Base Wholesale Price: [**REDACTED**] Scanning: [**REDACTED**] per image (first 10 images [**REDACTED**]) 301 to 1000 Products: Monthly Base Wholesale Price: [**REDACTED**] One Time Store Set-up Fee: Up to 100 products Monthly Base Wholesale Price: [**REDACTED**] ADDITIONAL PRODUCTS OR ADDITIONAL DESIGN WORK WITH RESPECT TO ANY STOREFRONTS MAY BE INCLUDED AT STORESONLINE'S STANDARD HOURLY RATES FOR SUCH WORK. [**REDACTED**] MALL DEVELOPMENT SERVICES AND PRICES 1. DEVELOPMENT. (a) StoresOnline shall develop, manage, maintain and host the Malls, which shall be branded around the Reseller name, brand and image. The Malls shall include an appropriate URL address, four to six featured products from various Reseller and third party advertisers, additional Reseller and non-Reseller advertiser stores and products catalogued with text references, and links to top tier eTailer sites (e.g., Amazon.com). The Malls shall also include an appropriate search engine, commerce functionality, banner and other appropriate advertising space, and such other features as both parties shall reasonably direct. The Malls shall link to a local online Mall in each cable market where Reseller has launched the sale of the Services pursuant to this Agreement. The Malls shall be accessible and fully functional by September 1, 1999 or such earlier date as may be mutually agreed by the parties. (b) ADDITIONAL MALLS MAY BE LAUNCHED PURSUANT TO THIS AGREEMENT UPON RESELLER'S WRITTEN NOTICE TO STORESONLINE OF ITS INTENTION TO LAUNCH A MALL IN A PARTICULAR BROADCAST MARKET. EACH ADDITIONAL MALL SHALL BE OPERATIONAL WITHIN FOURTEEN (14) BUSINESS DAYS OF STORESONLINE'S RECEIPT OF A WRITTEN NOTICE OF LAUNCH BY RESELLER. CUSTOMER STOREFRONTS DEVELOPED PURSUANT TO THIS AGREEMENT SHALL BE OPERATIONAL WITHIN FOURTEEN (14) BUSINESS DAYS OF STORESONLINE'S RECEIPT FROM A STOREFRONT CUSTOMER OF A COMPLETED STOREFRONT APPLICATION(S) AND ANY OTHER INFORMATION REQUIRED TO COMPLETE SUCH STOREFRONT, INCLUDING, WITHOUT LIMITATION, INFORMATION RELATED TO CUSTOM DEVELOPMENT SERVICES REQUIRED BY SUCH CUSTOMER. [**REDACTED**] 2. PRICING. StoresOnline shall waive its one-time development fee for the Malls. Reseller shall be entitled to all revenue generated by the Services and all associated television advertising revenue sold; PROVIDED, HOWEVER, that StoresOnline shall be entitled to: (a) a one-time store setup fee of $[**REDACTED**] for each storefront completed pursuant to this Agreement; and (b) the Montly Base Wholesale Price for each active Reseller storefront designated as such by Reseller, which amounts shall be payable in accordance with the terms of this Agreement. Additional design work and store development shall be available to Reseller and its end-user customers at StoresOnline's standard hourly rates. 3. MALL REVENUES. It is anticipated that the Malls will generate multiple revenue streams. Reseller and StoresOnline shall split the net revenue generated from all such revenue sources on a [**REDACTED**] basis. Such revenue sources to be split shall include, but are not limited to: (i) eCommerce advertisers provided by StoresOnline; (ii) the pro rata share of Mall banner advertising to which Reseller is entitled for participating in the Netgateway Online Mall network partners banner advertising program; and (iii) click-through revenue from eTailer sales in the Malls. The parties hereto shall mutually agree to pricing in the event advertising space is sold on a straight-buy basis, and such revenues shall be split equally between the two parties. For purposes of this provision, "net revenue" shall mean gross revenues received from all existing and future revenue streams generated by the Malls less any contractual fees, commissions and other charges due from StoresOnline to third parties in connection with the generation of such revenues, including, but not limited to, commission fees for banner advertising placements and affiliate sales programs. 4. PROMOTION. StoresOnline shall produce two thirty-second television commercials promoting the Malls and the Services. Reseller, at its sole expense, shall cablecast the commercials produced by StoresOnline a combined minimum of five hundred times per broadcast month, per broadcast market, in each broadcast market where the Malls are fully functional, and shall continue to cablecast such commercials for the term of this Agreement. 5. EQUITY PARTICIPATION. Pursuant to a Stock Purchase Agreement dated of even date herewith, Reseller shall receive 50,000 shares of unregistered common stock of Netgateway, Inc., StoresOnline's corporate parent. Such common stock shall be subject to applicable restrictions under Rule 144 of the federal securities laws. Pursuant to a Warrant Agreement dated of even date herewith, Reseller shall also receive warrants for the purchase of up to 200,000 additional shares of common stock of Netgateway, Inc.; such warrants shall vest incrementally in tranches of 50,000 warrants as each additional one million of Reseller's cable television homes launch the Malls (over the one million homes intended to be launched on or before September 1, 1999) for a total of five million cable television homes ("Full Distribution") to be launched on or before February 28, 2001. All warrants which vest pursuant to this Agreement shall be exercisable by Reseller at a price equal to the market value of the common stock of Netgateway, Inc. as of the date such warrants are earned. Subject to certain divestiture obligations (as set forth more fully in the Warrrant Agreement), all warrants which vest pursuant hereto shall be exercisable for a period of two years from the date on which such warrants vest. 6. MISCELLANEOUS. Reseller acknowledges and agrees that StoresOnline intends to market independently the Services through various other channels and other reseller relationships for which Reseller shall have no participation. The parties hereto seek to launch the first Mall and begin promotion thereof into one million of Reseller's cable television homes by September 1, 1999. The parties shall use their best efforts to achieve Full Distribution into all remaining Reseller cable television homes on or before February 28, 2001. EXHIBIT A STANDARD LICENSE AGREEMENT TERMS 1. LICENSE. This License allows you to use any software associated with the provision of the Services. 2. RESTRICTIONS. You may not use, copy, modify or transfer the program, or any copy, modification or merged portion, in whole or in part, except as expressly provided for in this License. If you transfer possession of any copy, modification or merged portion of the program to another party, your License is automatically terminated. 3. TERM. The License is effective until terminated. You may terminate it at any other time by notifying Reseller of your intent to do so. The License will also terminate upon the occurrence of certain events set forth elsewhere in this Agreement. Upon such termination, you agree to destroy the program together with all copies, modifications and merged portions in any form. 4. EXPORT LAW ASSURANCES. You agree that neither the pogrom nor any direct product thereof is being or will be shipped, transferred or re-exported, directly or indirectly, into any country prohibited by the US Export Administration Act and the regulations thereunder or will be used for any purpose prohibited by the Act. 5. LIMITED WARRANTY. The program is provided "AS IS" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of merchantability and fitness for a particular purpose. The full text of the warranty is provided in the user manual. 6. LIMITED LIABILITY. In no event will StoresOnline or Reseller be liable to you for any damages, including any lost profits, lost savings or other incidental or consequential damages arising out of the use or inability to use such program even if StoresOnline or Reseller has been advised of the possibility of such damages, or for any claim by any other party. 7. GENERAL. If you are a Government end-user, this License conveys only "RESTRICTED RIGHTS," and in its use, disclosure and duplication are subject to Federal Acquisition Regulations, subparagraph (c)(1)(11) 52.227-7013. (See U.S. Government End-User provisions in manual.) This License will be construed under the laws of the State of California, except for that body of law dealing with conflicts of law. If any provision of the License shall be held by a court of competent jurisdiction to be contrary to law, that provisions shall be enforced to the maximum extent permissible, and the remaining provisions of this License shall remain in full force and effect. EX-10.28 11 EXHIBIT 10.28 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT is entered into as of this 26th day of July, 1999, by and between MediaOne of Colorado, Inc., a Delaware corporation (the "BUYER") and Netgateway, Inc., a Nevada corporation (the "COMPANY"). RECITALS WHEREAS, the Company is an electronic commerce service provider, and owns, operates and maintains an Internet storefront building services package comprised of certain services delivered through the Company's proprietary software; WHEREAS, the Buyer is engaged in engaged in [**REDACTED**] the business of providing high speed Internet access, data transmission and cable television programming services throughout the United States. WHEREAS, the Company and the Buyer have entered into a strategic alliance (the "STRATEGIC ALLIANCE") pursuant to which the Company shall become an electronic commerce storefront provider for the Buyer; WHEREAS, the Strategic Alliance will initially be comprised of three initiatives to be performed by the Company for the Buyer, including the design and development of: (a) an online shopping mall branded around the Buyer's name and image; (b) an online store for the Buyer; and (c) a branded electronic storefront service (including the Company's standard eCommerce features, placement in the Buyer's branded online mall, storefront maintenance and unlimited help desk support) which the Buyer shall resell to third party merchants. WHEREAS, in connection with the Strategic Alliance, the Company and the Buyer have entered into a Cable Reseller and Mall Agreement (the "RESELLER AGREEMENT") and a Warrant Agreement (the "WARRANT AGREEMENT") , each dated of even date herewith (together with this Agreement, the "TRANSACTION AGREEMENTS"); WHEREAS, in consideration for the obligations of the Buyer under the Reseller Agreement, the Company desires to issue to the Buyer, and the Buyer desires to purchase, fifty thousand shares of the Company's common stock, par value $.001 per share ("COMMON STOCK"). AGREEMENT NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the Company and the Buyer hereby agree as follows: SECTION 1. DEFINITIONS 1.1 DEFINITIONS. As used in this Agreement, the following definitions shall apply: "AGREEMENT" means this Stock Purchase Agreement by and between the Buyer and the Company, as it may be amended or supplemented from time to time pursuant to the provisions hereof. "BY-LAWS" means the by-laws of Company, as the same may be amended or modified from time to time. "CERTIFICATE" means the articles or certificate of incorporation of the Company, as the same may be amended, restated or modified from time to time. "STOCK" means the 50,000 shares of Common Stock to be sold to the Buyer pursuant to the terms of this Agreement. SECTION 2. PURCHASE OF STOCK 2.1 PURCHASE OF STOCK. In consideration for the obligations of the Buyer under the terms of the Reseller Agreement, the Company hereby issues and sells to the Buyer, and the Buyer hereby purchases from the Company, fifty thousand (50,000) shares of Common Stock. The Company hereby agrees to promptly deliver the certificate(s) evidencing the Stock to the Buyer. ARTICLE 3. REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. In order to induce the Buyer to enter into this transaction, the Company represents and warrants as follows: a. ORGANIZATION AND STANDING. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. b. CORPORATE POWER. The Company has all necessary corporate power and authority to execute, deliver and perform this Agreement, the Reseller Agreement and the Warrant Agreement and the transactions contemplated hereby and thereby, and has all requisite corporate power and authority to sell and issue the Stock hereunder and to carry out the transactions contemplated hereby. -2- c. STOCK. Upon issuance, the Stock will be duly authorized, validly issued, fully paid and nonassessable, and issued in accordance with applicable laws. d. CAPITALIZATION AND VOTING RIGHTS. The authorized capital stock of the Company consists, or will consist, immediately prior to the Closing, of: (i) COMMON STOCK. _25,000,000 shares of Common Stock, of which 9,648,404 shares are issued and outstanding. (ii) Except for (i) an aggregate of 1,000,000 shares of Common Stock reserved for issuance under the Company's 1998 Stock Compensation Plan (including 998,301 shares subject to outstanding options granted thereunder); (ii) an aggregate of 5,000,000 shares reserved for issuance under the Company's 1998 Stock Option Plan for Senior Executives (including 2,596,667 shares subject to outstanding options granted thereunder); (iii) warrants to purchase an aggregate of 1,750,100 shares of Common Stock; (vi) an aggregate of 240,000 shares reserved for issuance pursuant to options granted outside of either of the Company's stock compensation plans; and (v) conversion rights in respect of the Company's Secured Convertible Debentures Due December 31, 1999, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal) or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding and, to the Company's best knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any of the Company's securities or the voting by or election of a director of the Company. (iii) All outstanding securities of the Company were duly and validly authorized and issued, are fully paid and nonassessable, and were issued in accordance with the registration or qualification provisions of the Securities Act of 1933, as amended (the "SECURITIES ACT"), and any relevant state securities laws, including Blue Sky laws, or pursuant to valid exemptions therefrom, and in accordance with the other applicable provisions of the Securities Act and the rules and regulations promulgated thereunder, and Rule 10b-5 under the Securities Exchange Act of 1934, as amended. e. GOVERNMENTAL CONSENTS. Except for the filing of notices required or permitted to be filed after the date hereof with certain United States federal and state securities commissions, which notices the Company will file on a timely basis, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with valid execution, delivery and performance of the Transaction Agreements or the consummation of the transactions contemplated therein. -3- f. COMPLIANCE WITH OTHER INSTRUMENTS. The Company has not violated and is not in violation, breach or default of any: (a) provision of its Certificate, or its Bylaws or any term or provision of any instrument, judgment, order, writ or decree: (b) any mortgage, note or other evidence of indebtedness or any lease, contract or any other agreement or obligation to which the Company is a party or by which it or its properties are bound (each a "DOCUMENT"); or (c) any provision of any federal or state law, rule or regulation applicable to the Company, the violation, breach or default of which would materially and adversely affect the assets, properties, financial condition, operating results, prospects or business of the Company. The execution, delivery and performance of the Transaction Agreements and the consummation of the transactions contemplated therein, will not result in any such violation or breach or be in conflict with or constitute, with or without the passage of time and giving of notice, a default under any Document. g. INTELLECTUAL PROPERTY RIGHTS. (i) The Company has full title to and ownership of or has the legal right to use all: (i) patents, patent applications, trademarks, service marks, trade names, trade dress, copyrights and any renewal rights therefor, mask works, net lists, schematics, technology, manufacturing processes, supplier lists, trade secrets, know-how, computer software programs or applications (in both source code and object code); (ii) software and firmware listings, fully commented and updated software source code, and complete system build software and instructions related to all software described therein; and (iii) documents, records and files relating to design, end user documentation, manufacturing, quality control, sales, marketing and customer support for all intellectual property described above (collectively "INTELLECTUAL PROPERTY") necessary for its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others. [**REDACTED**] there are no outstanding material options, licenses or agreements of any kind relating to the Company's Intellectual Property, nor is the Company bound by or a party to any material options, licenses or agreements of any kind with respect to the Intellectual Property of any other person or entity. (ii) To the Company's best knowledge, there is no unauthorized use, infringement or misappropriation of any of the Company's Intellectual Property by any third party, employee or former employee, the use of which would materially and adversely affect the assets, properties, financial condition, operating results, prospects or business of the Company or the Company's Intellectual Property. To the Company's best knowledge, the Company has not interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property of any third party, nor has the Company received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any Intellectual Property of -4- any third party. h. NO BREACH BY EMPLOYEE. The Company is not aware after due inquiry of its employees that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution or delivery of the Transaction Agreements nor the performance of the obligations contemplated thereby, nor the carrying on of the Company's business by the employees, agents and independent contractors of the Company, nor the conduct of the Company's business as proposed will, to the Company's knowledge after due inquiry of its employees, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any law, judgment, order, decree, contract, covenant or instrument under which any of such employees, agents or independent contractors is now subject to or obligated. The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment with or retention by the Company, except for inventions, trade secrets or proprietary information that have been assigned to the Company. i. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Each former and current employee and officer of the Company has executed an agreement with the Company regarding confidentiality, proprietary information and inventions assignments substantially in the form or forms delivered to the Buyer. The Company, after reasonable investigation, is not aware that any of its employees or officers are in violation of such agreements, and the Company will use best efforts to prevent any such violation. All consultants to or vendors of the Company with access to confidential information of the Company are parties to a written agreement substantially in the form or forms provided to the Buyer under which, among other things, each such consultant or vendor is obligated to maintain the confidentiality of confidential information of the Company. The Company, after reasonable investigation, is not aware that any of its consultants or vendors are in violation of such agreements, and the Company will use its best efforts to prevent any such violation. j. AGREEMENTS; ACTIONS. (i) Except in the ordinary course of business or as disclosed in writing to the Buyer, there are no agreements, understandings (oral or written), instruments, licenses, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it or any of its properties is bound that may involve: (A) obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000; (B) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services; or (C) indemnification by the Company with respect to overt allegations infringement of any Intellectual Property. -5- (ii) The Company has not: (A) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock; (B) incurred any indebtedness, other than the Secured Convertible Debentures due December 31, 1999, ordinary trade indebtedness or as otherwise disclosed to the Buyer in writing, for money borrowed, individually or in the aggregate, in excess of $50,000; (C) made any loans or advances to any person, other than ordinary advances for travel expenses; or (D) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of inventory in the ordinary course of business. (iii) For purposes of subsection (ii) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amount of such subsection. (iv) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Certificate, or Bylaws, which materially and adversely affects the assets, properties, financial condition, operating results, prospects or business of the Company as now conducted or as proposed to be conducted. k. LITIGATION. Except for the Company's dispute with [**REDACTED**] there is no action, suit, proceeding or investigation pending or, to the best knowledge of the Company, threatened against the Company or any of its properties or assets where the amount in controversy exceeds $15,000 or that questions the validity of the Transaction Agreements or any action taken or to be taken in connection therewith. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. l. PERMITS. The Company has all franchises, permits, licenses and other similar authorities necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the assets, properties, financial condition, operating results, prospects or business of the Company, and the Company believes that it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default under any such franchises, permits, licenses or other similar authority. m. TITLE TO PROPERTY AND ASSETS. Other than the Secured Convertible Debentures due December 31, 1999, the Company owns its properties and assets free and clear of all mortgages, -6- deeds of trust, liens, encumbrances, security interests and claims, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the Company's best knowledge, holds valid leasehold interests in such properties and assets free and clear of any liens, encumbrances, security interests or claims of any party other than the lessors of such property and assets. n. FINANCIAL STATEMENTS. The Company has delivered to the Buyer its audited financial statements (balance sheet and statement of operations, statement of changes in stockholder's equity and statement cash flows, including notes thereto) at June 30, 1998 and for the fiscal year then ended, and its unaudited financial statements (balance sheet and statement of operations) as at and for the nine-month period ended March 31, 1999 (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements: (i) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the period indicated and with each other; (ii) have been compiled from and are in accordance with the Company's books and records; (iii) are complete and correct in all material respects; and (iv) fairly present the financial condition, assets and liabilities and operating results of the Company as of the dates, and for the periods, indicated therein; PROVIDED, HOWEVER, that the unaudited Financial Statements are subject to year-end audit adjustments (which, individually or in the aggregate, are not expected to be material) and do not contain all footnotes required under generally accepted accounting principles. Except as set forth in the Financial Statements or as disclosed in writing to the Buyer or as otherwise contemplated herein, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to March 31, 1999, and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. o. TAX RETURNS, PAYMENTS AND ELECTIONS. [**REDACTED**] The Company has paid, or will pay, all taxes and other assessments due, except those contested by it in good faith and except to the extent that a reserve has been reflected on the Financial Statements in accordance with generally accepted accounting principles. The Company has not elected, pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that could materially and adversely affect the assets, properties, financial condition, operating results, prospects or business of the Company as presently conducted or as proposed to be conducted. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment -7- or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities and the Company is not in any dispute with any tax authorities. The Company has caused to be withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, Federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has caused the same to be paid to the proper tax receiving officers or authorized depositories. p. YEAR 2000. (i) For purposes of this Agreement, "YEAR 2000 COMPLIANT" means that the applicable software, hardware or firmware product, including, without limitation, any embedded microcontrollers (each, a "COMPUTER SYSTEM") will correctly differentiate between years in different centuries and will accurately process date/time data, including, but not limited to, recording, storing, processing, comparing, sequencing, calculating and presenting calendar dates (including Leap Year dates and dates that may also be interpreted as so-called "magic numbers," such as "9999" instead of September 9, 1999) falling before, on, during and after (and, if applicable, spans of time including) January 1, 2000, including correctly differentiating between years, in different centuries, that end in the same two digits. "YEAR 2000 COMPLIANT" also means that the applicable Computer System accurately processes any information dependent on or relating to such dates without loss of functionality, data integrity or performance. (ii) The Company is presently conducting an inventory of the Computer Systems used in the Company's business in order to determine whether such Computer Systems are Year 2000 Compliant. The Company is in the process of upgrading or replacing such Computer Systems that are not Year 2000 Compliant to ensure that such systems are Year 2000 Compliant prior to December 31, 1999 or such earlier date on which the applicable Computer System may shut down or produce incorrect calculations or otherwise malfunction without becoming totally inoperable. The Company is not aware of any events or circumstances that would delay or preclude the upgrading and implementation of such upgrades prior to December 31, 1999 or such earlier date on which the applicable Computer Systems may shut down or produce incorrect calculations or otherwise malfunction without becoming totally inoperable. The costs of upgrading the Company's Computer Systems to be Year 2000 Compliant will not be material. (iii) All Computer Systems sold, leased or licensed, subleased or sublicensed by the Company, including, without limitation, all Computer Systems integrated with the Company's products (whether or not developed, manufactured or otherwise produced by the Company) to third parties are Year 2000 Compliant. The Company has not made any misrepresentation to any customer or end-user regarding the Year 2000 Compliant status of any such Computer Systems. -8- q. DISCLOSURE. The Company has fully provided the Buyer with all information reasonably available to it without undue expense that the Buyer has requested for deciding whether to purchase the Stock and all of the information (including copies of all material agreements to which the Company is a party) which the Company believes is material to Buyer in making such decision. Neither this Agreement , the Reseller Agreement, the Warrant Agreement nor any other exhibits, schedules, statements or certificates made or delivered in connection herewith or therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. r. INSURANCE. The Company has in full force and effect (i) fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed, and (ii) standard comprehensive general liability insurance coverage customary for companies similarly situated to the Company. s. RELATED PARTY TRANSACTIONS. Except as (i) set forth in the Company's Form S-1 dated June 1, 1999, as amended (and filed with the Securities and Exchange Commission thereon); (ii) set forth in the Transaction Agreements; and (iii) provided for in any compensation arrangements made in the ordinary course of business, there are no agreements, understandings or proposed transactions between the Company and any of its employees, officers, directors, affiliates or any affiliate thereof, and no employee, officer, or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or extend guarantee credit) to any of them. To the Company's best knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. Except as disclosed to the Buyer in writing, no shareholder, employee, officer or director of the Company or member of his or her immediate family is directly or indirectly interested in any material contract with the Company. Except for that certain Lease Agreement, dated as of June 2, 1999, for the rental by the Company of office space located at 1333 8th Street S.W., Calgary, Alberta, Canada, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 3.2. REPRESENTATION AND WARRANTIES OF THE BUYER. In order to induce the Company to enter into this transaction, the Buyer represents and warrants as follows: a. ORGANIZATION AND STANDING. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. -9- b. CAPITALIZATION. The Buyer is a corporation, not formed for purposes of purchasing the Stock, with total assets in excess of US $5 million. c. CORPORATE POWER. The Buyer has all necessary power and authority to execute, deliver and perform this Agreement, the Reseller Agreement and the Warrant Agreement and the transactions contemplated hereby and thereby. All necessary corporate proceedings of the Buyer have been duly taken to authorize the execution, delivery and performance of the Transaction Agreements. The Transaction Agreements have been duly authorized, executed and delivered by the Buyer, are the legal, valid and binding obligations of the Buyer and are enforceable in accordance with their terms d. RESTRICTION ON TRANSFER. The Buyer hereby acknowledges and agrees that the Stock has not been registered under the Securities Act of 1933, as amended (the "ACT"), or qualified with the securities regulatory agency of any state and may not be resold or otherwise disposed of unless registered under the Act or qualified with the securities regulatory agency of any state which has jurisdiction over any such transfer or unless an exemption from such registration or qualification is available. The Buyer will transfer the Stock only in accordance with the applicable requirements of all federal and state securities laws. The Buyer acknowledges that the certificate(s) evidencing the Stock will bear a legend regarding restriction on transfer. Notwithstanding the foregoing, the Buyer may, in accordance with the requirements of all applicable federal and state securities laws, transfer any or all of its Stock to any person or entity that, directly or indirectly, controls or is controlled by or is under common control with, the Buyer. e. INVESTMENT. The Buyer is purchasing the Stock for its own account, for investment purposes only, and not for the account of any other person, and not with a view to, or for offer or sale in connection with, any distribution, assignment or resale to others or to fractionalization in whole or in part. f. RISK. The Buyer recognizes that investment in the Company involves substantial risks, and it has experience in financial and business matters is such that it is capable of evaluating the risks of an investment in the Stock. The Buyer is able to bear the substantial economic risks of an investment in the Company for an indefinite period of time, , and at the present time, could afford a complete loss of such investment. g. DUE DILIGENCE. The Buyer acknowledges that all documents, records and books pertaining to this investment have been made available for inspection to the Buyer. The Buyer has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the investment and all such questions have been answered to the full satisfaction of the Buyer. -10- SECTION 4. GENERAL 4.1. GOVERNING LAW. This Agreement, and the legal relations between the parties with respect hereto, shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in such state without regard to principles of conflicts of law. 4.2. HEADINGS. The descriptive heading of the Sections of this Agreement are for convenience only and do not constitute a part of this Agreement. 4.3. ENTIRE AGREEMENT. The Transaction Agreements contain the entire agreement and understanding of the parties hereto, and incorporate all prior and contemporaneous discussions, agreements and understanding between the parties with respect to the subject matter hereof, and no party shall be liable to the other party with respect to any warranties, representations or covenants except as specifically set forth in the Transaction Agreements. 4.4 COUNTERPARTS. This Agreement and any amendment hereto may be executed in one or more counterparts and by different parties in separate counterparts. Such counterparts shall constitute one and the same agreement and shall become effective when the counterparts have been signed by each party and delivered to the other party. 4.5. ATTORNEYS' FEES. In the event of any action by any party arising under or out of, in connection with or in respect of the Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and expenses incurred in such action. 4.6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of both the Buyer and the Company contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement. 4.7. MODIFICATION. Neither this Agreement, nor any provisions hereof, shall be waived, modified, changed, discharged, terminated, revoked or canceled except by an instrument in writing signed by the party against whom any change, discharge or termination is sought. IN WITNESS WHEREOF, the undersigned have caused this Stock Purchase Agreement to be duly executed and delivered by their respective officers thereunto duly authorized of the date first written above. -11- COMPANY: NETGATEWAY, INC. By: /s/ Donald M. Corliss, Jr. ------------------------------ Name: Donald M. Corliss, Jr. Title: President BUYER: MEDIAONE OF COLORADO, INC. By: /s/ Edward H. Dunbar, Jr. ------------------------------ Name: Edward H. Dunbar, Jr. Title: VP -12- EX-10.29 12 EXHIBIT 10.29 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." STORESONLINE.COM DISTRIBUTOR MALL AND STOREFRONT AGREEMENT BUYSELLBID.COM, INC. THIS DISTRIBUTOR MALL AND STOREFRONT AGREEMENT (the "AGREEMENT") is made and entered into as of the date set forth on the Addendum attached hereto and by this reference made a part hereof (the "ADDENDUM"), between and among STORESONLINE.COM, INC., a California corporation, and NETGATEWAY, a Nevada corporation, on the one hand (collectively, "STORESONLINE"), and BUYSELLBID.COM, INC., a Delaware corporation ("DISTRIBUTOR"), on the other hand. R E C I T A L S A. Distributor is an established business entity, engaged in the business described on the Addendum. B. StoresOnline owns, operates and maintains an Internet storefront-building services package comprised of certain services delivered through StoresOnline's proprietary software, the standard features of which are more particularly described on the Addendum (the "SERVICES"). C. The Services are delivered through the Internet and may be made available through a private, branded electronic exchange to be developed for resellers of Distributor. D. StoresOnline desires to (i) sell and license the Services to Distributor for Distributor's resale and sublicense to resellers and end-user customers and (ii) develop one or more on-line mall(s) to be branded around each reseller's name, brand and image (the "Malls"). AGREEMENT NOW, THEREFORE, on the basis of the foregoing recitals, and in consideration of the mutual promises contained herein, the receipt and sufficiency of which is hereby acknowledged, the parties hereto covenant and agree as follows: 1. SERVICES. a. SCOPE OF AGREEMENT. This Agreement covers (i) the purchase, licensing and sale of the Services and (ii) the design and development of the Malls pursuant to and in accordance with the terms and conditions set forth on the Addendum. b. LICENSE GRANT; SALE OF SERVICES. During the term of this Agreement, StoresOnline grants to Distributor, subject to the terms and conditions of this Agreement, the non-exclusive right and license to resell and sublicense (in the case of software products), the Services to Distributor's reseller customers; PROVIDED, HOWEVER, that, solely with respect to Distributor's media partners and reseller customers which are involved in the radio broadcasting industry, StoresOnline grants to Distributor the exclusive right and license to resell and sublicense (in the case of software products), the Services to such media partners and reseller customers. In the case of software products, Distributor acknowledges that such software is and will remain proprietary to StoresOnline, is copyrighted and that Distributor acquires no right, title or interest in or to any such software by this Agreement. Distributor agrees to sublicense the Services hereunder pursuant to the Standard License Agreement Terms set forth on Exhibit "A" hereto, and to cause each of its resellers to sublicense the Services pursuant to such license terms. All agreements between Distributor and any of its resellers for the resale and sublicense of the Services shall be in form and substance satisfactory to StoresOnline and its counsel. c. PRODUCT NAME. It is expressly agreed that the ownership and all right, title and interest in and to the Services and any trademark, trade name, patent or copyright relating to the Services is and will remain vested solely in StoresOnline; PROVIDED, HOWEVER, that as permitted by this Agreement, Distributor may use any existing or future trademark, trade name, patent or copyright relating to the Services, such use to be limited to promoting, selling, installing or maintaining the Services; and PROVIDED, FURTHER, that as permitted by this Agreement, the Services may be branded around the name, brand and image of one or more of Distributor's resellers. Distributor shall use its best efforts during the term of this Agreement to protect StoresOnline's trademarks, trade names, patents and copyrights, but shall not be required to instigate legal action against third parties for any infringement thereof. Distributor shall notify StoresOnline of any infringement as soon as practicable after becoming aware of any such infringement. Distributor shall not use, directly or indirectly, in whole or in part, StoresOnline's name or any other trade name or trademark that is owned or used by StoresOnline in connection with any product other than StoresOnline's products, without the prior written consent of StoresOnline. d. MALL DEVELOPMENT. StoresOnline shall develop the Malls in accordance with the terms and conditions set forth herein and on the Addendum. The Malls shall be branded around name, brand and image of Distributor and/or Distributor's resellers and shall link to such reseller's branded StoresOnline individual storefront solution. The Malls will include appropriate URL addresses, four to six featured products and stores from various Distributor, reseller and/or third party advertisers, additional Distributor/reseller and non-Distributor/non-reseller advertiser stores and products catalogued with text references, and links to top-tier eCommerce sites, as approved by Distributor.. The Malls will also include an appropriate search engine, commerce functionality, banner and other appropriate advertising space and such other features as the parties shall mutually agree. The Mall will be capable of cataloguing stores independently or in conjunction with all other Malls developed hereunder, if any, as well as other malls which belong to the StoresOnline electronic mall network. Distributor agrees and understands that the storefronts contained in the Malls may be placed in one or more electronic malls developed and/or operated by StoresOnline. 2. TERM OF AGREEMENT. The term of this Agreement shall commence as of the execution hereof and continue for an initial term of six (6) months. The Agreement shall automatically be extended for successive six-month terms thereafter unless either party notifies the other, not less than thirty (30) days prior to the expiration of the applicable term, of its intention not to renew. a. Notwithstanding the foregoing, this Agreement may be terminated in accordance with the provisions of Section 10. b. Termination of this Agreement shall not relieve either party of any obligations incurred prior to termination, including outstanding delivery and payment obligations and other contractual commitments herein or mutually agreed to from time to time by the parties in writing. The obligations set forth in Sections 3d, 6b, 8, 10a, 12c, 12e, 12f and 12h are expressly intended to survive termination of this Agreement. 3. PRICES AND TAXES. a. PRICES FOR SERVICES. StoresOnline shall charge Distributor's end-user customers the one-time Store Set-up Price set forth on the Addendum for each electronic storefront that is established pursuant to this Agreement. StoresOnline shall charge Distributor the applicable Monthly Base Wholesale Price set forth on the Addendum for each active storefront. Unless Distributor elects to bill its customers directly in accordance with paragraph 6.c herein, the Monthly Base Wholesale Price for each active storefront shall be offset by StoresOnline against payments due to Distributor and the applicable mall reseller in accordance with paragraph 6.b hereof. b. PRICE ADJUSTMENTS FOR SERVICES. The prices for the Services set forth on the Addendum (other than the Retail Prices which are set by Distributor) are subject to change by StoresOnline at any time, and shall become effective ninety (90) days after written notification of such change to Distributor. Distributor shall retain the right to terminate this Agreement during such notification period in the event such price changes are not acceptable. c. RETAIL PRICES FOR SERVICES. On or before the first day of each month, Distributor shall provide StoresOnline with a list of the Distributor prices charged for each class of Accounts or for each Account (as hereinafter defined). d. PRICES FOR MALL DEVELOPMENT; MALL REVENUE SPLIT. All prices for Mall design, development and operation provided hereunder shall be as set forth on the Addendum. It is anticipated that the Malls will generate multiple revenue streams. After deducting amounts due to reseller, net revenue generated from all such revenue sources shall be split as follows: [**REDACTED**] to StoresOnline, [**REDACTED**] to Distributor, unless StoresOnline waives the Mall development fees at time of Mall development in which case the split, after deducting amounts due to reseller, shall be [**REDACTED**] to StoresOnline and [**REDACTED**] to Distributor. Such revenues sources to be split shall include, but are not limited to: (i) eCommerce advertisers provided by StoresOnline; (ii) the pro rata share of Mall banner advertising attributable to Distributor; (iii) click-through revenue from eTailer sales; and (iv) revenue generated from featured product sales. The parties hereto shall mutually agree to pricing in the event advertising space is sold on a straight-buy basis. e. TAXES. All prices for any services or products supplied hereunder are exclusive of any federal, state or local sales, use, excise, AD VALOREM or personal property taxes levied, or any fines, forfeitures or penalties assessed in connection therewith, as a result of this Agreement or the installation or use of services or products hereunder (collectively, but exclusive of taxes based on StoresOnline's income, "Taxes"). Distributor or Distributor's customers, as applicable, shall pay any and all such Taxes, or StoresOnline may pay such Taxes for Distributor's account or Distributor's customers' account, in which case Distributor shall be obligated to reimburse StoresOnline for amounts so paid. Any such Taxes which are charged to or payable by StoresOnline will be invoiced to and paid by Distributor in the manner set forth in Section 6 below. In the event that Distributor directly invoices its customers pursuant to paragraph 6.c hereof, Distributor shall be solely responsible for the collection and payment of any such Taxes. In the event that Distributor requests that StoresOnline arrange for the installation of high speed telecommunications services necessary for Distributor's use, such services will be maintained in StoresOnline's name or Distributor's name, as determined by StoresOnline in its sole discretion. In the event that such services are maintained in the name of StoresOnline, Distributor shall promptly remit payment to StoresOnline for all charges in connection with the installation and use thereof. STORESONLINE SHALL NOT BE LIABLE TO DISTRIBUTOR FOR ANY FAILURE, FAULT, DELAY, INTERRUPTION OR LOSS OF TELECOMMUNICATIONS SERVICES EXCEPT TO THE EXTENT CAUSED BY STORESONLINE'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. 4. FORECASTS. Within thirty (90) days of execution of this Agreement, Distributor shall provide StoresOnline with a written, non-binding forecast of Distributor's projected purchases of Services for the following twelve (12) calendar months, with a projected number of Malls and Account (as hereinafter defined) quantities to be identified by month. Such forecast shall be updated monthly by Distributor to set forth forecasts for each subsequent twelve (12) month period. 5. CUSTOMER ACCOUNTS. a. CUSTOMER ACCOUNT REGISTRATION PROCESS. The Services provided hereunder include an online registration process that end-user customers (i.e., merchants) will use to establish storefront accounts with StoresOnline (the "ACCOUNTS"). In order to establish an Account, such customers must complete an on-line registration process in accordance with the terms set forth on the applicable Mall website. At the option of the customer, registration may also be completed non-electronically. To establish an Account, end-user customers must also provide credit card information and authorize the payment of fees for Services on a monthly basis in advance. The general terms and conditions for the use of Accounts shall be posted from time to time on the applicable Mall web site, or in the event that StoresOnline establishes an electronic exchange for Distributor or Distributor's reseller, such information will be posted on such exchange. The terms and conditions as posted shall, in all events and at all times, be binding upon the Distributor, its resellers and their customers who establish Accounts. The terms and conditions governing such Accounts may be amended on-line from time to time by StoresOnline in its sole discretion. b. CONTINUATION OF CUSTOMER ACCOUNTS. Continuation of each customer Account and the Malls are subject to the timely payment of the monthly fees associated with such Accounts and Malls, and failure to do so shall constitute grounds for StoresOnline to cancel and terminate an Account or to shut down the Mall. 6. BILLING AND PAYMENT TERMS. a. INVOICING FOR SERVICES. StoresOnline shall electronically invoice all end-user customers and directly charge against the credit card accounts provided by such customers for that purpose during the registration process for the retail price of the Services charged by Distributor. All fees due from customers shall be paid in advance and are due on the first day of each month. In preparing the invoices and charging against the applicable credit cards, StoresOnline shall use the most recent Distributor retail prices provided to StoresOnline by Distributor pursuant to Section 3.c hereof for the Accounts invoiced. b. PAYMENT AND COLLECTION FOR SERVICES. StoresOnline shall collect the monthly fees set by Distributor from all end-user customers on a monthly basis and, after deducting any fees and expenses to which it is entitled hereunder, shall remit (i) all amounts due to the applicable reseller in a manner approved by Distributor, and (ii) the balance to Distributor, together with statements setting forth the amounts collected, the amounts deducted and the total amount remitted within 45 days after the month in which such amounts were collected. In the event payment is not received by StoresOnline within the specified time, an additional late charge of one and one half percent (1.5%) of the past due amount will be assessed to such late paying customer for each thirty (30) days outstanding, prorated on a daily basis, which late charges shall be payable in full to StoresOnline. All payments for Services shall be made in United States dollars. c. DIRECT DISTRIBUTOR BILLING FOR SERVICES. Distributor may invoice its customers directly for the Services provided hereunder. In such event, Distributor shall remit directly to StoresOnline the applicable Monthly Base Wholesale Price (per storefront). All such fees shall be paid in advance and are due on the first day of each month. d. BILLING FOR MALL RELATED CHARGES; ADVERTISING AND RELATED REVENUES. StoresOnline shall invoice Distributor directly for all charges due hereunder in connection with the design, development and operation of the Malls, which charges shall be payable by Distributor in accordance with the Addendum. All revenues generated from the Malls (including advertising and related revenues) which are required to be split between StoresOnline and Distributor pursuant to paragraph 3(d) hereof shall be invoiced and collected by StoresOnline if due from individual stores or advertising sold by Stores Online; and by Stores Online or Distributor, as determined by Distributor, if from reseller or advertising sold by reseller or Distributor. StoresOnline and/or Distributor shall thereafter forward all amounts due, if any, to the other party (net 45 days) at the address provided on the signature page hereto, together with a statement setting forth the total amounts collected, the amounts payable and the amounts remitted. 7. REAL TIME PAYMENT PROCESSING. In the event that a customer wishes to use the StoresOnline real-time credit card payment processing option, such customer must establish a customer account with an FDIC network bank and must open an account with a participating credit-card processor. 8. DISCLAIMER OF WARRANTIES AND LIMITATIONS OF LIABILITY. a. DISCLAIMER OF WARRANTY. EXCEPT AS SPECIFICALLY PROVIDED HEREIN, THERE ARE NO, AND STORESONLINE EXPRESSLY DENIES, REJECTS AND DISCLAIMS ANY WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTIES OF THE CORRECTNESS, ACCURACY, PRECISION, TIMELINESS OR COMPLETENESS OF ANY INFORMATION OR SERVICES PROVIDED HEREUNDER. b. LIMITATION OF LIABILITY. STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES AND AGENTS SHALL NOT BE LIABLE TO DISTRIBUTOR, ANY RESELLER OR TO ANY OTHER THIRD PARTY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR INTERRUPTIONS OF SERVICE DUE TO MECHANICAL ELECTRICAL OR WIRE DEFECTS OR DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR OTHER CAUSES OVER WHICH STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES OR AGENTS AGAINST WHOM LIABILITY IS SOUGHT, HAVE NO REASONABLE CONTROL, OR FOR LOSS OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS STATEMENTS, ERRORS OF FACTS, OMISSIONS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF THE SERVICES, OR ANY DATA PROVIDED AS A PART OF THE SERVICES PURSUANT TO THIS AGREEMENT, EXCEPT TO THE EXTENT CAUSED BY THE NEGLIGENCE OR WILLFUL MISCONDUCT OF STORESONLINE. IN ALL CASES ARISING FROM EVENTS OCCURRING DURING THE TERM OF THIS AGREEMENT, WHETHER BASED UPON TORT, CONTRACT, WARRANTY, INDEMNITY, CONTRIBUTION OR OTHERWISE, DAMAGES SHALL BE LIMITED TO, AND DISTRIBUTOR AGREES NOT TO MAKE ANY CLAIM OR CLAIMS EXCEEDING, TWENTY-FIVE THOUSAND DOLLARS ($25,000.00), REGARDLESS OF HOW MANY CLAIMS DISTRIBUTOR HAVE; PROVIDED, HOWEVER, THAT THE DOLLAR LIMITATION SET FORTH IN THIS SENTENCE SHALL NOT APPLY TO ANY MONIES DUE TO DISTRIBUTOR IN CONNECTION WITH ANY OF THE ACCOUNTS ESTABLISHED PURSUANT TO THIS AGREEMENT. IN ADDITION, IN NO EVENT SHALL STORESONLINE BE LIABLE TO DISTRIBUTOR OR ANY RESELLER OR TO ANY OTHER THIRD PARTY FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES WHICH DISTRIBUTOR, SUCH RESELLER OR SUCH THIRD PARTY MAY INCUR OR EXPERIENCE ON ACCOUNT OF ENTERING INTO OR RELYING ON THIS AGREEMENT OR UTILIZING THE SERVICES, REGARDLESS OF WHETHER STORESONLINE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES ARE CAUSED, IN WHOLE OR IN PART, BY THE NEGLIGENCE OF STORESONLINE. c. TIME FOR MAKING CLAIMS. ANY SUIT OR ACTION BY DISTRIBUTOR AGAINST STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES, AGENTS, SUCCESSORS OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL BE COMMENCED WITHIN TWO (2) YEARS OF THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF STORESONLINE'S LIABILITY SET FORTH IN THIS PARAGRAPH 8 OR ELSEWHERE IN THIS AGREEMENT. d. DISCLAIMER. THE WARRANTIES AND CONDITIONS SET FORTH HEREIN AND THE OBLIGATIONS AND LIABILITIES OF STORESONLINE HEREUNDER ARE IN LIEU OF, AND DISTRIBUTOR HEREBY WAIVES, ALL EXPRESS AND IMPLIED WARRANTIES AND CONDITIONS, INCLUDING, WITHOUT LIMITATION, THOSE OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT. IN NO EVENT SHALL STORESONLINE'S LIABILITY FOR ANY CLAIM ASSERTED BASED ON A VIOLATION OF WARRANTY OR CONDITION EXCEED THE AMOUNT PAID BY DISTRIBUTOR TO STORESONLINE FOR THE AFFECTED ITEM OF SERVICES. e. INDEMNIFICATION. DISTRIBUTOR SHALL INDEMNIFY, DEFEND AND HOLD STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES AND AGENTS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, COSTS, CAUSES OF ACTION, EXPENSES AND LIABILITIES, OF ANY KIND OR NATURE WHATSOEVER, INCLUDING REASONABLE ATTORNEYS' FEES, ASSERTED BY ANY OF DISTRIBUTOR'S RESELLERS AND RESULTING FROM OR ARISING OUT OF THIS AGREEMENT OR THE SERVICES RESOLD OR SUBLICENSED HEREUNDER, EXCEPT FOR CLAIMS BY RESELLER(S) FOR AMOUNTS DUE IN CONNECTION WITH ANY OF THE STOREFRONT ACCOUNTS ESTABLISHED PURSUANT TO THIS AGREEMENT. 9. DOCUMENTATION AND TRAINING. Provided that Distributor has met the minimum performance standards set forth elsewhere in this Agreement, StoresOnline shall, on a semi-annual basis, provide free-of-charge a one (1) day training program for employees designated by Distributor at the StoresOnline corporate headquarters. Additional training by StoresOnline shall be made available to Distributor at StoresOnline's standard rates. All expenses of the trainees under this Section 9 shall be borne solely by Distributor. 10. DEFAULT. a. DISTRIBUTOR'S DEFAULT. The failure by Distributor to make any payment required hereunder or a material breach by Distributor of its obligations hereunder shall constitute an event of default by Distributor. Upon the occurrence of an event of default, StoresOnline shall provide Distributor with written notice specifying the nature of such default. If Distributor has not cured such default within thirty (30) days after receipt of such notice, StoresOnline may, at its sole discretion, terminate this Agreement and/or seek any other available remedies available at law or in equity; PROVIDED, HOWEVER, that the cancellation of this Agreement shall not prevent Distributor from reselling the Services (and sublicensing the software component thereof) previously paid for by Distributor and sublicenses previously granted by Distributor pursuant hereto shall not be affected by such termination. b. STORESONLINE'S DEFAULT. The failure by StoresOnline to make any payment required hereunder or a material breach by StoresOnline of its obligations hereunder shall constitute an event of default by StoresOnline. Upon the occurrence of an event of default by StoresOnline, Distributor or Reseller shall provide StoresOnline with written notice specifying the nature of such default. If StoresOnline fails to cure such default within thirty (30) days after receipt of such notice, Distributor may, at its sole option, terminate this Agreement. c. INSOLVENCY. The commencement of any proceeding (voluntary or involuntary) in bankruptcy or insolvency by or against either party hereto, or the appointment (with or without the party's consent) of an assignee for the benefit of creditors or a receiver with respect to either party hereto shall constitute an event of default hereunder, and the non-defaulting party may elect to terminate this Agreement immediately. 11. DISPUTE RESOLUTION. a. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is most knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this Paragraph 11 are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "dispute" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement, other than as provided in subparagraph e. below, may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (1) The complaining party will notify the other party in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (2) In the event that such matter remains unresolved for thirty (30) days after the delivery of the complaining party's written notice, a senior representative of each party shall meet or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (3) In the event that the meeting or conference specified in (2) above does not resolve such matter, the senior officer of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (4) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with subparagraph b. below. b. Except as provided in subparagraph e. below, any dispute arising under this Agreement shall, after utilizing the procedures in subparagraph a., be resolved by final and binding arbitration in Long Beach, California, before a single arbitrator selected by, and in accordance with, the rules of commercial arbitration of the American Arbitration Association. Each party shall bear its own costs in the arbitration, including attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. c. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. d. Either party may apply to a court of general jurisdiction to enforce a arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including reasonable attorneys' fees. e. Notwithstanding the provisions of subparagraphs a. and b. above, any action by StoresOnline to enforce its rights under Paragraph 12e of this Agreement or to enjoin any infringement of the same by Distributor may, at StoresOnline's election, be commenced in the state or federal courts of California, and Distributor consents to personal jurisdiction and venue in such courts for such actions. 12. GENERAL. a. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Joint Marketing and Promotion Agreement, dated of even date herewith, by and between StoresOnline and the Distributor constitute the entire agreement between StoresOnline and the Distributor and supersede all previous understandings, negotiations and proposals, whether written or oral. This Agreement may not be altered, amended or modified except by an instrument in writing signed by duly authorized representatives of each party. In the event that any one or more provisions contained in this Agreement should for any reason be held to be unenforceable in any respect, such unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed as if such unenforceable provision had not been contained herein. b. FORCE MAJEURE. Neither party shall be liable to the other for delays or failures to perform an obligation to the other hereunder if such delay or failure to perform is due to any act of God, acts of civil or military authority, labor disputes, fire, riots, civil commotion's, sabotage, war, embargo, blockage, floods, epidemics, delays in transportation, inability beyond StoresOnline's reasonable control to obtain necessary labor, materials or manufacturing facilities, or when due to governmental restrictions, including the inability of StoresOnline to obtain appropriate U.S. export license approval or the subsequent suspension of same. In the event of any such delay or failure, the parties shall have an additional period of time equal to the time lost by reason of the foregoing in which to perform hereunder. c. GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California, without regard to principles of choice of law. d. ASSIGNMENT. Distributor shall not assign this Agreement or any rights hereunder without the prior written consent of StoresOnline, which consent shall not be unreasonably withheld, except that Distributor may assign this Agreement without the consent of StoresOnline if such assignment is completed in connection with the the sale of all or substantially all of the assets of Distributor. StoresOnline may assign this Agreement to a subsidiary, affiliate corporation or the purchaser of all or substantially all of StoresOnline's assets. e. DISCLOSURE OF INFORMATION. Distributor acknowledges that, in the course of purchasing Services and meeting its obligations under this Agreement, it will obtain information relating to the Services and to StoresOnline, which is of a confidential and proprietary nature ("STORESONLINE PROPRIETARY INFORMATION"). Such StoresOnline Proprietary Information may include, but is not limited to, trade secrets, know-how, inventions, techniques, processes, programs, schematics, data, customer lists, financial information and sales and marketing plans. Distributor shall at all times during the term of this Agreement and for three years after its termination, keep in confidence and trust from any person or entity, all StoresOnline Proprietary Information and shall not disclose or use such StoresOnline Proprietary Information without the prior written consent of StoresOnline, unless compelled to disclose such StoresOnline Proprietary Information by judicial or administrative process (including, without limitation, in connection with obtaining the necessary approvals of this Agreement and the transactions contemplated hereby of governmental or regulatory authorities) or by other requirements of law. Upon termination of this Agreement, Distributor shall promptly return to StoresOnline all StoresOnline Proprietary Information under its control and all copies thereof. Neither party hereto shall disclose the specific terms of this Agreement to any third parties except as may be mutually agreed or as required by law or the order of a court of competent jurisdiction. The above limitations on disclosure of StoresOnline Proprietary Information shall not apply to information which becomes publicly available through no act of Distributor, is released by StoresOnline in writing with no restrictions, is lawfully obtained by Distributor without breach of this Agreement from third parties without obligations of confidentiality, is previously known by Distributor without similar restrictions as shown by documents in its possession prior to disclosure by StoresOnline or is independently developed by Distributor. f. COMPLIANCE WITH LAW. Distributor shall comply with all applicable law the violation of which would have a material adverse effect on StoresOnline or its business, including, without limitation, the export control laws of the United States of America and prevailing regulations which may be issued from time to time by the United States Department of Commerce and any export control regulations of the United States and those countries involved in transactions concerning the exporting, importing and re-exporting of Services purchased under application of these terms and conditions. Distributor shall also comply with the United States Foreign Corrupt Practices Act and shall indemnify StoresOnline from violations of such act by Distributor. This provision shall survive any termination or expiration of the Agreement. g. EXERCISE OF REMEDIES. Any delay or omission by either party to exercise any right or remedy under this Agreement shall not be construed to be a waiver of any such right or remedy or any other right or remedy hereunder. h. LIMITATION OF LIABILITY. NEITHER PARTY HERETO SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES DUE TO FAILURE TO PERFORM ITS OBLIGATIONS HEREUNDER. i. HEADINGS. Headings contained in this Agreement are for convenience only, are not a part of this Agreement, and do not in anyway interpret, limit or amplify the scope, extent or intent of this Agreement or any of the provisions hereof. j. REGULATORY APPROVAL. Distributor warrants that the Services and the Malls, when utilized with its own products, will comply with all applicable industry and governmental standards and requirements. StoresOnline assumes no responsibility or liability for these governmental and regulatory standards or requirements, which liability and responsibility is assumed entirely by Distributor. Upon request, StoresOnline will provide copies of regulatory approvals to Distributor. k. BRANDING; COPYRIGHT PROTECTION. StoresOnline shall have the right to place a "Powered by Netgateway in association with BuySellBid.com" or "Powered by StoresOnline in association with BuySellBid.com" byline in a prominent mutually agreed upon location on each storefront site. Each screen of the Malls shall display a prominent copyright notice protecting against third party usage in a manner to be determined by the agreement of the parties. The parties hereto agree that all copyright interests shall be determined as a matter of law and the placement or absence of a copyright notice shall not be an acknowledgement as to the ownership of a copyright interest as between the parties. In the case of Malls with screens or pages designed by or paid for by Distributor, Distributor shall retain rights to such screens or pages. With respect to any such Mall, Distributor shall be responsible for all content to be included in such Mall including, without limitation, legal disclaimers and other information; provided, however, that StoresOnline may license to Distributor all such content so long as proper attribution is made on the Mall as to such license and the ownership interest in any such content. Notwithstanding the absence of any copyright notice of Stores Online on Distributor's Malls, in the case of layouts or screens the copyrights of which belong to Stores Online, Distributor hereby recognizes StoresOnline's ownership of such copyrights, including any Mall layouts belonging to Stores Online that do hold such copyright notices. l. PUBLICITY. StoresOnline (or its parent company, Netgateway, Inc.) shall have the right to inform its customers and the public that StoresOnline has entered into this Agreement with Distributor. Each party may use the other's name or the name of its customers in marketing the Services and the development of the Malls and may link to each other's websites, but neither party will perform any actions which will harm the other's or its customers name and reputation. m. NOTICES. Any notice required in connection with this Agreement shall be given in writing and shall be deemed effective upon personal delivery or three business days after deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days' advance written notice to the other party. All facsimile notices shall be confirmed by written notice mailed, as provided above, within five (5) days of the date of the facsimile is sent. Once confirmed, the notice shall be effective as of the date of the facsimile. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the date set forth herein. STORESONLINE.COM, INC., A CALIFORNIA CORPORATION By /s/ David Bassett-Parkins ------------------------------------------------- Name: David Bassett-Parkins --------------------------------------- Its: COO --------------------------------------- Address for Notices: 300 Oceangate, Suite 500 Long Beach, CA 90802 (562) 308-0010 NETGATEWAY, A NEVADA CORPORATION By /s/ David Basset-Parkins ------------------------------------------------ Name: David Basset-Parkins --------------------------------------- Its: COO --------------------------------------- Address for Notices: 300 Oceangate, Suite 500 Long Beach, CA 90802 (562) 308-0010 BUYSELLBID, INC., A DELAWARE______ CORPORATION By /s/ Jay S. Shepard -------------------------------------------------- Name: Jay S. Shepard --------------------------------------- Its: Chief Executive Officer --------------------------------------- Address for Notices: Address: 921 14th Ave. Longview, WA 98632 Telephone: 360-425-5000 Facsimile: 360-636-5051 E-mail Address: jshepard@buysellbid.com Company URL: buysellbid.com Sales Representative: Valery Gilbert valery@buysellbid.com Technical Contact: Micheal Mckenna Telephone: 619-457-6800 ext 110 E-mail Address: mmckenna@buysellbid.com ADDENDUM NAME OF DISTRIBUTOR BuySellBid.com, Inc. --------------------------- TYPE OF ENTITY: Delaware Corp. ------------------------- DATE OF AGREEMENT: 8-25-99 ---------------------- DESCRIPTION OF DISTRIBUTOR'S BUSINESS: Distributes malls to radio/t.v. stations ---------------------------------------- STANDARD FEATURE SET CATALOGS - - International Currencies - - Weight Units: Kilograms, Grams, Pounds and Ounces - - Sending Methods: Internet, Fax/Mail and Phone - - Faxed Internet Orders - - Payment Methods: VISA, MasterCard, American Express, Discover and JCB - - Custom Payment Methods - - Standard Shipping Destinations: United States, Canadian Provinces and World Countries - - Custom Shipping Destinations - - Multiple Shipping Methods and Regions - - Shipping Formula Variables: Quantities Ordered, Weight and Subtotal - - Shipping Formula Functions: Minimum, Maximum and Range - - Custom Tax Rates - - Custom Survey Questions: Long Answer, Short Answer, Multiple Choice and Single Choice - - Custom Subtotal Items: Fixed, User Enterable and Optional - - Users and Passwords CATEGORIES - - Unlimited Categories - - Full Description - - Image PRODUCTS - - Base Item Number - - Description: Full Description - - Image - - Price - - Sale Price - - Unique Sale Price for Each Catalogue - - Non-Taxable Products - - Weight - - Category - - Multiple Product Options (i.e., Color, Size) - - Multiple Product Option Items (i.e., Red, Green, Blue) - - Custom Item Numbers based on Options - - Custom Pricing based on Options - - Option Conflicts - - Quantity Discounts - - Links to Related Items - - Links to other URL's - - Preview product pages - - Generated HTML code to copy and paste into existing sites - - Graphical pricing for easy integration into existing sites - - Import product information from a test-delimited file ORDERS - - E-mail notification of new orders - - Order Status - - Waybill Number and Shipper - - Custom Notes - - End-user Order Tracking - - Export Order Information STORESONLINE POINT OF SALE - - Multiple Merchant Numbers - - Automatic authorization of orders sent over the Internet - - Manual Authorizations - - Credits - - Automatic Settlement - - Freeze and Thaw Transactions STORESONLINE HOSTING - - Home Page Builder - - Unique URL - - 10 MB Free - - Virtual hosting of existing domain names - - Professionally designed templates - - Customize your own templates STORESONLINE SEARCH - - Full Text Search Engine - - Full Word Listing - - Phrase or Boolean Searching - - Re-index your site anytime - - Integrate into existing sites PRICING FOR STOREFRONT SERVICES: Up to 25 Products: Monthly Base Wholesale Price: [**REDACTED**] Suggested Retail Price: 26 to 50 Products: Monthly Base Wholesale Price: [**REDACTED**] Suggested Retail Price: 51 to 100 Products: Monthly Base Wholesale Price: [**REDACTED**] Suggested Retail Price: 101 to 300 Products: Monthly Base Wholesale Price: [**REDACTED**] Suggested Retail Price: 301 to 1000 Products: Monthly Base Wholesale Price: [**REDACTED**] Suggested Retail Price: One Time Store Set-up Fee: Up to 100 products Base Wholesale Price: $ [**REDACTED**] Suggested Retail Price: Additional Products may be included at [**REDACTED**] per product Scanning: [**REDACTED**] per image (first 10 images [**REDACTED**]) MALL DEVELOPMENT SERVICES AND PRICES 1. DEVELOPMENT. StoresOnline shall design and develop one or more on-line Malls, to be branded around the name, brand and image of each of Distributor's reseller media partners. The Malls will include appropriate URL addresses, four to six featured products and stores from various Distributor/reseller and third party advertisers, additional Distributor/reseller and non-Distributor/non-reseller advertiser stores and products catalogued with text references, and links to top-tier eCommerce sites. The Malls will also include an appropriate search engine, commerce functionality, banner and other appropriate advertising space and such other features as the parties shall mutually agree. The Malls will be capable of cataloguing stores independently or in conjunction with all other Malls developed hereunder, if any, as well as other malls which belong to the StoresOnline electronic mall network. Distributor agrees and understands that the storefronts of all end-user customers may be placed in one or more electronic malls developed and/or operated by StoresOnline. 2. PRICING. Distributor shall pay a one-time development fee for such Mall to be developed hereunder in an amount to be determined by StoresOnline and Distributor on a case by case. 3. ADDITIONAL DESIGN WORK. Any additional design work that is not covered by this Agreement but required by a particular reseller in connection with the development of on or more of the Malls shall be bid by StoresOnline, and StoresOnline shall not be required to complete any such work unless its bid has been accepted in writing by reseller. EXHIBIT A STANDARD LICENSE AGREEMENT TERMS 1. LICENSE. This License allows you to use any software associated with the provision of the Services. 2. RESTRICTIONS. You may not use, copy, modify or transfer the program, or any copy, modification or merged portion, in whole or in part, except as expressly provided for in this License. If you transfer possession of any copy, modification or merged portion of the program to another party, your License is automatically terminated. 3. TERM. The License is effective until terminated. You may terminate it at any other time by notifying Distributor of your intent to do so. The License will also terminate upon the occurrence of certain events set forth elsewhere in this Agreement. Upon such termination, you agree to destroy the program together with all copies, modifications and merged portions in any form. 4. EXPORT LAW ASSURANCES. You agree that neither the pogrom nor any direct product thereof is being or will be shipped, transferred or re-exported, directly or indirectly, into any country prohibited by the US Export Administration Act and the regulations thereunder or will be used for any purpose prohibited by the Act. 5. LIMITED WARRANTY. The program is provided "AS IS" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of merchantability and fitness for a particular purpose. The full text of the warranty is provided in the user manual. 6. LIMITED LIABILITY. In no event will StoresOnline be liable to you for any damages, including any lost profits, lost savings or other incidental or consequential damages arising out of the use of inability to use such program even if StoresOnline has been advised of the possibility of such damages, or for any claim by any other party. 7. GENERAL. If you are a Government end-user, this License conveys only "RESTRICTED RIGHTS," and in its use, disclosure and duplication are subject to Federal Acquisition Regulations, subparagraph (c)(1)(11) 52.227-7013. (See U.S. Government End-User provisions in manual.) This License will be construed under the laws of the State of California, except for that body of law dealing with conflicts of law. If any provision of the License shall be held by a court of competent jurisdiction to be contrary to law, that provisions shall be enforced to the maximum extent permissible, and the remaining provisions of this License shall remain in full force and effect. EX-10.30 13 EXHIBIT 10.30 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." BUYSELLBID.COM, INC. JOINT MARKETING AND PROMOTION AGREEMENT Date: August 25, 1999 Companies: Netgateway, a Nevada corporation; and StoresOnline.com, Inc., a California corporation Contact: Hanh M. Ngo, SVP, Operations Address: 300 Oceangate Long Beach, CA 90802 Telephone: (562) 308-0010 Fax: (562) 308-0021 E-mail Address: hngo@netgateway.net Web Address: www.netgateway.net AGREEMENT between BuySellBid.com, Inc., a Delaware corporation, sometimes doing business as "InXsys Broadcast Networks" (referred to herein as "BuySellBid"); and Netgateway, a Nevada corporation, and StoresOnline.com, Inc., a California corporation (jointly referred to herein as "Netgateway"): Recitals A. Netgateway owns, operates and maintains an Internet storefront building services packages consisting of various services delivered through its proprietary software. Netgateway operates a web site to promote its products and services (www.storesonline.com, hereafter referred to as the "Netgateway Site"), and it also designs, develops, owns and operates on-line "malls" whereby its clients may market products and services on-line either independently or in conjunction with other malls belonging to Netgateway's mall network. B. BuySellBid has developed and operates a multimedia classified and personals ad service available to on-line users (the "BuySellBid Services"). C. The parties desire to cooperate for the purpose of complementing and enhancing the range of products and services provided by each. Therefore, in consideration of the promises set forth herein, the parties hereby agree as follows: 1) PROMOTION OF BUYSELLBID SERVICES. During the term of this Agreement, Netgateway shall introduce and recommend the BuySellBid Services to each of its current and future Web clients to encourage such clients to use the BuySellBid Services on the Web sites provided by Netgateway. In this connection, Netgateway shall provide to its clients such marketing materials and otherwise take such actions to promote the BuySellBid Services as BuySellBid shall reasonably request. 2) EXCLUSIVITY. During the term of this Agreement, Netgateway shall make commercially reasonable efforts to promote the use of the BuySellBid Services by its clients and shall not (a) use, maintain links to, or otherwise reference on the Netgateway Site any services or firms providing products or services in competition with the BuySellBid Services, or (b) introduce or encourage any use of or links or references to such competing firms or services on sites maintained or operated for or by its clients. 3) DISPLAY; PRIVATE LABEL; CO-BRANDING; PUBLICITY. Netgateway shall promote the BuySellBid Services on the Netgateway Site and on the sites of its clients which utilize such services in a manner to be agreed upon by the parties. The parties shall private label the BuySellBid Services on the Netgateway Site and on the sites of its clients which utilize such services, as applicable. On the Netgateway Site and on the sites of its clients that utilize the BuySellBid Services, Netgateway shall cause a legend to be prominently displayed stating that said services are "Powered by BuySellBid technology in association with Netgateway" or such other words to that effect as the parties may select, and BuySellBid shall be listed among Netgateway's affiliates or partners. The parties shall cooperate in issuing such press releases and similar media statements respecting their affiliation hereunder and the availability of the BuySellBid Services on sites maintained by Netgateway as either party may deem appropriate from time to time. BuySellBid and Netgateway shall have the right to inform their customers and the public regarding their affiliation hereunder. Each party may use the other's name or the name of its customers in marketing their respective products and services and may link to each other's websites, but neither party will perform any actions that will harm the other's or its customers' name and reputation. 4) COMPENSATION AND REPORTING. BuySellBid shall remit to Netgateway [**REDACTED**] of the Net Revenues generated from links placed on websites of Netgateway and its clients after the date of this Agreement, calculated in accordance with BuySellBid's standard fee schedule as in effect from time to time, which fee schedule shall be subject to change at the sole discretion of BuySellBid. A copy of BuySellBid's current fee schedule is attached hereto as Exhibit A; BuySellBid shall provide Netgateway with copies of all revised fee schedules. For purposes of this paragraph, Net Revenues shall equal all membership, listing and user fees received from classified and on-line personals advertisements, less credit card processing fees, customer refunds, taxes, third-party commissions, third party content rental fees, and any shipping, insurance, discounts, or similar charges incurred in connection therewith. Said payment shall be delivered to Netgateway not later than 45 days after the last day of the month in which said revenues were received by BuySellBid, together with a report setting forth in reasonable detail by client the amount and sources of said revenues. Netgateway may inspect BuySellBid's records regarding said revenues upon reasonable request. 5) RESPONSIBILITY. The relationship of the parties shall be that of independent contractors, and nothing contained herein shall be construed to create a joint venture, agency or partnership relation between them. 6) DURATION AND TERMINATION OF THE AGREEMENT. This Agreement shall commence as of the date hereof and continue for an initial term of six months. Such term shall be automatically extended for successive terms of six months each unless either party notifies the other, not les than 30 days prior to the expiration of the then-current term, of its intentions not to renew. 7) CONFIDENTIALITY. Neither party shall disclose any proprietary information regarding the other that may come into its possession, including without limitation, business strategies, product plans, financial information, partner information, marketing plans, personnel information and technology research, without prior written permission. This clause shall survive by 12 months the termination of this Agreement. 8) GOVERNING LAW. This Agreement shall be deemed to have been made in, and shall be construed pursuant to the laws of the state of Washington and the United States. 9) LIMITATION OF LIABILITY. BUYSELLBID AND ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES AND AGENTS SHALL NOT BE LIABLE TO NETGATEWAY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS, INTERRUPTIONS, OR MALFUNCTIONS REGARDING THE BUYSELLBID SERVICES FOR ANY REASON WHATSOEVER, WHETHER PROVIDED TO NETGATEWAY OR ANY OF ITS CLIENTS, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES DUE TO FAILURE TO PERFORM ITS OBLIGATIONS HEREUNDER. 10) DISPUTE RESOLUTION. a. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is most knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this paragraph are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "dispute" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (1) The complaining party will notify the other party in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (2) In the event that such matter remains unresolved for 30 days after the delivery of the complaining party's written notice, a senior representative of each party shall meet or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (3) If the event that the meeting or conference specified in (2) above does not resolve such matter, the senior officer of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (4) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with subparagraph b. below. b. Any dispute arising under this Agreement shall, after utilizing the procedures in subparagraph a., be resolved by final and binding arbitration in Seattle, Washington, before a single arbitrator selected by, and in accordance with, the rules of commercial arbitration of the American Arbitration Association. Each party shall bear its own costs in the arbitration, including attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. c. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. d. Either party may apply to a court of general jurisdiction to enforce the arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including reasonable attorneys' fees. 11) ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous understandings, negotiations and proposals, whether written or oral; provided, that the parties acknowledge the execution by the parties of that certain Distributor Mall and Storefront Agreement of even date herewith. This Agreement may not be altered, amended or modified except by an instrument in writing signed by duly authorized representatives of each party. In the event that any one or more provisions contained in this Agreement should for any reason be held to be unenforceable in any respect, such unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed as if such unenforceable provision had not been contained herein. 12) ASSIGNMENT. Neither party may assign this Agreement or any rights hereunder without the prior written consent of the other. 13) NOTICES. Any notice required in connection with this Agreement shall be given in writing and shall be deemed effective upon personal delivery or three business days after deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days' advance written notice to the other party. All facsimile notices shall be confirmed by written notice mailed, as provided above, within five (5) days of the date of the facsimile is sent. Once confirmed, the notice shall be effective as of the date of the facsimile. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date written above by their duly authorized representatives. BUYSELLBID.COM., INC. /s/ Jay S. Shepard - ------------------------------- By: Title: CEO NETGATEWAY /s/ David Basset-Parkins - ------------------------------- By: Title: STORESONLINE.COM, INC. /s/ David Basset-Parkins - ------------------------------- By: Title: EX-10.31 14 EXHIBIT 10.31 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." StoresOnline.com CABLE RESELLER AND MALL AGREEMENT CableONE, Inc. THIS CABLE RESELLER AND MALL AGREEMENT (the "AGREEMENT") is made and entered into as of the date set forth on the Addendum attached hereto and by this reference made a part hereof (the "ADDENDUM"), between and among STORESONLINE.COM, INC., a California corporation, and NETGATEWAY, a Nevada corporation, on the one hand (collectively, "STORESONLINE"), and the Reseller identified on the Addendum, on the other hand ("RESELLER"). R E C I T A L S A. Reseller is a cable television operator, engaged in the business described on the Addendum. B. StoresOnline owns, operates and maintains an Internet storefront-building services package comprised of certain services delivered through StoresOnline's proprietary software, the standard features of which are more particularly described on the Addendum (the "SERVICES"). C. The Services are delivered through the Internet and may be made available through a private, branded electronic exchange to be developed for Reseller. D. StoresOnline desires to (i) sell and license the Services to Reseller for Reseller's resale and sublicense to end-user customers or, with the written permission of StoresOnline, to other resellers and (ii) develop certain on-line mall(s) to be branded around Reseller's name, brand and image (the "MALLS"). E. Reseller desires to purchase and license the Services for resale to end-user customers and shall use its unique resources to promote the Services as hereinafter set forth. AGREEMENT NOW, THEREFORE, on the basis of the foregoing recitals, and in consideration of the mutual promises contained herein, the receipt and sufficiency of which is hereby acknowledged, the parties hereto covenant and agree as follows: 1. SERVICES. a. SCOPE OF AGREEMENT. This Agreement covers (i) the purchase, licensing, promotion and sale of the Services and (ii) the design and development of the Malls pursuant to and in accordance with the terms and conditions set forth on the Addendum. b. LICENSE GRANT; SALE OF SERVICES. StoresOnline grants to Reseller, subject to the terms and conditions of this Agreement, the non-exclusive right and license to resell and sublicense (in the case of software products), the Services to Reseller's end-user customers or, with the written permission of StoresOnline, to other resellers. In the case of software products, Reseller acknowledges that such software is and will remain proprietary to StoresOnline, is copyrighted and that Reseller acquires no right, title or interest in or to any such software by this Agreement. Reseller agrees to sublicense the Services hereunder pursuant to the Standard License Agreement Terms set forth on Exhibit A hereto, and to cause each of its customers or other resellers to sublicense the Services pursuant to such terms, which terms, in the case of a reseller, shall be accepted upon store set-up and, in the case of an end-user customer, shall be accepted as part of the storefront registration process described below. c. PRODUCT NAME. It is expressly agreed that the ownership and all right, title and interest in and to the Services and any trademark, trade name, patent or copyright relating to the Services is and will remain vested solely in StoresOnline; PROVIDED, HOWEVER, that as permitted by this Agreement, Reseller may use any existing or future trademark, trade name, patent or copyright relating to the Services, such use to be limited to promoting, selling, installing or maintaining the Services; and PROVIDED, FURTHER, that as permitted by this Agreement, the Services may be branded around Reseller's name, brand and image. Reseller shall use its best efforts during the term of this Agreement to protect StoresOnline's trademarks, trade names, patents and copyrights, but shall not be required to instigate legal action against third parties for any infringement thereof. Reseller shall notify StoresOnline of any infringement as soon as practicable after becoming aware of any such infringement. Reseller shall not use, directly or indirectly, in whole or in part, StoresOnline's name or any other trade name or trademark that is owned or used by StoresOnline in connection with any product other than StoresOnline's products, without the prior written consent of StoresOnline. d. MALL DEVELOPMENT. StoresOnline shall develop the Malls in accordance with the terms and conditions set forth herein and on the Addendum. The Malls may be branded around Reseller's name, brand and image and shall link to the Reseller's branded StoresOnline solution. The Malls will include appropriate URL addresses, four to six featured products and stores from various Reseller and third party advertisers, additional Reseller and non-Reseller advertiser stores and products catalogued with text references, and links to top-tier eCommerce sites. The Malls will also include an appropriate search engine, commerce functionality, banner and other appropriate advertising space and such other features as the parties shall mutually agree. The Mall will be capable of cataloguing stores independently or in conjunction with all other Malls developed hereunder, if any, as well as other malls which belong to the StoresOnline electronic mall network. Reseller agrees and understands that the storefronts of its end-user customers may be placed in one or more electronic malls developed and/or operated by StoresOnline. 2. TERM OF AGREEMENT. The term of this Agreement shall commence as of the execution hereof and continue for an initial term of one (1) year. Such term shall automatically be extended for additional one year terms thereafter unless either party notifies the other, not less than sixty (60) days prior to the expiration of the applicable term, of its intention not to renew the Agreement. a. Notwithstanding the foregoing, this Agreement may be terminated in accordance with the provisions of Section 10. b. Termination of this Agreement shall not relieve either party of any obligations incurred prior to termination, including outstanding delivery and payment obligations and other contractual commitments herein or mutually agreed to from time to time by the parties in writing. The obligations set forth in Sections 3d, 6, 8, 10a, 12c, 12e, 12f and 12h are expressly intended to survive termination of this Agreement. 3. PRICES AND TAXES. a. PRICES FOR SERVICES. StoresOnline shall charge Reseller the one-time Store Set-up Price set forth on the Addendum for each electronic storefront that Reseller instructs StoresOnline to place in the Mall. StoresOnline shall charge Reseller the applicable Monthly Base Wholesale Price set forth on the Addendum for each active storefront. Unless Reseller elects to bill its customers directly in accordance with paragraph 6.c hereof, the Monthly Base Wholesale Price shall be offset by StoresOnline against payments due to Reseller in accordance with paragraph 6.b hereof. b. PRICE ADJUSTMENTS FOR SERVICES. The prices for the Services are subject to change by StoresOnline at any time, and shall become effective ninety (90) days after written notification of such change to Reseller. c. RETAIL PRICES FOR SERVICES. On or before the first day of each month, Reseller shall provide StoresOnline with a list of the Reseller prices charged for each class of Accounts or for each Account (as hereinafter defined). d. PRICES FOR MALL DEVELOPMENT; MALL REVENUE SPLIT. All prices for Mall design, development and operation provided hereunder shall be as set forth on the Addendum. It is anticipated that the Malls will generate multiple revenue streams. Reseller and StoresOnline shall split the net revenue generated from all such revenue sources on a [**REDACTED**] basis. Such revenue sources to be split shall include, but are not limited to: (i) eCommerce advertisers provided by StoresOnline; (ii) the pro rata share of Mall banner advertising attributable to Reseller; (iii) click-through revenue from eTailer sales and (iv) revenue generated from featured product sales. The parties hereto shall mutually agree to pricing in the event advertising space is sold on a straight-buy basis. e. TAXES. All prices for any services or products supplied hereunder are exclusive of any federal, state or local sales, use, excise, AD VALOREM or personal property taxes levied, or any fines, forfeitures or penalties assessed in connection therewith, as a result of this Agreement or the installation or use of services or products hereunder (collectively, but exclusive of taxes based upon StoresOnline's income, "Taxes"). Reseller or Reseller's customers, as applicable, shall pay any and all such Taxes, or StoresOnline may pay such Taxes for Reseller's account or Reseller's customers' account, in which case Reseller shall be obligated to reimburse StoresOnline for amounts so paid. Any such Taxes which are charged to or payable by StoresOnline will be invoiced to and paid by Reseller in the manner set forth in Section 6 below. In the event that Reseller directly invoices its customers pursuant to paragraph 6.c hereof, Reseller shall be solely responsible for the collection and payment of any such Taxes. In the event that Reseller requests that StoresOnline arrange for the installation of high speed telecommunications services necessary for Reseller's use, such services will be maintained in StoresOnline's name or Reseller's name, as determined by StoresOnline in its sole discretion. In the event that such services are maintained in the name of StoresOnline, Reseller shall promptly remit payment to StoresOnline for all charges in connection with the installation and use thereof. STORESONLINE SHALL NOT BE LIABLE TO RESELLER FOR ANY FAILURE, FAULT, DELAY, INTERRUPTION OR LOSS OF TELECOMMUNICATIONS SERVICES EXCEPT TO THE EXTENT CAUSED BY STORESONLINE'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. 4. PROMOTION. Reseller shall promote the Mall and the Services by cablecasting two thirty second television commercials provided to Reseller by StoresOnline. In the event Reseller elects to produce additional commercials, it shall do so at its own expense and must receive StoresOnline's approval prior to cablecasting such commercials, which approval shall not be unreasonably withheld. All commercials promoting the services shall be cumulatively cablecast by Reseller a minimum of 400 times per broadcast month, in each broadcast market where a Mall has been launched and/or the Services are being offered by Reseller to its subscribers.. Reseller shall use its best efforts to ensure that the commercials are placed in even rotations on a variety of its cable television networks. 5. CUSTOMER ACCOUNTS. a. CUSTOMER ACCOUNT REGISTRATION PROCESS. The Services provided hereunder include an online registration process that Reseller and its customers will use to establish storefront accounts with StoresOnline (the "ACCOUNTS"). In order to establish an Account, Reseller's customers must complete an on-line registration process in accordance with the terms set forth on the StoresOnline website. At the option of the customer, registration may also be completed non-electronically. To establish an Account, Reseller's customers must also provide credit card information and authorize the payment of fees for Services on a monthly basis in advance. The general terms and conditions for the use of Accounts shall be posted from time to time on the StoresOnline web site, or in the event that StoresOnline establishes an electronic exchange for Reseller, such information will be posted on Reseller's exchange. The terms and conditions as posted shall, in all events and at all times, be binding upon the Reseller and its customers who establish Accounts. The terms and conditions governing such Accounts may be amended from time to time by StoresOnline in its sole discretion. b. CONTINUATION OF CUSTOMER ACCOUNTS. Continuation of each customer Account is subject to the timely payment of the monthly fees associated with such Accounts, and failure to do so shall constitute grounds for StoresOnline to cancel and terminate an Account. 6. BILLING AND PAYMENT TERMS. a. INVOICING FOR SERVICES. In the event Reseller requests that StoresOnline invoice Reseller's customers directly, StoresOnline shall electronically invoice Reseller's customers and directly charge against the credit card accounts provided by such customers for such purpose during the registration process for the retail price of the Services charged by Reseller. All fees due from customers shall be paid in advance and are due on the first day of each month. In preparing the invoices and charging against the applicable credit cards, StoresOnline shall use the most recent Reseller retail prices provided to StoresOnline by Reseller pursuant to Section 3c hereof for the Accounts invoiced. b. PAYMENT AND COLLECTION FOR SERVICES. StoresOnline shall collect the monthly fees set by Reseller from Reseller's customers and, after deducting any monthly fees and expenses to which it is entitled hereunder, shall remit the balance to Reseller on a monthly basis, together with a statement setting forth the amounts collected, the amounts deducted and the total amount remitted. In the event payment is not received by StoresOnline within the specified time, an additional late charge of one and one half percent (1.5%) of the past due amount will be assessed for each thirty (30) days outstanding, prorated on a daily basis. All payments for Services shall be made in United States dollars. c. DIRECT RESELLER BILLING FOR SERVICES. Reseller may invoice its customers directly for the Services provided hereunder. In the event that Reseller chooses to bill its customers directly for the Services, Reseller shall remit directly to StoresOnline the applicable Monthly Wholesale Price for each active storefront maintained pursuant to this Agreement. All such fees shall be paid in advance and are due on the first day of each month. d. BILLING FOR MALL RELATED CHARGES; ADVERTISING AND RELATED REVENUES. StoresOnline shall invoice Reseller directly for all charges due hereunder in connection with the design, development and operation of the Malls, which charges shall be payable in accordance with the Addendum. All revenues generated from the Malls (including advertising and related revenues) which are required to be split between StoresOnline and Reseller pursuant to paragraph 3(d) hereof shall be invoiced and collected by StoresOnline. StoresOnline shall thereafter forward all amounts due, if any, to Reseller (net 30 days) at the address provided on the signature page hereto, together with a statement setting forth the total amount collected, the amounts payable to Reseller and the total amount remitted. 7. REAL TIME PAYMENT PROCESSING. In the event that a customer wishes to use the StoresOnline real-time credit card payment processing option, such customer must establish a customer account with an FDIC network bank and must open an account with a participating credit-card processor. 8. DISCLAIMER OF WARRANTIES AND LIMITATIONS OF LIABILITY. a. DISCLAIMER OF WARRANTY. EXCEPT AS SPECIFICALLY PROVIDED HEREIN, THERE ARE NO, AND STORESONLINE EXPRESSLY DENIES, REJECTS AND DISCLAIMS ANY WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTIES OF THE CORRECTNESS, ACCURACY, PRECISION, TIMELINESS OR COMPLETENESS OF ANY INFORMATION OR SERVICES PROVIDED HEREUNDER. b. LIMITATION OF LIABILITY. STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES AND AGENTS SHALL NOT BE LIABLE TO RESELLER OR TO ANY THIRD PARTY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR INTERRUPTIONS OF SERVICE DUE TO MECHANICAL ELECTRICAL OR WIRE DEFECTS OR DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR OTHER CAUSES OVER WHICH STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES OR AGENTS AGAINST WHOM LIABILITY IS SOUGHT, HAVE NO REASONABLE CONTROL, OR FOR LOSS OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS STATEMENTS, ERRORS OF FACTS, OMISSIONS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF THE SERVICES, OR ANY DATA PROVIDED AS A PART OF THE SERVICES PURSUANT TO THIS AGREEMENT, EXCEPT TO THE EXTENT CAUSED BY THE NEGLIGENCE OR WILLFUL MISCONDUCT OF STORESONLINE. IN ALL CASES ARISING FROM EVENTS OCCURRING DURING THE TERM OF THIS AGREEMENT, WHETHER BASED UPON TORT, CONTRACT, WARRANTY, INDEMNITY, CONTRIBUTION OR OTHERWISE, DAMAGES SHALL BE LIMITED TO, AND RESELLER AGREES NOT TO MAKE ANY CLAIM OR CLAIMS EXCEEDING TWENTY-FIVE THOUSAND DOLLARS ($25,000.00), REGARDLESS OF HOW MANY CLAIMS RESELLER MAY HAVE; PROVIDED, HOWEVER, THAT THE DOLLAR LIMITATION SET FORTH IN THIS SENTENCE SHALL NOT APPLY TO MONIES DUE TO RESELLER IN CONNECTION WITH ANY OF RESELLER'S ACCOUNTS ESTABLISHED PURSUANT TO THIS AGREEMENT. IN ADDITION, IN NO EVENT SHALL STORESONLINE BE LIABLE TO RESELLER OR TO ANY THIRD PARTY FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES WHICH RESELLER OR SUCH THIRD PARTY MAY INCUR OR EXPERIENCE ON ACCOUNT OF ENTERING INTO OR RELYING ON THIS AGREEMENT OR UTILIZING THE SERVICES, REGARDLESS OF WHETHER STORESONLINE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES ARE CAUSED, IN WHOLE OR IN PART, BY THE NEGLIGENCE OF STORESONLINE. c. TIME FOR MAKING CLAIMS. ANY SUIT OR ACTION BY RESELLER AGAINST STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES, AGENTS, SUCCESSORS OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL BE COMMENCED WITHIN TWO (2) YEARS OF THE DATE ON WHICH THE RESELLER KNEW OR SHOULD HAVE KNOWN OF THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF STORESONLINE'S LIABILITY SET FORTH IN THIS PARAGRAPH 8 OR ELSEWHERE IN THIS AGREEMENT. d. DISCLAIMER. THE WARRANTIES AND CONDITIONS SET FORTH HEREIN AND THE OBLIGATIONS AND LIABILITIES OF STORESONLINE HEREUNDER ARE IN LIEU OF, AND BUYER HEREBY WAIVES, ALL EXPRESS AND IMPLIED WARRANTIES AND CONDITIONS, INCLUDING, WITHOUT LIMITATION, THOSE OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL STORESONLINE'S LIABILITY FOR ANY CLAIM ASSERTED BASED ON A VIOLATION OF WARRANTY OR CONDITION EXCEED THE AMOUNT PAID BY RESELLER TO STORESONLINE FOR THE AFFECTED ITEM OF SERVICES. e. INFRINGMENT. StoresOnline will indemnify and hold Reseller harmless from and against any claim by third parties pertaining to the infringement of U.S. copyrights, trademarks or patents arising solely from Reseller's use of any of computer programs or software products utilized by StoreOnline to provide the Services as authorized hereunder, provided that such computer programs or software products have not been altered, revised or modified by Reseller in a manner that causes the alleged infringement, and further provided that: (i) Reseller promptly notifies StoresOnline in writing of such claim; (ii) StoresOnline will have sole control of the defense of any action on such claim and of all negotiations for its settlement or compromise; (iii) Reseller cooperates with StoresOnline in every reasonable way to facilitate the settlement or defense of such claim; and (iv) should such Services become or, in StoresOnline's opinion, be likely to become, the subject of an infringement claim, Reseller will permit StoresOnline, at StoresOnline's expense, to (1) procure for Reseller the right to continue using such Services, or (2) replace or modify the same to become functionally equivalent yet non-infringing, or (3) upon the failure of (1) and (2) above, terminate, without penalty, Reseller's use of the affected Services, in which event StoresOnline will refund to Reseller on a pro-rata basis any prepaid amounts related thereto. Notwithstanding the foregoing, StoresOnline shall not be liable to indemnify Reseller for any claims of infringement by third parties relating in any manner to the contents of the Mall or any of the third party merchants' storefronts contained therein provided by Reseller or any of its end-user customers. 9. DOCUMENTATION AND TRAINING. Provided that Reseller has met the minimum performance standards set forth elsewhere in this Agreement, StoresOnline shall, on a semi-annual basis, provide free-of-charge a one (1) day training program for employees designated by Reseller at the StoresOnline corporate headquarters. Additional training by StoresOnline shall be made available to Reseller at StoresOnline's standard rates. All expenses of the trainees under this Section 9 shall be borne solely by Reseller. 10. DEFAULT. a. RESELLER'S DEFAULT. The failure by Reseller to make any payment required hereunder or a material breach by Reseller of its obligations hereunder shall constitute an event of default by Reseller. Upon the occurrence of an event of default, StoresOnline shall provide Reseller with written notice specifying the nature of such default. If Reseller has not cured such default within thirty (30) days after receipt of such notice, StoresOnline may, at its sole discretion, terminate this Agreement and/or seek any other available remedies available at law or in equity; PROVIDED, HOWEVER, that the cancellation of this Agreement shall not prevent Reseller from reselling the Services (and sublicensing the software component thereof) previously paid for by Reseller and sublicenses previously granted by Reseller pursuant hereto shall not be affected by such termination. b. STORESONLINE'S DEFAULT. The failure by StoresOnline to make any payment required hereunder or a material breach by StoresOnline of its obligations hereunder shall constitute an event of default by StoresOnline. Upon the occurrence of an event of default by StoresOnline, Reseller shall provide StoresOnline with written notice specifying the nature of such default. If StoresOnline fails to cure such default within thirty (30) days after receipt of such notice, Reseller may, at its sole option, terminate this Agreement and/or seek any other available remedies available at law or in equity. c. INSOLVENCY. The commencement of any proceeding (voluntary or involuntary) in bankruptcy or insolvency by or against either party hereto, or the appointment (with or without the party's consent) of an assignee for the benefit of creditors or a receiver with respect to either party hereto shall constitute an event of default hereunder, and the non-defaulting party may elect to terminate this Agreement immediately. 11. DISPUTE RESOLUTION. a. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is most knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this Paragraph 11 are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "DISPUTE" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement, other than as provided in subparagraph e. below, may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (1) The complaining party will notify the other party in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (2) In the event that such matter remains unresolved for thirty (30) days after the delivery of the complaining party's written notice, a senior representative of each party shall meet or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (3) In the event that the meeting or conference specified in (2) above does not resolve such matter, the senior officer of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (4) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with subparagraph b. below. b. Except as provided in subparagraph e. below, any dispute arising under this Agreement shall, after utilizing the procedures in subparagraph a., be resolved by final and binding arbitration in Long Beach, California, before a single arbitrator selected by, and in accordance with, the rules of commercial arbitration of the American Arbitration Association. Each party shall bear its own costs in the arbitration, including attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. c. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. d. Either party may apply to a court of general jurisdiction to enforce a arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including reasonable attorneys' fees. e. Notwithstanding the provisions of subparagraphs a. and b. above, any action by StoresOnline to enforce its rights under Paragraph 12e of this Agreement or to enjoin any infringement of the same by Reseller may, at StoresOnline's election, be commenced in the state or federal courts of Los Angeles, California, and Reseller consents to personal jurisdiction and venue in such courts for such actions. 12. GENERAL. a. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement between StoresOnline and Reseller and supersedes all previous understandings, negotiations and proposals, whether written or oral. This Agreement may not be altered, amended or modified except by an instrument in writing signed by duly authorized representatives of each party. In the event that any one or more provisions contained in this Agreement should for any reason be held to be unenforceable in any respect, such unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed as if such unenforceable provision had not been contained herein. b. FORCE MAJEURE. Neither party shall be liable to the other for delays or failures to perform an obligation to the other hereunder if such delay or failure to perform is due to any act of God, acts of civil or military authority, labor disputes, fire, riots, civil commotion's, sabotage, war, embargo, blockage, floods, epidemics, delays in transportation, inability beyond StoresOnline's reasonable control to obtain necessary labor, materials or manufacturing facilities, or when due to governmental restrictions, including the inability of StoresOnline to obtain appropriate U.S. export license approval or the subsequent suspension of same. In the event of any such delay or failure, the parties shall have an additional period of time equal to the time lost by reason of the foregoing in which to perform hereunder. c. GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California, without regard to principles of choice of law. d. ASSIGNMENT. Neither party shall assign this Agreement or any rights hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld, except that either party may assign this Agreement without the consent of the other to a successor or affiliate entity. e. DISCLOSURE OF INFORMATION. Each party hereto acknowledges that, in the course of meeting its obligations under this Agreement, it will obtain information relating to the other party, which is of a confidential and proprietary nature ("PROPRIETARY INFORMATION"). Such Proprietary Information may include, but is not limited to, trade secrets, know-how, inventions, techniques, processes, programs, schematics, data, customer lists, financial information and sales and marketing plans. Each party shall at all times during the term of this Agreement and for one year after its termination, keep in confidence and trust from any person or entity, all Proprietary Information of the other party and shall not disclose or use such Proprietary Information without the prior written consent of the party which owns such Proprietary Information, unless compelled to disclose such Proprietary Information by judicial or administrative process (including, without limitation, in connection with obtaining the necessary approvals of this Agreement and the transactions contemplated hereby of governmental or regulatory authorities) or by other requirements of law. Upon termination of this Agreement, each party shall promptly return to the other party all Proprietary Information under itscontrol and all copies thereof. Neither party shall disclose the specific terms of this Agreement to any third parties except as may be mutually agreed or as required by law or the order of a court of competent jurisdiction. The above limitations on disclosure of Proprietary Information shall not apply to information which becomes publicly available through no act of the disclosing party, is released by the owning party in writing with no restrictions, is lawfully obtained by the disclosing party without breach of this Agreement from third parties without obligations of confidentiality, is previously known by the disclosing party without similar restrictions as shown by documents in its possession prior to disclosure or is independently developed by the disclosing party. f. COMPLIANCE WITH LAW. Both parties hereto shall comply with all applicable laws the violation of which would have a material adverse effect on the other party or its business, including, without limitation, the export control laws of the United States of America and prevailing regulations which may be issued from time to time by the United States Department of Commerce and any export control regulations of the United States and those countries involved in transactions concerning the exporting, importing and re-exporting of Services purchased under application of these terms and conditions. Reseller shall also comply with the United States Foreign Corrupt Practices Act and shall indemnify StoresOnline from violations of such act by Reseller. This provision shall survive any termination or expiration of the Agreement. g. EXERCISE OF REMEDIES. Any delay or omission by either party to exercise any right or remedy under this Agreement shall not be construed to be a waiver of any such right or remedy or any other right or remedy hereunder. h. LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES DUE TO FAILURE TO PERFORM ITS OBLIGATIONS HEREUNDER. i. HEADINGS. Headings contained in this Agreement are for convenience only, are not a part of this Agreement, and do not in anyway interpret, limit or amplify the scope, extent or intent of this Agreement or any of the provisions hereof. j. REGULATORY APPROVAL. Reseller warrants that the Services and the Malls, when utilized with its own products, will comply with all applicable industry and governmental standards and requirements. StoresOnline assumes no responsibility or liability for these governmental and regulatory standards or requirements, which liability and responsibility is assumed entirely by Reseller. Upon request, StoresOnline will provide copies of regulatory approvals to Reseller. k. BRANDING. StoresOnline shall have the right to place a "POWERED BY NETGATEWAY" or "POWERED BY STORESONLINE" byline in a mutually agreed upon location and in a size and design to be mutually agreed upon by the parties on each storefront site and on each Mall site. l. PUBLICITY. StoresOnline (or its parent company, Netgateway, Inc.) shall have the right to inform its customers and the public that StoresOnline has entered into this Agreement with Reseller. Each party may use the other's name or the name of its customers in marketing the Services and the development of the Malls and may link to each other's websites, but neither party will perform any actions which will harm the other's or its customers name and reputation. Any such marketing materials will be provided in advance to the other party for comment before publication. m. NOTICES. Any notice required in connection with this Agreement shall be given in writing and shall be deemed effective upon personal delivery or three business days after deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days' advance written notice to the other party. All facsimile notices shall be confirmed by written notice mailed, as provided above, within five (5) days of the date of the facsimile is sent. Once confirmed, the notice shall be effective as of the date of the facsimile. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the date set forth herein. STORESONLINE.COM, INC., A CALIFORNIA CORPORATION By /s/ Donald M. Corliss, Jr. ------------------------------------------------- Name: Donald M. Corliss, Jr. -------------------------------------------- Their: Authorized Agent ------------------------------------------- Address for Notices: 300 Oceangate, Suite 500 Long Beach, CA 90802 (562) 308-0010 NETGATEWAY, a Nevada corporation By /s/ Donald M. Corliss, Jr. ------------------------------------------------- Name: Donald M. Corliss, Jr. -------------------------------------------- Their: President ------------------------------------------- Address for Notices: 300 Oceangate, Suite 500 Long Beach, CA 90802 (562) 308-0010 CableONE, Inc. By /s/ Ronald Pancratz ------------------------------------------------- Name: Ronald Pancratz -------------------------------------------- Its: Vice President ------------------------------------------- Address for Notices: Address: 1314 N. 3rd Street, 3rd Floor Phoenix, AZ 85004 Telephone: (602) 364-6000 Facsimile: (602) 364-6014 E-mail Address: Company URL: www.cableone.net Technical Contact: Telephone: E-mail Address: ADDENDUM Name of Reseller CableONE, Inc. Description of Reseller's Business: Cable ------------------ ----- Type Entity: Corporation television operator ----------------------- ----------------------------------------- Date of Agreement: August 30, 1999 ----------------- ----------------------------------------- STANDARD FEATURE SET CATALOGS - - International Currencies - - Weight Units: Kilograms, Grams, Pounds and Ounces - - Sending Methods: Internet, Fax/Mail and Phone - - Faxed Internet Orders - - Payment Methods: VISA, MasterCard, American Express, Discover and JCB - - Custom Payment Methods - - Standard Shipping Destinations: United States, Canadian Provinces and World Countries - - Custom Shipping Destinations - - Multiple Shipping Methods and Regions - - Shipping Formula Variables: Quantities Ordered, Weight and Subtotal - - Shipping Formula Functions: Minimum, Maximum and Range - - Custom Tax Rates - - Custom Survey Questions: Long Answer, Short Answer, Multiple Choice and Single Choice - - Custom Subtotal Items: Fixed, User Enterable and Optional - - Users and Passwords CATEGORIES - - Unlimited Categories - - Full Description - - Image PRODUCTS - - Base Item Number - - Description: Full Description - - Image - - Price - - Sale Price - - Unique Sale Price for Each Catalogue - - Non-Taxable Products - - Weight - - Category - - Multiple Product Options (i.e., Color, Size) - - Multiple Product Option Items (i.e., Red, Green, Blue) - - Custom Item Numbers based on Options - - Custom Pricing based on Options - - Option Conflicts - - Quantity Discounts - - Links in Related Items - - Links to other URL's - - Preview product images - - Generated HTML code to copy and paste into existing sites - - Graphical pricing for easy integration into existing sites - - Import product information from a test-delimited file ORDERS - - E-mail notification of new orders - - Order Status - - Waybill Number and Shipper - - Custom Notes - - End-user Order Tracking - - Export Order Information STORESONLINE POINT OF SALE - - Multiple Merchant Numbers - - Automatic authorization of orders sent over the Internet - - Manual Authorizations - - Credits - - Automatic Settlement - - Freeze and Thaw Transactions STORESONLINE HOSTING - - Home Page Builder - - Unique URL - - 10 MB Free - - Virtual hosting of existing domain names - - Professionally designed templates - - Customize your own templates STORESONLINE SEARCH - - Full Text Search Engine - - Full Word Listing - - Phrase or Boolean Searching - - Re-index your site anytime - - Integrate into existing sites PRICING FOR STOREFRONT SERVICES: One-Time Store Set-up Fee [**REDACTED**] Monthly Base Wholesale Price per active storefront [**REDACTED**] Optional Monthly Maintenance Plan Determined based on individual merchant store requirements - -* The [**REDACTED**] set-up fee is for the basic StoresOnline store set-up service. Additional products, images and custom work will be billed at StoresOnline's standard rates. A quote will be approved by the merchant prior to the commencement of such work. ** This fee applies to storefronts with up to 100 products. The Monthly Base Wholesale Price shall be [**REDACTED**] for those storefronts with 101 to 300 products and [**REDACTED**] for those storefronts with 301 to 1000 products. Pricing for Stores with over 1000 products will be determined by quote. Tier: Reseller MALL DEVELOPMENT SERVICES AND PRICES 1. DEVELOPMENT. StoresOnline shall design and develop one or more on-line Malls, to be branded around Reseller's name, brand and image, and shall link to the Reseller's branded StoresOnline solution. The Malls will include appropriate URL addresses, four to six featured products and stores from various Reseller and third party advertisers, additional Reseller and non-Reseller advertiser stores and products catalogued with text references, and links to top-tier eCommerce sites. The Malls will also include an appropriate search engine, commerce functionality, banner and other appropriate advertising space and such other features as the parties shall mutually agree. The Mall will be capable of cataloguing stores independently or in conjunction with all other Malls developed hereunder, if any, as well as other malls which belong to the StoresOnline electronic mall network. Reseller agrees and understands that the storefronts of its end-user customers may be placed in one or more electronic malls developed and/or operated by StoresOnline. 2. PRICING. StoresOnline shall waive the mall design and development fee in return for Reseller meeting its promotional and other obligations as set forth herein. EXHIBIT A STANDARD LICENSE AGREEMENT TERMS 1. LICENSE. This License allows you to use any software associated with the provision of the Services. 2. RESTRICTIONS. You may not use, copy, modify or transfer the program, or any copy, modification or merged portion, in whole or in part, except as expressly provided for in this License. If you transfer possession of any copy, modification or merged portion of the program to another party, your License is automatically terminated. 3. TERM. The License is effective until terminated. You may terminate it at any other time by notifying Reseller of your intent to do so. The License will also terminate upon the occurrence of certain events set forth elsewhere in this Agreement. Upon such termination, you agree to destroy the program together with all copies, modifications and merged portions in any form. 4. EXPORT LAW ASSURANCES. You agree that neither the pogrom nor any direct product thereof is being or will be shipped, transferred or re-exported, directly or indirectly, into any country prohibited by the US Export Administration Act and the regulations thereunder or will be used for any purpose prohibited by the Act. 5. LIMITED WARRANTY. The program is provided "AS IS" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of merchantability and fitness for a particular purpose. The full text of the warranty is provided in the user manual. 6. LIMITED LIABILITY. In no event will StoresOnline be liable to you for any damages, including any lost profits, lost savings or other incidental or consequential damages arising out of the use of inability to use such program even if StoresOnline has been advised of the possibility of such damages, or for any claim by any other party. 7. GENERAL. If you are a Government end-user, this License conveys only "RESTRICTED RIGHTS," and in its use, disclosure and duplication are subject to Federal Acquisition Regulations, subparagraph (c)(1)(11) 52.227-7013. (See U.S. Government End-User provisions in manual.) This License will be construed under the laws of the State of California, except for that body of law dealing with conflicts of law. If any provision of the License shall be held by a court of competent jurisdiction to be contrary to law, that provisions shall be enforced to the maximum extent permissible, and the remaining provisions of this License shall remain in full force and effect. EX-10.32 15 EXHIBIT 10.32 "NOTE - Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." NETGATEWAY ELECTRONIC COMMERCE SERVICES AGREEMENT THIS ELECTRONIC COMMERCE SERVICES AGREEMENT (this "AGREEMENT") is made effective as of the Acceptance Date set forth in the initial eCommerce Services Order Form ( July 28, 1999) accepted by Netgateway, a Nevada corporation ("NETGATEWAY"), and the subscriber identified below ("SUBSCRIBER"). PARTIES: SUBSCRIBER NAME: B2BSTORES.COM INC. ADDRESS: 211 PARK AVENUE HICKSVILLE, NY 11801 PHONE: (516) 931-4455 FAX: (516) 931-3530 NETGATEWAY 300 Oceangate, Suite 500 Long Beach, CA 90802 Phone: (562) 308-0010 Fax: (562) 308-0021 1. ELECTRONIC COMMERCE SERVICES. 1.1 eCOMMERCE SERVICES. Subject to the terms and conditions of this Agreement, during the term of this Agreement, Netgateway will, through the Netgateway Internet Commerce Center-TM- ("NETGATEWAY ICC"), provide to Subscriber the services described in the eCommerce Services Order Form(s) (the "eCOMMERCE SERVICES ORDER FORM(S)") accepted by Netgateway, or substantailly similar services if such substantailly similar services would provide Subscriber with substantially similar benefits (the "eCOMMERCE SERVICES"). All such eCommerce Services Order Forms will be incorporated herein by this reference as of the Acceptance Date set forth on each such form. Netgateway and Subscriber have mutually agreed or will mutually agree upon the detailed final specifications (the "SPECIFICATIONS") for the eCommerce Services and the development timeline therefor, all of which are or will be set forth on the attached initial eCommerce Services Order Form attached hereto as Exhibit "A", and by this reference made a part hereof. 1.2 AVAILABILITY. eCommerce Services will be available to Subscriber for inquiry and order entry functions twenty-four (24) hours a day, seven (7) days a week. Netgateway reserves the right upon reasonable notice to Subscriber to limit or curtail holiday or weekend availability when necessary for system upgrades, adjustments, maintenance or other operational considerations. 1.3 ENHANCEMENTS. General enhancements to existing eCommerce Services provided hereunder, as well as new features that Netgateway incorporates into its standard commerce processing system, regardless of whether they are initiated by Netgateway or developed at the request of Subscriber or other subscribers, shall be made available to Subscriber at no additional cost. Any new features or services that may be developed by Netgateway during the term of this Agreement which Netgateway intends to offer to subscribers on a limited or optional basis may, at Netgateway's option, and subject to Subscriber's acceptance, be made available to Subscriber at Netgateway's then-current prices for such new features or service. Enhancements to existing eCommerce Services requested by Subscriber that benefit only Subscriber at the time such enhancements are put into service shall be billed to Subscriber at Netgateway's standard rates for programming. All enhancements to the eCommerce Services, and any new features or services introduced by Netgateway, shall remain the exclusive proprietary property of Netgateway. 1.4 TRAINING. At no cost to Subscriber Netgateway shall provide such onsite training and other assistance, as Netgateway deems necessary to assure that Subscriber's personnel are able to make effective use of the eCommerce Services. On-site training shall take place at such times and places as are mutually agreeable to the parties hereto. 1.5 SUBSCRIBER DATA. (a) SUBSCRIBER DATA. Subscriber will timely supply Netgateway, in a form acceptable to Netgateway, with all data necessary for Netgateway to perform the ongoing services to be provided hereunder. It is the sole responsibility of Subscriber to insure the completeness and accuracy of such data. (b) CONFIDENTIALITY. Netgateway acknowledges that all records, data, files and other input material relating to Subscriber are confidential and shall take reasonable steps to protect the confidentiality of such records, data, files and other materials. Netgateway will provide reasonable security safeguards to limit access to Subscriber's files and records to Subscriber and other authorized parties. (c) PROTECTION OF SUBSCRIBER FILES. Netgateway will take reasonable steps to protect against the loss or alteration of Subscriber's files, records and data retained by Netgateway, but Subscriber recognizes that events beyond the control of Netgateway may cause such loss or alteration. Netgateway will maintain backup file(s) containing all the data, files and records related to Subscriber. Subscriber's file(s), records and data shall, at no cost to Subscriber, be released to Subscriber on an occurrence that renders Netgateway unable to perform hereunder, or upon the termination of this Agreement as provided herein. (d) OWNERSHIP OF DATA. Netgateway acknowledges that all records, data, files and other input material relating to Subscriber and its customers are the exclusive property of the Subscriber. 2. FEES AND BILLING. 2.1 FEES. Subscriber will pay all fees and amounts in accordance with the eCommerce Service Provider Forms. 2.2 BILLING COMMENCEMENT. The Initial Development Fee shall be due and payable in accordance with the terms set forth on the eCommerce Services Order Form. Billing for eCommerce Services indicated in the eCommerce Services Order Form (including the eCommerce Rate, Fees Per Hit, Banner Advertising Revenue and Click Through Revenue, as applicable) other than the Initial Development Fee, shall commence on the "OPERATIONAL DATE" indicated in the eCommerce Services Order Form. In the event that Subscriber orders other eCommerce Services in addition to those listed in the initial eCommerce Services Order Form, billing for such services shall commence on the date Netgateway first provides such additional eCommerce Services to Subscriber or as otherwise agreed to by Subscriber and Netgateway in the applicable eCommerce Services Order Form. 2.3 BILLING AND PAYMENT TERMS. All amounts due under this Agreement for eCommerce Services indicated in the eCommerce Services Order Form shall be payable in accordance with the Billing and Payment Terms set forth on Exhibit "B" annexed hereto, which by this reference is made a part hereof. 2.4 TAXES, UTILITIES AND EXCLUSIONS. All charges shall be exclusive of any federal, state or local sales, use, excise, AD VALOREM or personal property taxes levied, or any fines, forfeitures or penalties assessed in connection therewith, as a result of this Agreement or the installation or use of the eCommerce Services provided hereunder. Any such taxes shall be paid by Subscriber or by Netgateway for Subscriber's account, in which case Subscriber shall reimburse Netgateway for amounts so paid. Netgateway shall provide burstible at 1 megabit per second capacity bandwith for Subscriber's website at no additional charge. Should Subscriber need additional bandwidth, Netgateway shall provide or make arrangements to provide such additional bandwidth and invoice Subscriber for such excess bandwidth and/or use beyond a 1 megabit per second burstible line. Netgateway will provide traffic reports to Subscriber with respect to burstible capacity. Netgateway is not responsible for providing connectivity to Subscriber's offices. 3. SUBSCRIBER'S OBLIGATIONS. 3.1 COMPLIANCE WITH LAWS AND RULES AND REGULATIONS. Subscriber agrees that Subscriber will comply at all times with all applicable laws and regulations and Netgateway's general rules and regulations relating to its provision of eCommerce Services, currently included herein as Section 10, which may be updated and provided by Netgateway to Subscriber from time to time ("RULES AND REGULATIONS"). Subscriber acknowledges that Netgateway exercises no control whatsoever over the content contained in or passing through the Subscriber's web site, storefront or mall ("eCOMMERCE CENTERS"), and that it is the sole responsibility of Subscriber to ensure that the information it transmits and receives complies with all applicable laws and regulations. 3.2 ACCESS AND SECURITY. Subscriber will be fully responsible for any charges, costs, expenses (other than those included in the eCommerce Services), and third party claims that may result from its use of, or access to, the Netgateway Internet Commerce Center-TM-, including, but not limited to, any unauthorized use or any access devices provided by Netgateway hereunder. 3.3 NO COMPETITIVE SERVICES. Subscriber may not at any time permit any eCommerce Services to be utilized by Subscriber for the provision of any services that compete with any Netgateway services, without Netgateway's prior written consent. 3.4 INSURANCE. (a) MINIMUM LEVELS. Within six (6) months of the date of this Agreement (the last day of such period, the "Insurance Due Date"), Subscriber shall obtain and keep in full force and effect during the term of this Agreement: (i) comprehensive general liability insurance in an amount not less than $5 million per occurrence for bodily injury and property damage; (ii) employer's liability insurance in an amount not less than $1 million per occurrence; and (iii) workers' compensation insurance in an amount not less than that required by applicable law. Subscriber also agrees that it will be solely responsible for ensuring that its agents (including contractors and subcontractors) maintain, other insurance at levels no less than those required by applicable law and customary in Subscriber's industry. (b) CERTIFICATES OF INSURANCE. On or prior to the Insurance Due Date, Subscriber will furnish Netgateway with certificates of insurance which evidence the minimum levels of insurance set forth above, and will notify Netgateway in writing in the event that any such insurance policies are cancelled. (c) NAMING NETGATEWAY AS AN ADDITIONAL INSURED. Subscriber agrees that on or prior to the Insurance Due Date, Subscriber will cause its insurance provider(s) to name Netgateway as an additional insured and notify Netgateway in writing of the effective date thereof. 4. CONFIDENTIAL INFORMATION. 4.1 CONFIDENTIAL INFORMATION. Each party acknowledges that it will have access to certain confidential information of the other party concerning the other party's business, plans, customers, technology and products, including the terms and conditions of this Agreement ("CONFIDENTIAL INFORMATION"). Confidential Information will include, but not be limited to, each party's proprietary software and customer information. Each party agrees that it will not use in any way, for its own account or the account of any third party, except as expressly permitted by this Agreement, nor disclose to any third party (except as required by law or to that party's attorneys, accountants and other advisors on a need to know basis), any of the other party's Confidential Information and will take reasonable precautions to protect the confidentiality of such Confidential Information. 4.2 EXCEPTIONS. Information will not be deemed Confidential Information hereunder if such information: (i) is known to the receiving party prior to receipt from the disclosing party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (ii) becomes known (independently of disclosure by the disclosing party) to the receiving party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (iii) becomes publicly known or otherwise ceases to be secret or confidential, except through a breach of this Agreement by the receiving party; or (iv) is independently developed by the receiving party. 5. REPRESENTATIONS AND WARRANTIES. 5.1 WARRANTIES BY SUBSCRIBER. (a) SUBSCRIBER'S BUSINESS. Subscriber represents and warrants that: (i) Subscriber's services, products, materials, data and information used by Subscriber in connection with this Agreement as well as Subscriber's and its permitted customers' and users' use of the eCommerce Services (collectively, "SUBSCRIBER'S BUSINESS") does not, as of the Operational Date, and will not during the term of this Agreement, operate in any manner that would violate any applicable laws or regulations. (ii) Subscriber owns or has the right to use all material contained in the Subscriber's web site, including all text, graphics, sound, video, programming, scripts and applets; and (iii) The use, reproduction, distribution and transmission of the web site, or any information or materials contained in it does not: (A) infringe or misappropriate any copyright, patent, trademark, trade secret or any other proprietary rights of a third party; or (B) constitute false advertising, unfair competition, defamation, an invasion of privacy or violate a right of publicity. (b) RULES AND REGULATIONS. Subscriber has read the Rules and Regulations (Section 10 below) and represents and warrants that Subscriber and Subscriber's Business are currently in full compliance with the Rules and Regulations, and will remain so at all times during the term of this Agreement. (c) BREACH OF WARRANTIES. In the event of any breach, or reasonably anticipated breach, of any of the foregoing warranties, in addition to any other remedies available at law or in equity, Netgateway will have the right immediately in Netgateway's reasonable discretion, to suspend any related eCommerce Services if deemed reasonably necessary by Netgateway to prevent any harm to Netgateway or its business. 5.2 WARRANTIES AND DISCLAIMERS BY NETGATEWAY. (a) NO OTHER WARRANTY. THE eCOMMERCE SERVICES ARE PROVIDED ON AN "AS IS" BASIS, AND SUBSCRIBER'S USE OF THE eCOMMERCE SERVICES IS AT ITS OWN RISK. NETGATEWAY DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL OTHER EXPRESS AND/OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT AND TITLE, AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICE. NETGATEWAY DOES NOT WARRANT THAT THE eCOMMERCE SERVICES WILL BE UNINTERRUPTED, ERROR-FREE OR COMPLETELY SECURE. (b) DISCLAIMER OF ACTIONS CAUSED BY AND/OR UNDER THE CONTROL OF THIRD PARTIES. NETGATEWAY DOES NOT AND CANNOT CONTROL THE FLOW OF DATA TO OR FROM NETGATEWAY'S INTERNET COMMERCE CENTER AND OTHER PORTIONS OF THE INTERNET. SUCH FLOW DEPENDS IN LARGE PART ON THE PERFORMANCE OF INTERNET SERVICES PROVIDED OR CONTROLLED BY THIRD PARTIES. AT TIMES, ACTIONS OR INACTIONS CAUSED BY THESE THIRD PARTIES CAN PRODUCE SITUATIONS IN WHICH NETGATEWAY'S SUBSCRIBERS' CONNECTIONS TO THE INTERNET (OR PORTIONS THEREOF) MAY BE IMPAIRED OR DISRUPTED. ALTHOUGH NETGATEWAY WILL USE COMMERCIALLY REASONABLE EFFORTS TO TAKE ACTIONS IT DEEMS APPROPRIATE TO REMEDY AND AVOID SUCH EVENTS, NETGATEWAY CANNOT GUARANTEE THAT THEY WILL NOT OCCUR. ACCORDINGLY, NETGATEWAY DISCLAIMS ANY AND ALL LIABILITY RESULTING FROM OR RELATED TO SUCH EVENTS. 6. LIMITATIONS OF LIABILITY. 6.1 EXCLUSIONS. IN NO EVENT WILL NETGATEWAY BE LIABLE TO ANY THIRD PARTY FOR ANY CLAIMS ARISING OUT OF OR RELATED TO THIS AGREEMENT, SUBSCRIBER'S BUSINESS OR OTHERWISE, AND ANY LOST REVENUE, LOST PROFITS, REPLACEMENT GOODS, LOSS OF TECHNOLOGY, RIGHTS OR SERVICES, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, LOSS OF DATA, OR INTERRUPTION OR LOSS OF USE OF SERVICE OR SUBSCRIBER'S BUSINESS, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE. 6.2 LIMITATIONS. NETGATEWAY, ITS AFFILIATES, EMPLOYEES, OFFICERS AND AGENTS SHALL NOT BE LIABLE TO SUBSCRIBER OR TO ANY THIRD PARTY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR INTERRUPTIONS OF SERVICE DUE TO MECHANICAL ELECTRICAL OR WIRE DEFECTS OR DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR OTHER CAUSES OVER WHICH NETGATEWAY, ITS AFFILIATES, EMPLOYEES, OFFICERS, OR AGENTS AGAINST WHOM LIABILITY IS SOUGHT, HAVE NO REASONABLE CONTROL, OR FOR LOSS OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS STATEMENTS, ERRORS OF FACTS, OMISSIONS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF ECOMMERCE SERVICES, OR ANY DATA PROVIDED AS A PART OF THE ECOMMERCE SERVICES PURSUANT TO THIS AGREEMENT, EXCEPT TO THE EXTENT CAUSED BY THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF NETGATEWAY. IN ADDITION, IN NO EVENT SHALL NETGATEWAY BE LIABLE TO SUBSCRIBER OR TO ANY THIRD PARTY FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES WHICH SUBSCRIBER OR SUCH THIRD PARTY MAY INCUR OR EXPERIENCE ON ACCOUNT OF ENTERING INTO OR RELYING ON THIS AGREEMENT OR UTILIZING THE NETGATEWAY ECOMMERCE SERVICES, REGARDLESS OF WHETHER NETGATEWAY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES ARE CAUSED, IN WHOLE OR IN PART, BY THE NEGLIGENCE OF NETGATEWAY. 6.3 MAXIMUM LIABILITY. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IN ALL CASES ARISING FROM EVENTS OCCURRING DURING THE TERM OF THIS AGREEMENT, WHETHER BASED UPON TORT, CONTRACT WARRANTY, INDEMNITY CONTRIBUTION OR OTHERWISE, DAMAGES SHALL BE LIMITED TO, AND SUBSCRIBER AGREES NOT TO MAKE ANY CLAIM OR CLAIMS EXCEEDING [**REDACTED**] REGARDLESS OF HOW MANY CLAIMS SUBSCRIBER MAY HAVE.. 6.4 TIME FOR MAKING CLAIMS. ANY SUIT OR ACTION BY SUBSCRIBER AGAINST NETGATEWAY, ITS AFFILIATES, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, SUCCESSORS OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL BE COMMENCED WITHIN TWO (2) YEARS OF THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF NETGATEWAY'S LIABILITY SET FORTH IN SECTION 6 OR ELSEWHERE IN THIS AGREEMENT. 6.5 SUBSCRIBER'S INSURANCE. [Reserved]. 6.6 BASIS OF THE BARGAIN; FAILURE OF ESSENTIAL PURPOSE. Subscriber acknowledges that Netgateway has set its prices and entered into this Agreement in reliance upon the limitations of liability and the disclaimers of warranties and damages set forth herein, and that the same form an essential basis of the bargain between the parties. The parties agree that the limitations and exclusions of liability and disclaimers specified in this Agreement will survive and apply even if found to have failed of their essential purpose. 7. INDEMNIFICATION. 7.1 NETGATEWAY'S INDEMNIFICATION OF SUBSCRIBER. Netgateway will indemnify, defend and hold Subscriber harmless from and against any and all costs, liabilities, losses and expenses (including, but not limited to, reasonable attorneys' fees) (collectively, "LOSSES") resulting from any claim, suit, action or proceeding (each, an "ACTION") brought against Subscriber alleging the infringement of any third party registered U.S. copyright or issued U.S. patent resulting from the provision of eCommerce Services pursuant to this Agreement (but excluding any infringement contributorily caused by Subscriber's Business). 7.2 SUBSCRIBER'S INDEMNIFICATION OF NETGATEWAY. Subscriber will indemnify, defend and hold Netgateway, its affiliates and customers harmless from and against any and all Losses resulting from or arising out of Subscriber's breach of any provision of this Agreement or any Action brought against Netgateway, its directors, employees, affiliates or Subscribers alleging with respect to the Subscriber's Business: (a) infringement or misappropriation of any intellectual property rights; (b) defamation, libel, slander, obscenity, pornography or violation of the rights of privacy or publicity; (c) spamming, or any other offensive, harassing or illegal conduct or violation of the Rules and Regulations; or, (d) any violation of any other applicable law or regulation. 7.3 NOTICE. Each party will provide the other party, prompt written notice of the existence of any such indemnifiable event of which it becomes aware, and an opportunity to participate in the defense thereof. 8. DISPUTE RESOLUTION. 8.1 PROCEDURES. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is most knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this Paragraph 8 are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "DISPUTE" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement, other than as provided in paragraph 8.5 below, may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (a) The complaining party's representative will notify the other party's representative in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (b) In the event that such matter remains unresolved thirty (30) days after the delivery of the complainant party's written notice, a senior representative of each party shall meet or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (c) In the event that the meeting or conference specified in (b) above does not resolve such matter, the senior officer of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (d) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with paragraph 8.2 below. 8.2 BINDING ARBITRATION. Except as provided in paragraph 8.5 below, any dispute arising under this Agreement shall, after utilizing the procedures in paragraph 8.1, be resolved by final and binding arbitration in Los Angeles, California, before a single arbitrator selected by, and in accordance with, the rules of commercial arbitration of the American Arbitration Association or as otherwise provided in Paragraph 11.6. Each party shall bear its own costs in the arbitration, including reasonable attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. 8.3 ARBITRATOR'S AUTHORITY. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. 8.4 ENFORCEMENT OF ARBITRATOR'S AWARD. Any party may apply to a court of general jurisdiction to enforce an arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including reasonable attorneys' fees. 8.5 ACCESS TO COURTS. Notwithstanding the provisions of paragraphs 8.1 and 8.2 above, any action by Netgateway to enforce its rights under Paragraphs 10.1 or 10.3 of this Agreement or to enjoin any infringement of the same by Subscriber may, at Netgateway's election, be commenced in the state or federal courts of Los Angeles, California, and Subscriber consents to personal jurisdiction and venue in such courts for such actions. 9. TERM AND TERMINATION. 9.1 TERM. This Agreement will be effective on the date first above written and will terminate eighteen (18) months ("INITIAL TERM") from the date Subscriber begins processing live data through the Netgateway ICC-TM-, unless earlier terminated according to the provisions of this Section 9. This Agreement will automatically renew for successive additional terms of one (1) year each unless a party hereto elects not to so renew and notifies the other party in writing of such election by a date which is six (6) months prior to the lapse of the Initial Term or any renewal term thereafter. 9.2 TERMINATION. Either party will have the right to terminate this Agreement if: (i) the other party breaches any material term or condition of this Agreement and fails to cure such breach within thirty (30) days after receipt of written notice of the same, except in the case of failure to pay fees, which failure must be cured within five (5) days after receipt of written notice from Netgateway; (ii) the other party becomes the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors; or(iii) the other party becomes the subject of an involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors, if such petition or proceeding is not dismissed within sixty (60) days of filing. Subscriber shall have the right to terminate the Agreement if the Netgateway servers which provide eCommerce Services hereunder experience more than two percent (2%) down-time measured on an annual basis; PROVIDED, HOWEVER, that down-time shall not include time expended on regularly scheduled maintenance and other system upgrades. 9.3 NO LIABILITY FOR TERMINATION. Neither party will be liable to the other for any termination or expiration of this Agreement in accordance with its terms. 9.4 EFFECT OF TERMINATION. Upon the effective date of expiration or termination of this Agreement: (a) Netgateway shall immediately cease providing eCommerce Services; (b) any and all payment obligations of Subscriber under this Agreement shall become due immediately; and (c) within thirty (30) days after such expiration or termination, each party shall return all Confidential Information of the other party in its possession at the time of expiration or termination and shall not make or retain any copies of such Confidential Information, except as required to comply with any applicable legal or accounting record keeping requirements. 9.5 SURVIVAL. The following provisions shall survive any expiration or termination of the Agreement: Sections 2, 3, 4, 5, 6, 7, 8, 9 and 10. 10. USE OF eCOMMERCE SERVICES - RULES AND REGULATIONS. 10.1 PROPRIETARY SYSTEMS. Subscriber acknowledges that the software systems utilized by Netgateway in the provision of eCommerce Services hereunder, including the Netgateway ICC-TM-, all enhancements thereto and all screens and formats used in connection therewith, are the exclusive proprietary property of Netgateway, and Subscriber shall not publish, disclose, display, provide access to or otherwise make available any Netgateway eCommerce software or products thereof, or any screens, formats, reports or printouts used, provided, produced or supplied from or in connection therewith, to any person or entity other than an employee of Subscriber without the prior written consent of, and on terms acceptable to, Netgateway, which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that Subscriber may disclose to a governmental or regulatory agency or to customers of Subscriber any information expressly prepared and acknowledged in writing by Netgateway as having been prepared for disclosure to such governmental or regulatory agency or to such customers. Neither party shall disclose Subscriber's use of eCommerce Services in any advertising or promotional materials without the prior written consent to such use, and approval of such materials, by the other. 10.2 USE OF SERVICES PERSONAL TO SUBSCRIBER. Subscriber agrees that it will use the services provided hereunder only in connection with its eCommerce business, and it will not, without the express written permission of Netgateway, sell, lease or otherwise provide or make available eCommerce Services to any third party. 10.3 SURVIVAL OF OBLIGATIONS. The obligations of this Section 10 shall survive termination of this Agreement. Subscriber understands that the unauthorized publication or disclosure of any of Netgateway' software or copies thereof, or the unauthorized use of eCommerce Services would cause irreparable harm to Netgateway for which there is no adequate remedy at law. Subscriber therefore agrees that in the event of such unauthorized disclosure or use, Netgateway may, at its discretion and at Subscriber's expense, terminate this Agreement, obtain immediate injunctive relief in a court of competent jurisdiction, or take such other steps as it deems necessary to protect its rights. If Netgateway, in its reasonable, good faith judgment, determines that there is a material risk of such unauthorized disclosure or use, it may demand immediate assurances, satisfactory to Netgateway, that there will be no such unauthorized disclosure or use. In the absence of such assurance, Netgateway may immediately terminate this Agreement and take such other actions as it deems necessary. The rights of Netgateway hereunder are in addition to any other remedies provided by law. 11. MISCELLANEOUS PROVISIONS. 11.1 FORCE MAJEURE. Except for the obligation to pay money, neither party will be liable for any failure or delay in its performance under this Agreement due to any cause beyond its reasonable control, including act of war, acts of God, earthquake, flood, embargo, riot, sabotage, labor shortage or dispute, governmental act or failure of the Internet, provided that the delaying party: (a) gives the other party prompt notice of such cause, and (b) uses its reasonable commercial efforts to correct promptly such failure or delay in performance. 11.2 NO LEASE. This Agreement is a services agreement and is not intended to, and will not constitute, a lease of any real or personal property. Subscriber acknowledges and agrees that: (i) it has been granted only a license to use Netgateway's ICC-TM- and any equipment provided by Netgateway in accordance with this Agreement, (ii) Subscriber has not been granted any real property interest in the Netgateway's ICC-TM-, and (iii) Subscriber has no rights as a tenant or otherwise under any real property or landlord/tenant laws, regulations or ordinances. 11.3 MARKETING. Subscriber agrees that Netgateway may refer to Subscriber by trade name and trademark, and may briefly describe Subscriber's business, in Netgateway's marketing materials and web site. Subscriber hereby grants Netgateway a license to use any Subscriber trade names and trademarks solely in connection with the rights granted to Netgateway pursuant to this Section 11.3. 11.4 GOVERNMENT REGULATIONS. Subscriber will not export, re-export, transfer or make available, whether directly or indirectly, any regulated item or information to anyone outside the U.S. in connection with this Agreement without first complying with all export control laws and regulations which may be imposed by the U.S. Government and any country or organization of nations within whose jurisdiction Subscriber operates or does business. 11.5 NON-SOLICITATION. Except with the prior consent of Netgateway, which consent shall not be unreasonably withheld, during the period beginning on the Operational Data and ending on the first anniversary of the termination or expiration of this Agreement in accordance with its terms, Subscriber agrees that it will not, and will ensure that its affiliates do not, directly or indirectly, solicit or attempt to solicit for employment any persons employed by Netgateway during such period. 11.6 GOVERNING LAW; DISPUTE RESOLUTION, SEVERABILITY; WAIVER. This Agreement is made under and will be governed by and construed in accordance with the laws of the State of California (without regard to that body of law controlling conflicts of law) and specifically excluding from application to this Agreement that law known as the United Nations Convention on the International Sale of Goods. Any dispute relating to the terms, interpretation or performance of this Agreement (other than claims for preliminary injunctive relief or other pre-judgment remedies) will be resolved at the request of either party through binding arbitration. Arbitration will be conducted in Los Angeles County, California, under the rules and procedures of the Judicial Arbitration and Mediation Society ("JAMS"). The parties will request that JAMS appoint a single arbitrator possessing knowledge of online services agreements; PROVIDED, HOWEVER, the arbitration will proceed even if such a person is unavailable. In the event any provision of this Agreement is held by a tribunal of competent jurisdiction to be contrary to the law, the remaining provisions of this Agreement will remain in full force and effect. The waiver of any breach or default of this Agreement will not constitute a waiver of any subsequent breach or default, and will not act to amend or negate the rights of the waiving party. 11.7 ASSIGNMENT; NOTICES. Subscriber may not assign its rights or delegate its duties under this Agreement either in whole or in part without the prior written consent of Netgateway, except that Subscriber may assign this Agreement in whole as part of a corporate reorganization, consolidation, merger or sale of substantially all of its assets. Any attempted assignment or delegation without such consent will be void. Netgateway may assign this Agreement in whole or part. This Agreement will bind and inure to the benefit of each party's successors and permitted assigns. Any notice or communication required or permitted to be given hereunder may be delivered by hand, deposited with an overnight courier, sent by confirmed facsimile, or mailed by registered or certified mail, return receipt requested, postage prepaid, in each case to the address of the receiving party indicated on the signature page hereof, or at such other address as may hereafter be furnished in writing by either party hereto to the other. Such notice will be deemed to have been given as of the date it is delivered, mailed or sent, whichever is earlier. 11.8 RELATIONSHIP OF PARTIES. Netgateway and Subscriber are independent contractors and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise or agency between Netgateway and Subscriber. Neither Netgateway nor Subscriber will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent, except as otherwise expressly provided herein. 11.9 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement, including all documents incorporated herein by reference, constitutes the complete and exclusive agreement between the parties with respect to the subject matter hereof, and supersedes and replaces any and all prior or contemporaneous discussions, negotiations, understandings and agreements, written and oral, regarding such subject matter. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. Subscriber's and Netgateway's authorized representatives have read the foregoing and all documents incorporated therein and agree and accept such terms effective as of the date first above written. SUBSCRIBER Signature: /s/ Woo Jin Kim Signature: -------------------------- ------------------------ Print Name: Woo Jin Kim Print Name: -------------------------- ------------------------ Title: CEO -------------------------- NETGATEWAY Signature: /s/ Donald M. Corliss, Jr. Signature: -------------------------- ------------------------ Print Name: Donald M. Corliss, Jr. Print Name: -------------------------- ------------------------ Title: President -------------------------- EXHIBIT "A" ELECTRONIC COMMERCE SERVICES ORDER FORM NETGATEWAY eCOMMERCE SERVICES ORDER FORM SUBSCRIBER NAME: B2BSTORES.COM INC. FORM DATE: JULY 28, 1999 FORM NO.: 001 GENERAL INFORMATION: 1. By submitting this eCommerce Services Order Form ("FORM") to Netgateway, Subscriber hereby places an order for the eCommerce Services described herein pursuant to the terms and conditions of the Electronic Commerce Services Agreement between Subscriber and Netgateway prefixed hereto (the "ECS AGREEMENT"). 2. Billing, with the exception of Development Fees, will commence on the Operational Date set forth below or the date that Subscriber first begins to process transactions through the Netgateway Internet Commerce Center, whichever occurs first. 3. Netgateway will provide the eCommerce Services pursuant to the terms and conditions of the ECS Agreement, which incorporates this Form. The terms of this Form supersede, and by accepting this Form, Netgateway hereby rejects, any conflicting or additional terms provided by Subscriber in connection with Netgateway's provision of the eCommerce Services. If there is a conflict between this Form and any other Form provided by Customer and accepted by Subscriber, the Form with the latest date shall control. 4. Netgateway will not be bound by or required to provide eCommerce Services pursuant to this Form or the ECS Agreement until each is signed by an authorized representative of Netgateway. SUBSCRIBER HAS READ, UNDERSTANDS AND HEREBY SUBMITS THIS ORDER. Submitted By: /s/ Woo Jin Kim Operational Date: 8-9-99 ----------------------- ----------------- (AUTHORIZED SIGNATURE) Print Name: /s/ Woo Jin Kim ----------------------- Title: CEO ----------------------- NETGATEWAY ACCEPTANCE /s/ Donald M. Corliss, Jr. Date: 8-4-99 - ------------------------------------- ----------------------------- (AUTHORIZED SIGNATURE) NETGATEWAY eCOMMERCE SERVICES ORDER FORM Subscriber Name: B2BSTORES.COM INC. Form Date: July 28, 1999 Form No.: 001 TERMS: 1. DEVELOPMENT FEE. The initial development fee for the B2BSTORES.COM and ENVIROGOODS.COM internet commerce system shall be [**REDACTED**] and shall be due and payable in full upon submission of this Order Form. 2. PHASE SPECIFICATIONS. Phase specifications shall be as set forth on Schedule A annexed hereto. 3. ICC COMMERCE RATE. Netgateway shall be entitled to transaction fees based upon the following schedule: ANNUAL GROSS SALES REVENUE TRANSACTON FEE RATE -------------------------- ------------------- $ 0 TO $25,000,000 25,000,001 TO 50,000,000 [**REDACTED**] 50,000,001 TO $100,000,000 100,000,001 and over For purposes hereof, gross sales revenue shall mean all revenues generated from transactions processed through the Netgateway Internet Commerce Center which are related to Subscriber. 4. FEE PER HIT. Netgateway to receive [**REDACTED**] per hit (as that term is customarily understood in the industry). 5. BANNER ADVERTISING REVENUE. Netgateway to receive [**REDACTED**] of all banner advertising revenue from ads placed by Subscriber or Netgateway on Subscriber's web site or mall. 6. CLICK-THROUGH REVENUE. Netgateway to receive [**REDACTED**] of all click-through revenue generated from advertisers placed by Subscriber or Netgateway on Subscriber's web site or mall. 7. DEVELOPMENT TIMELINE: The B2BSTORES.COM internet commerce center shall be fully operational on or before August 9, 1999. 8. PUBLIC ANNOUNCEMENTS: B2BSTORES.COM understands that Netgateway is a public company and can be affected by the manner or content of public announcements concerning this relationship. Neither party shall make any public announcement of this Agreement or of the relationship they have entered into without the prior written consent of the other. Subscriber's Initial WJK --------- EX-10.34 16 EXHIBIT 10.34 StoresOnline.com RESELLER AND MALL AGREEMENT Frontiervision "NOTE--Certain confidential technical and commercial information has been redacted from this exhibit in order to preserve the confidentiality of such information. All of the confidential information which has been redacted is on file with the Securities and Exchange Commission. Redacted material is indicated by the symbol, "[**REDACTED**]" where such redacted text would have appeared in this exhibit." THE RESELLER AND MALL AGREEMENT (the "Agreement") is made and entered into as of the date set forth on the Addendum attached hereto and by this reference made a part hereof (the "Addendum"), between and among STORESONLINE.COM, INC., a California corporation, and NETGATEWAY, a Nevada corporation, on the one hand (collectively, "StoresOnline"), and the Reseller identified on the Addendum, on the other hand ("Reseller"). R E C I T A L S A. Reseller is an established business entity, engaged in the business described in the Addendum. B. StoresOnline owns, operates and maintains an Internet storefront- building services package comprised of certain services delivered through StoresOnline's proprietary software, the standard features of which are more particularly described on the Addendum (the "Services"). C. The Services are delivered through the Internet and may be made available through a private, branded electronic exchange to be developed for Reseller. D. StoresOnline desires to (i) sell and license the Services to Reseller for Reseller's resale and sublicense to end-user customers or, with the written permission of StoresOnline, to other resellers and (ii) develop certain on-line mall(s) to be branded around Reseller's name, brand and image (the "Malls"). AGREEMENT NOW, THEREFORE, on the basis of the foregoing recitals, and in consideration of the mutual promises contained herein, the receipt and sufficiency of which is hereby acknowledged, the parties hereto covenant and agree as follows: 1. SERVICES. a. SCOPE OF AGREEMENT. This Agreement covers (i) the purchase, licensing, promotion and sale of the Services and (ii) the design and development of the Malls pursuant to and in accordance with the terms and conditions set forth on the Addendum. b. LICENSE GRANT; SALE OF SERVICES. StoresOnline grants to Reseller, subject to the terms and conditions of this Agreement, the [**REDACTED**] right and license to resell and sublicense (in the case of software products), the Services to Reseller's end-user customers or, with the written permission of StoresOnline, to other resellers. In the case of software products, Reseller acknowledges that such software is and will remain proprietary to StoresOnline, is copyrighted and that Reseller acquires no right, title or interest in or to any such software by this Agreement. Reseller agrees to sublicense the Services hereunder pursuant to the license terms set forth in the Addendum, and to cause each of its customers or other resellers to sublicense the Services pursuant to such license terms, which terms shall be accepted electronically as part of the storefront registration process described below. c. PRODUCT NAME. It is expressly agreed that the ownership and all right, title and interest in and to the Services and any trademark, trade name, patent, or copyright relating to the Services is and will remain vested solely in StoresOnline, PROVIDED, HOWEVER, that as permitted by this Agreement, Reseller may use any existing or future trademark, trade name, patent or copyright relating to the Services, such use to be limited to promoting, selling, installing or maintaining the Services, and PROVIDED, FURTHER, that as permitted by this Agreement, the Services may be branded around Reseller's name, brand and image. Reseller shall use its best efforts during the term of this Agreement to protect StoresOnline's trademarks, trade names, patents and copyrights, but shall not be required to instigate legal action against third parties for any infringement thereof. Reseller shall notify StoresOnline of any infringement as soon as practicable after becoming aware of any such infringement. Reseller shall not use, directly or indirectly, in whole or in part, StoresOnline's name or any other trade name or trademark, that is owned or used by StoresOnline in connection with any product other than StoresOnline's products, without prior written consent of StoresOnline. d. MALL DEVELOPMENT. StoresOnline shall develop the Malls in accordance with the terms and conditions set forth herein and on the Addendum. The Malls may be branded around Reseller's name, brand and image and shall link to the Reseller's branded StoresOnline solution. The Malls will include appropriate URL addresses, four to six featured products and stores from various Reseller and third party advertisers, additional Reseller and non-Reseller advertiser stores and products catalogued with text references and links to top-tier eCommerce sites. The Mall will also include an appropriate search engine, commerce functionality, banner and other appropriate advertising space and such other features as the parties shall mutually agree. The Mall will be capable of cataloguing stores independently or in conjunction with all other Malls developed hereunder, if any, as well as other malls which belong to the StoresOnline mall network. 2. TERMS OF AGREEMENT. The term of this Agreement shall commence as of the execution hereof and continue for an initial term of one (1) year. Such term shall automatically be extended for additional one-year terms thereafter unless either party notifies the other, not less than thirty (30) days prior to the expiration of this applicable term, of its intention not to renew the Agreement. a. Notwithstanding the foregoing, this Agreement may be terminated in accordance with the provisions of Section 10. b. Termination of this Agreement shall not relieve either party of any obligations incurred prior to termination, including outstanding delivery and payment obligations and other contractual commitments agreed to from time to time in writing by an officer of StoresOnline. The obligation set forth in Sections 3d,6b,8,10a,12c,12e,12f and 12h are expressly intended to survive termination of this Agreement. 3. PRICES AND TAXES a. PRICES FOR SERVICES. StoresOnline shall charge Reseller the one-time Store Set-up Price set forth on the Addendum for each of Reseller's customers. StoresOnline shall also charge Reseller the applicable Monthly Basic Wholesale Price set forth on the Addendum. b. PRICE ADJUSTMENTS FOR SERVICES. The prices for the Services are subject to change by StoresOnline at any time, and shall become effective ninety (90) days after written notification of such change to Reseller. c. RETAIL PRICES FOR SERVICES. On or before the first day of each month, Reseller shall provide StoresOnline with a list of the Reseller prices charged for each class of Accounts or for each Account (as hereinafter defined). d. PRICES FOR MALL DEVELOPMENT. All prices for Mall design, development and operation provided hereunder shall be as set forth on the Addendum. It is anticipated that the Malls will generate multiple revenue streams. Reseller and StoresOnline shall split the net revenue generated from all such revenue sources on a [**REDACTED**] basis. Such revenue sources to be split shall include, but are not limited to: (i) eCommerce advertisers provided by StoresOnline, (ii) the pro rata share of Mall banner advertising attributable to Reseller, (iii) click-through revenue from eTailer sales; and (iv) revenue generated from featured product sales. The parties hereto shall mutually agree to pricing in the event advertising space is sold on a straight-buy basis. e. TAXES. All prices for any services or products supplied hereunder are exclusive of any federal, state or local sales, use, excise, AD VALOREM or personal property taxes levied, or any fines, forfeitures or penalties assessed in connection therewith, as a result of this Agreement or the installation or use of services or products hereunder. Reseller or Reseller's customer shall pay any and all such taxes, or StoresOnline may pay such taxes for Reseller's account of Reseller's customer account, in which case Reseller shall be obligated to reimburse StoresOnline for amounts so paid. Any such taxes, duties or government imposed levies which are charged to or payable by StoresOnline (exclusive of taxes based on StoresOnline's net income) will be invoiced to and paid by Reseller in the manner set forth in Section 6 below. 4. PROMOTION. StoresOnline shall provide Reseller with two thirty second Mall promotional television commercials that Reseller shall cablecast on its various cable systems a minimum of 1,000 times per broadcast month, per market for the duration of the Agreement. 5. CUSTOMER ACCOUNTS a. CUSTOMER ACCOUNT REGISTRATION PROCESS. The Services provided hereunder include an online registration process that Reseller and its customers will use to establish storefront accounts (the "Accounts"). In order to establish an account, Reseller's customers must complete an on-line registration process in accordance with the terms set forth on the StoresOnline website. At the option of the customer, registration may also be completed non-electronically. The general terms and conditions for the use of Accounts shall be posted from time to time on the StoresOnline web site, or in the event that StoresOnline establishes an electronic exchange for Reseller such information will be posted on Reseller's exchange. The terms and conditions as posted shall, in all events and at all times, be binding upon the Reseller and its customers who establish Accounts. The terms and conditions governing such Accounts may be amended or canceled, from time to time, upon thirty (30) days prior electronic notice to Reseller. To establish an Account, Reseller's customers must provide credit card information and authorize the payment of fees for Services on a monthly basis in advance. b. CONTINUATION OF CUSTOMER ACCOUNTS. Continuation of each customer Account is subject to the timely payment of the monthly fees associated with such accounts, and failure to do so shall constitute grounds for StoresOnline to cancel and terminate an Account. 6. BILLING AND PAYMENT TERMS. a. INVOICING FOR SERVICES. Reseller may request that StoresOnline invoice Reseller's customers directly. In such event, StoresOnline shall electronically invoice Reseller's customers and directly charge against the credit card accounts provided by such customers on a monthly basis for the retail price of the Services charged by Reseller. All fees due under this Agreement shall be paid in advance and are due on the first day of each month. In preparing the invoices and charging against the applicable credit cards, StoresOnline shall use the most recent Reseller retail prices provided to StoresOnline by Reseller pursuant to Section 3c hereof for the Accounts invoiced. b. PAYMENT AND COLLECTION FOR SERVICES. Payments shall be made through Reseller's customers' credit cards provided by Reseller's customers for that purpose during the registration process. StoresOnline shall collect the monthly fees set by Reseller from Reseller's customers and, after deducting any monthly fees and expenses to which it is entitled hereunder, shall remit the balance to Reseller on a monthly basis, together with a statement setting forth the amounts collected, the amounts deducted and the total amount remitted. In the event payment is not received by StoresOnline within the specified time, an additional late charge of one and one half percent (1.5%) of the past due amount will be accrued for each thirty (30) days outstanding, prorated on a daily basis. All payments for Services shall be made in United States dollars. c. DIRECT RESELLER BILLING FOR SERVICES. In the event that Reseller chooses to bill its customers directly for the Services, Reseller shall remit directly to StoresOnline the applicable Monthly Wholesale Retail Price (per storefront). All such fees shall be paid in advance and are due on the first day of each month. d. BILLING FOR MALL RELATED CHARGES; ADVERTISING AND RELATED REVENUES. StoresOnline shall invoice Reseller indirectly for all charges due hereunder in connection with the design development and operation of the Malls, which charges shall be payable in full in advance. All revenues generated from the Malls (including advertising and related revenues) which are to required to be split between StoresOnline and Reseller pursuant to paragraph 3(d) hereof shall be invoiced and collected by StoresOnline. StoresOnline shall thereafter forward all amounts due, if any, to Reseller (net 30 days) at the address provided on the signature page hereto. 7. REAL TIME PAYMENT PROCESSING. Real-time credit card processing shall be available in accordance with the terms of this Section 7. In the event that a customer wishes the StoresOnline real-time credit payment processing option, such customer must establish a customer account with an FDIC network bank and must open an account with a participating credit-card processor. 8. DISCLAIMER OF WARRANTIES AND LIMITATIONS OF LIABILITY. a. DISCLAIMER OF WARRANTY. EXCEPT AS SPECIFICALLY PROVIDED HEREIN, THERE ARE NO, AND STORESONLINE EXPRESSLY DENIES, REJECTS AND DISCLAIMS ANY WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTIES OF THE CORRECTNESS, ACCURACY, PRECISION, TIMELINESS OR COMPLETENESS OF ANY INFORMATION OR SERVICES PROVIDED HEREUNDER. b. LIMITATION OF LIABILITY. STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES AND AGENTS SHALL NOT BE LIABLE TO RESELLER OR TO ANY THIRD PARTY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR INTERRUPTIONS OR SERVICE DUE TO MECHANICAL, ELECTRICAL OR WIRE DEFECTS OR DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR OTHER CAUSES OVER WHICH STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYESS OR AGENTS AGAINST WHOM LIABILITY IS SOUGHT HAVE NO REASONABLE CONTROL, OR FOR LOSS OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS STATEMENTS, ERRORS OF FACTS, OMISSIONS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF THE SERVICES, OR ANY DATA PROVIDED AS A PART OF THE SERVICES PURSUANT TO THIS AGREEMENT, EXCEPT TO THE EXTENT CAUSED BY THE NEGLIGENCE OR WILLFUL MISCONDUCT OF STORESONLINE. IN ALL CASES ARISING FROM EVENTS OCCURRING DURING THE TERM OF THIS AGREEMENT, WHETHER BASED UPON TORT, CONTRACT, WARRANTY, INDEMNITY, CONTRIBUTION OR OTHERWISE, DAMAGES SHALL BE LIMITED TO, AND RESELLER AGREES NOT TO MAKE ANY CLAIM OR CLAIMS EXCEEDING TWENTY-FIVE THOUSAND DOLLARS ($25,000.00), REGARDLESS OF HOW MANY CLAIMS RESELLER MAY HAVE. IN ADDITION, IN NO EVENT SHALL STORESONLINE BE LIABLE TO RESELLER OR TO ANY THIRD PARTY FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES WHICH RESELLER OR SUCH THIRD PARTY MAY INCUR OR EXPERIENCE ON ACCOUNT OF ENTERING INTO OR RELYING ON THIS AGREEMENT OR UTILIZING THE SERVICES, REGARDLESS OF WHETHER STORESONLINE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES ARE CAUSED, IN WHOLE OR IN PART, BY THE NEGLIGENCE OF STORESONLINE. C. TIME FOR MAKING CLAIMS. ANY SUIT OR ACTION BY RESELLER AGAINST STORESONLINE, ITS DIRECTORS, OFFICERS, AFFILIATES, EMPLOYEES, AGENTS, SUCCESSORS OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL BE COMMENCED WITHIN TWO (2) YEARS OF THE FIRST OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF STORESONLINE'S LIABILITY SET FORTH IN THIS PARAGRAPH 8 OR ELSEWHERE IN THIS AGREEMENT. d. DISCLAIMER. THE WARRANTIES AND CONDITIONS SET FORTH HEREIN AND THE OBLIGATIONS AND LIABILITIES OF STORESONLINE HEREUNDER ARE IN LIEU OF, AND BUYER HEREBY WAIVES, ALL EXPRESS AND IMPLIED WARRANTIES AND CONDITIONS, INCLUDING, WITHOUT LIMITATION, THOSE OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OF NONINFRINGEMENT. IN NO EVENT SHALL STORESONLINE'S LIABILITY FOR ANY CLAIM ASSERTED BASED ON A VIOLATION OF WARRANTY OR CONDITION EXCEED THE AMOUNT PAID BY RESELLER TO STORESONLINE FOR THE AFFECTED ITEM OR SERVICES. 9. DOCUMENTATION AND TRAINING. Provided that Reseller has met the minimum performance standards set forth elsewhere in this Agreement, StoresOnline shall, on a semi-annual basis, provide free-of-charge a one (1) day training program for employees designated by Reseller at the StoresOnline corporate headquarters. Additional training by StoresOnline shall be made available to Reseller at StoresOnline's standard rates. All expenses of the trainees under this Section 9 shall be borne by Reseller. 10. DEFAULT. a. RESELLER'S DEFAULT. The failure by Reseller to make any payment required hereunder or a material breach by Reseller of its obligations hereunder shall constitute an event of default by Reseller. Upon the occurrence of an event of default, StoresOnline shall provide Reseller with written notice specifying the nature of such default. If Reseller has not cured such default within thirty (30) days after receipt of such notice, StoresOnline may, at its sole discretion, terminate this Agreement and/or seek any other available remedies available at law or in equity, PROVIDED, HOWEVER, that the cancellation of this Agreement shall not prevent Reseller from reselling the Services (and sublicensing the software component thereof) previously paid for by Reseller and sublicenses previously granted by Reseller pursuant hereto shall not be affected by such termination. b. STORESONLINE'S DEFAULT. A material breach by StoresOnline of its obligations hereunder shall constitute an event of default by StoresOnline. Upon the occurrence of an event of default by StoresOnline, Reseller shall provide StoresOnline with written notice specifying the nature of such default. If StoresOnline fails to cure such default, within thirty (30) days after receipt of such notice, Reseller may, at its sole option, terminate this Agreement. c. INSOLVENCY. The commencement of any proceeding (voluntary of involuntary) in bankruptcy or insolvency by or against either party hereto, or the appointment (with or without the party's consent) of an assignee for the benefit of creditors or a receiver with respect to either party hereto shall constitute an event of default hereunder, and the non-defaulting party may elect to terminate this Agreement immediately. 11. DISPUTE RESOLUTION. a. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is more knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this Paragraph 11 are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "dispute" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement, other than as provided in subparagraph e. below, may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (1) The complaining party's representative will notify the other party's representative in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (2) In the event that such matter remains unresolved for thirty (30) days after the delivery of the complaining party's written notice, a senior representative of each party shall meet or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (3) In the event that the meeting or conference specified in (2) above does not resolve such matter, the senior officer of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (4) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with subparagraph b. below. b. Except as provided in subparagraph e. below, any dispute arising under this Agreement shall, after utilizing the procedures in subparagraph a., be resolved by final and binding arbitration in Long Beach, California, before a single arbitrator selected by, and in accordance with, the rules of commercial arbitration of the American Arbitration Association. Each party shall bear its own costs in the arbitration, including attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. c. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. d. Either party may supply to a court of general jurisdiction to enforce an arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including reasonable attorneys' fees. e. Notwithstanding the provisions of subparagraphs a. and b. above, any action by StoresOnline to enforce its rights under Paragraph 12e of this Agreement or to enjoin any infringement of the same by Reseller may, at StoresOnline's election, be commenced in the state or federal courts of California, and Reseller consents to personal jurisdiction and venue in such courts for such actions. 12. GENERAL. a. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement between StoresOnline and Reseller and supersedes all previous understandings, negotiations, and proposals, whether written or oral. This Agreement may not by altered, amended or modified except by an instrument in writing signed by duly authorized representatives of each party. In the event that any one or more provisions contained in this Agreement should for any reason be held to be unenforceable in any respect, such unenforceability shall not affect any other provisions hereof, and this Agreement shall by construed as if such unenforceable provision had not been contained herein. b. FORCE MAJEURE. Neither party shall be liable to the other for delays or failures to perform an obligation to the other hereunder if such delay or failure to perform is due to any act of God, acts of civil or military authority, labor disputes, fire, riots, civil commotion's, sabotage, war, embargo, blockage, floods, epidemics, delays in transportation, inability beyond StoresOnline's reasonable control to obtain necessary labor, materials or manufacturing facilities, or when due to governmental restrictions, including the inability of StoresOnline to obtain appropriate U.S. export license approval or the subsequent suspension of same. In the event of any such delay or failure, the parties shall have an additional period of time equal to the time lost by reason of the foregoing in which to perform hereunder. c. GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California, without regard to principles of choice of law. d. ASSIGNMENT. Reseller shall not assign this Agreement or any rights hereunder without the prior written consent of StoresOnline, which consent shall not be unreasonably withheld. StoresOnline may assign this Agreement to a subsidiary or affiliate corporation. e. DISCLOSURE OF INFORMATION. Reseller acknowledges that, in the course of purchasing Services and meeting its obligations under this Agreement, it will obtain information relating to the Services and to StoresOnline, which is of a confidential and proprietary nature ("StoresOnline Proprietary Information"). Such StoresOnline Proprietary Information may include, but is not limited to, trade secrets, know-how, inventions, techniques, processes, programs, schematics, data, customer lists, financial information and sales and marketing plans. Reseller shall at all times during the term of this Agreement and for three years after its termination, keep in confidence and trust from any person or entity all StoresOnline Proprietary Information and shall not disclose or use such StoresOnline Proprietary Information without the prior written consent of StoresOnline, unless compelled to disclose such StoresOnline Proprietary Information by judicial or administrative process (including, without limitation, in connection with obtaining the necessary approvals of this Agreement and the transaction contemplated hereby of governmental or regulatory authorities) or by other requirements of law. Upon termination of this Agreement, Reseller shall promptly return to StoresOnline all StoresOnline Proprietary Information under its control and all copies thereof. Neither party shall disclose the specific terms of this Agreement to any third parties except as may be mutually agreed or as required by law or the order of a court of competent jurisdiction. The above limitations on disclosure of StoresOnline Proprietary Information shall not apply to information which becomes publicly available through no act of Reseller, is released by StoresOnline in writing with no restrictions, is lawfully obtained by Reseller without breach of this Agreement from third parties without obligations of confidentiality, is previously known by Reseller without similar restrictions as shown by documents in its possession prior to disclosure by StoresOnline or is independently developed by Reseller. f. COMPLIANCE WITH LAW. Reseller shall comply with all applicable law including, without limitation, the export control laws of the United States of America and prevailing regulations which may be issued from time to time by the United States Department of Commerce and any export control regulations of the United States and those countries involved in transactions concerning the exporting, importing and re-exporting of Services purchased under application of these terms and conditions. Reseller shall also comply with the United States Foreign Corrupt Practices Act and shall indemnity StoresOnline from violations of such act by Reseller. This provision shall survive any termination or expiration of the Agreement. g. EXERCISE OF REMEDIES. Any delay or omission by either party to exercise any right or remedy under this Agreement shall not be construed to be a waiver of any such right or remedy or any other right or remedy hereunder. h. LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES DUE TO FAILURE TO PERFORM ITS OBLIGATIONS HEREUNDER. i. HEADINGS. Headings contained in this Agreement are for convenience only, are not a part of this Agreement, and do not in anyway interpret, limit or amplify the scope, extent or intent of this Agreement or any of the provisions hereof. j. REGULATORY APPROVAL. Reseller warrants that the Services and the Malls, when utilized with its own products, will comply with all applicable industry and governmental standards and requirements. StoresOnline assumes no responsibility or liability for these governmental and regulatory standards or requirements, which liability and responsibility is assumed entirely by Reseller. Upon request, StoresOnline will provide copies of regulatory approvals to Reseller. k. BRANDING. StoresOnline shall have the right to place a "Powered by Netgateway" or "Powered by StoresOnline" byline in a prominent manually agreed upon location on each storefront site and on each Mall site. l. PUBLICITY. StoresOnline (or its present company, Netgateway, Inc.) shall have the right to inform its customers and the public that StoresOnline has entered into this Agreement with Reseller. Each party may use the other's name or the name of its customers in marketing the Services and the development of the Malls and may link to each other's websites, but neither party will perform any actions which will harm the other's or its customers name and reputation. m. NOTICES. Any notice required in connection with this Agreement shall be given in writing and shall be deemed effective upon personal delivery or three business days after deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice to the other party. All facsimile notices shall be confirmed by written notice mailed, as provided above, within five (5) days of the date of the facsimile is sent. Once confirmed, the notice shall be effective as of the date of the facsimile. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the date set forth herein. STORESONLINE.COM INC., a California corporation NETGATEWAY, INC., a Nevada corporation By /s/ DONALD M. CORLISS, JR. -------------------------- Name: Donald M. Corliss, Jr. ---------------------- Its: ---------------------- Address for Notices: 300 Oceangate, Suite 500 Long Beach, CA 90802 (562) 308-0010 /s/ GINA OLENIO ---------------- Name of Reseller By /s/ FrontierVision ------------------- Name: Gina Olenio ----------- Its: ----------- Address: Telephone: Facsimile: E-mail Address: URL: Technical Contact: Telephone: E-mail Address: ADDENDUM Name of Reseller FRONTIERVISION Description of Resellers --------------- Business: Type Entity: CABLE TELEVISION PROGRAMMING SERVICES ------------------- ---------------------------------------------- Date of Agreement: JULY 27, 1999 --------------- ---------------------------------------------- STANDARD FEATURE SET Catalogs - - International Currencies - - Weight Units: Kilograms, Grams, Pounds and Ounces - - Sending Methods: Internet, Fax/Mail and Phone - - Faxed Internet Orders - - Payment Methods: VISA, MasterCard, American Express, Discover and JCB - - Custom Payment Methods - - Standard Shipping Destinations: United States, Canadian Provinces and World Countries - - Custom Shipping Destinations - - Multiple Shipping Methods and Regions - - Shipping Formula Variables: Quantities Ordered, Weight and Subtotal - - Shipping Formula Functions: Minimum, Maximum and Range - - Custom Tax Rates - - Custom Survey Questions: Long Answer, Short Answer, Multiple Choice and Single Choice - - Custom Subtotal Items: Fixed, User Enterable and Optional - - Users and Passwords Categories - - Unlimited Categories - - Full Description - - Image Products - - Base Item Number - - Description: Full Description - - Image - - Price - - Sale Price - - Unique Sale Price for Each Catalogue - - Non-Taxable Products - - Weight - - Category - - Multiple Products Options (i.e., Color, Size) - - Multiple Product Option Items (i.e., Red, Green, Blue) - - Custom Item Numbers based on Options - - Custom Pricing based on Options - - Option Conflicts - - Quantity Discounts - - Links to Related Items - - Links to other URL's - - Preview product pages - - Generated HTML code to copy and paste into existing sites - - Graphical pricing for easy integration into existing sites - - Import product information from a test-delimited file Orders - - E-mail notification of new orders - - Order Status - - Waybill Number and Shipper - - Custom Notes - - End-user Order Tracking - - Export Order Information StoresOnline Point of Sale - - Multiple Merchant Numbers - - Automatic authorization of orders sent over the Internet - - Manual Authorizations - - Credits - - Automatic Settlement - - Freeze and Thaw Transactions StoresOnline Hosting - - Home Page Builder - - Unique URL - - 10 MB Free - - Virtual hosting of existing domain name - - Professionally designed templates - - Customize your own templates StoresOnline Search - - Full Text Search Engine - - Full Word Listing - - Phrase or Boolean Searching - - Re-index your site anytime - - Integrate into existing sites PRICING FOR STOREFRONT SERVICES Up to 100 Products: Monthly Base Wholesale Price: [**REDACTED**] One Time Store Set-up Fee: Up to 100 products Base Wholesale Price: $[**REDACTED**] Additional products may be preordered at [**REDACTED**] per product Scanning [**REDACTED**] per image (First 10 images [**REDACTED**]) Optional store ????? / custom design work billed to merchant at standard StoresOnline rates. As a launch incentive, Reseller shall receive up to [**REDACTED**] Free Store Set-Ups and the monthly wholesale price of [**REDACTED**] shall be waived for 60 days following the Set-up of each Free Store for each new Frontiervision market launching the service. STANDARD LICENSE AGREEMENT TERMS 1. LICENSE. This license allows you to use any software associated with the provision of the Services. 2. RESTRICTIONS. You may not use, copy, modify or transfer the program, or any copy, modification or merged portion, in whole or in part, except as expressly provided for in this License. If you transfer possession of any copy, modification or merged portion of the program to another party, your License is automatically terminated. 3. TERM. The License is effective until terminated. You may terminate it at any other time by notifying Reseller of your intent to do so. The License will also terminate upon the occurrence of certain events set forth elsewhere in this Agreement. Upon such termination, you agree to destroy the program together with all copies, modifications and merged portions in any form. 4. EXPORT LAW ASSURANCES. You agree that neither the program nor any direct product thereof is being or will be shipped, transferred or re-exported, directly or indirectly, into any country prohibited by the US Export Administration Act and the regulations thereunder or will be used for any purpose prohibited by the Act. 5. LIMITED WARRANTY. The program is provided "as is" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of merchantability and fitness for a particular purpose. The full text of the warranty is provided in the user manual. 6. LIMITED LIABILITY. In no event will StoresOnline be liable to you for any damages, including any lost profits, lost savings or other incidental or consequential damages arising out of the use or inability to use such program even if StoresOnline has been advised of the possibility of such damages, or for any claim by any other party. 7. GENERAL. If you are a Government end-user, this License conveys only "Restricted Rights" and in its use, disclosure and duplication are subject to Federal Acquisition Regulations, subparagraph (c) (1) (11) 52.227-7013. (See U.S. Government End-User provisions in manual.) This License will be construed under the laws of the State of California, except for that body of law dealing with conflicts of law. If any provision of the License shall be held by a court of competent jurisdiction to be contrary to law, that provision shall be enforced to the maximum extent permissible, and the remaining provisions of this License shall remain in full force and effect. MALL DEVELOPMENT SERVICES AND PRICES 1. DEVELOPMENT. StoresOnline shall design and develop one on-line Mall, with links to local market malls, to be branded around Reseller's name, brand and image. The Mall will be capable of cataloguing stores independently or in conjunction with all other Malls developed hereunder, as well as other malls which belong to the StoresOnline mall network. 2. PRICING. The initial on-line Mall development fees shall be waived. EX-10.53 17 EXHIBIT 10.53 EXHIBIT 10.53 NETGATEWAY INTERNET SERVICES AGREEMENT THIS INTERNET SERVICES AGREEMENT (this "AGREEMENT") is made effective as of the Acceptance Date set forth in the initial Internet Services Order Form (October 25, 1999) accepted by Netgateway, a Nevada corporation ("NETGATEWAY"), and the subscriber identified below ("SUBSCRIBER"). PARTIES: SUBSCRIBER NAME: BERGEN BRUNSWIG DRUG COMPANY ADDRESS: 4000 METROPOLITAN DRIVE ORANGE, CA 92868 PHONE: (714) 385-4000 FAX: (714) 704-7034 NETGATEWAY, INC. 300 Oceangate, Suite 500 Long Beach, CA 90802 Phone: (562) 308-0010 Fax: (562) 308-0021 1. INTERNET SERVICES. 1.1 INTERNET SERVICES. Subject to the terms and conditions of this Agreement, during the term of this Agreement, Netgateway will, through the Netgateway Internet Commerce Center-TM- ("NETGATEWAY ICC") provide to Subscriber the services described in the Internet Services Order Form(s) (the "INTERNET SERVICES ORDER FORM(S)") accepted by Netgateway, or substantially similar services if such substantially similar services would provide Subscriber with substantially similar benefits (the "INTERNET SERVICES"). All such Internet Services Order Forms will be incorporated herein by this reference as of the Acceptance Date set forth in each such form. Netgateway and Subscriber have mutually agreed or will mutually agree upon the detailed final specifications (the "SPECIFICATIONS") for the Internet Services and the development timeline therefor, all of which are or will be set forth on the attached initial Internet Services Order Form, marked Exhibit "A", and by this reference made a part hereof. 1.2 AVAILABILITY. Internet Services will be available to Subscriber for inquiry and order entry functions twenty-four (24) hours a day, seven (7) days a week. Netgateway reserves the right upon reasonable notice to Subscriber to limit or curtail holiday or weekend availability when necessary for system upgrades, adjustments, maintenance, or other operational considerations. 1.3 ENHANCEMENTS. General enhancements to existing Internet Services provided hereunder, as well as new features that Netgateway incorporates into its standard commerce processing system, regardless of whether they are initiated by Netgateway or developed at the request of Subscriber or other subscribers, shall be made available to Subscriber at no additional cost. Any new features or services that may be developed by Netgateway during the term of this Agreement that Netgateway intends to offer to Subscriber on a limited or optional basis may, at Netgateway' option, and subject to Subscriber's acceptance, be made available to Subscriber at Netgateway's then-current prices for such new features or services. Enhancements to existing Internet Services requested by Subscriber that benefit only Subscriber at the time such enhancements are put into service shall be billed to Subscriber at Netgateway's standard rates for programming. All enhancements to the Internet Services, and any new features or services introduced by Netgateway, shall remain the exclusive proprietary property of Netgateway. 1.4 TRAINING. At no cost to Subscriber, Netgateway shall provide such onsite training and other assistance, as Netgateway deems necessary to assure that Subscriber's personnel are able to make effective use of the Internet Services. On-site training shall take place at such times and places as are mutually agreeable to the parties hereto. 1.5 SUBSCRIBER DATA. (a) SUBSCRIBER DATA. Subscriber will timely supply Netgateway, in a form acceptable to Netgateway, with all data necessary for Netgateway to perform the ongoing services to be provided hereunder. It is the sole responsibility of Subscriber to insure the completeness and accuracy of such data. (b) CONFIDENTIALITY. Netgateway acknowledges that all records, data, files and other input material relating to Subscriber are confidential and shall take reasonable steps to protect the confidentiality of such records, data, files and other materials. Netgateway will provide reasonable security safeguards to limit access to Subscriber's files and records to Subscriber and other authorized parties. (c) PROTECTION OF SUBSCRIBER FILES. Netgateway will take reasonable steps to protect against the loss or alteration of Subscriber's files, records and data retained by Netgateway, but Subscriber recognizes that events beyond the control of Netgateway may cause such loss or alteration. Netgateway will maintain backup file(s) containing all the data, files and records related to Subscriber. Subscriber's file(s), records and data shall, at no cost to Subscriber, be released to Subscriber on an occurrence that renders Netgateway unable to perform hereunder, or upon the termination of this Agreement as provided herein. (d) OWNERSHIP OF DATA. Netgateway acknowledges that all records, data, files and other input material relating to Subscriber and its customers, including derivative material prepared from such material, are the exclusive property of the Subscriber. It is the parties' intention that all rights in such derivative material will vest in Subscriber as works made for hire for inclusion in Subscriber's collective works under copyright laws of the United States. If, for any reason, such works are not considered works made for hire, Netgateway hereby grants and assigns to Subscriber its rights in such derivative material. The foregoing is not applicable to the parties' rights to design layouts, templates, displays and icons and/or functional, technical and system specifications created by Netgateway for Subscriber, which rights will shall be the property of Netgateway, and which may be licensed by Netgateway to Subscriber pursuant to the terms of Section 10(b) hereof. 2. FEES AND BILLING. 2.1 FEES. Subscriber will pay all fees and amounts in accordance with the Internet Service Order Forms. 2.2 BILLING COMMENCEMENT. Billing for Internet Services indicated in the Internet Services Order Forms, other than the Initial Development Fee, if any, shall commence on the "OPERATIONAL DATE" indicated in the Internet Services Order Forms. In the event that Subscriber orders other Internet Services in addition to those listed in the initial Internet Services Order Form, billing for such services shall commence on the date Netgateway first provides such additional Internet Services to Subscriber or as otherwise agreed to by Subscriber and Netgateway in the applicable Internet Services Order Form. 2.3 BILLING AND PAYMENT TERMS. Netgateway shall invoice Subscriber monthly in advance of the provision of Internet Commerce Services, and payment of such fees will be due within thirty (30) days of the date of each Netgateway invoice. All payments will be made in U.S. dollars. Late payments hereunder will accrue interest at a rate of one and one-half percent (1 1/2%) per month, or the highest rate allowed by applicable law, whichever is lower. If in its reasonable judgment Netgateway determines that Subscriber is not creditworthy or is otherwise not financially secure, Netgateway may, upon prior written notice to Subscriber, modify the payment terms to require full payment before the provision of Internet Services or other assurances to secure Subscriber's payment obligations hereunder. 2.4 TAXES, UTILITIES AND EXCLUSIONS. All charges shall be exclusive of any federal, state or local sales, use, excise, AD VALOREM or personal property taxes levied, or any fines, forfeitures or penalties assessed in connection therewith, as a result of this Agreement or the installation or use of Internet Services hereunder. Any such taxes, which may be applicable will be paid by Subscriber or by Netgateway for Subscriber's account, in which case Subscriber shall reimburse Netgateway for amounts so paid. Netgateway will provide traffic reports to Subscriber with respect to burstible capacity. Netgateway is not responsible for providing connectivity to Subscriber's offices. 3. SUBSCRIBER'S OBLIGATIONS. 3.1 COMPLIANCE WITH LAW AND RULES AND REGULATIONS. Subscriber agrees that Subscriber will comply at all times with all applicable laws and regulations and Netgateway's general rules and regulations relating to its provision of Internet Services, currently included herein as Section 10, which may be updated and provided by Netgateway to Subscriber from time to time ("RULES AND REGULATIONS"). Subscriber acknowledges that Netgateway exercises no control whatsoever over the content contained in or passing through the Subscriber's web site or mall ("INTERNET CENTERS"), and that it is the sole responsibility of Subscriber to ensure that the information it transmits and receives complies with all applicable laws and regulations. 3.2 ACCESS AND SECURITY. Subscriber will be fully responsible for any charges, costs, expenses (other than those included in the Internet Services), and third party claims that may result from its use of, or access to, the Netgateway Internet Commerce Center-TM-, including, but not limited to, any unauthorized use or any access devices provided by Netgateway hereunder. 3.3 NO COMPETITIVE SERVICES. Subscriber may not at any time permit any Internet Services to be utilized for the provision of any services that compete with any Netgateway services, without Netgateway's prior written consent. 3.4 INSURANCE. (a) MINIMUM SUBSCRIBER LEVELS. Subscriber will keep in full force and effect during the term of this Agreement: (i) comprehensive general liability insurance in an amount not less than $5 million per occurrence for bodily injury and property damage; (ii) employer's liability insurance in an amount not less than $1 million per occurrence; and PAGE 1 (iii) workers' compensation insurance in an amount not less than that required by applicable law. Subscriber also agrees that it will be solely responsible for ensuring that its agents (including contractors and subcontractors) maintain, other insurance at levels no less than those required by applicable law and customary in Subscriber's industries. (b) MINIMUM NETGATEWAY LEVELS. Netgateway will keep in full force and effect during the term of this Agreement: (i) comprehensive general liability insurance in an amount not less than $1 million per occurrence for bodily injury and property damage; (ii) employer's liability insurance in an amount not less than $1 million per occurrence; and (iii) workers' compensation insurance in an amount not less than that required by applicable law. Netgateway also agrees that it will be solely responsible for ensuring that its agents (including contractors and subcontractors) maintain, other insurance at levels no less than those required by applicable law and customary in Netgateway's industry. (c) CERTIFICATES OF INSURANCE. Prior to the Operational Date, each party will furnish to the other certificates of insurance which evidence the minimum levels of insurance set forth above, and will notify the other party in writing in the event that any such insurance policies are cancelled. (d) NAMING PARTIES AS ADDITIONAL INSUREDS. Each of Subscriber and Netgateway agrees that prior to the Operational Date, it will cause its insurance provider(s) to name the other party as an additional insured and notify the other party in writing as of the effective date thereof. 4. CONFIDENTIAL INFORMATION. 4.1 CONFIDENTIAL INFORMATION. Each party acknowledges that it will have access to certain confidential information of the other party concerning the other party's business, plans, customers, technology, and products, including the terms and conditions of this Agreement ("CONFIDENTIAL INFORMATION"). Confidential Information will include, but not be limited to, each party's proprietary software and customer information. Each party agrees that it will not use in any way, for its own account or the account of any third party, except as expressly permitted by this Agreement, nor disclose to any third party (except as required by law or to that party's attorneys, accountants and other advisors as reasonably necessary), any of the other party's Confidential Information and will take reasonable precautions to protect the confidentiality of such information. 4.2 EXCEPTIONS. Information will not be deemed Confidential Information hereunder if such information: (i) is known to the receiving party prior to receipt from the disclosing party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (ii) becomes known (independently of disclosure by the disclosing party) to the receiving party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (iii) becomes publicly known or otherwise ceases to be secret or confidential, except through a breach of this Agreement by the receiving party; or (iv) is independently developed by the receiving party. 5. REPRESENTATIONS AND WARRANTIES. 5.1 WARRANTIES BY SUBSCRIBER. (a) SUBSCRIBER'S BUSINESS. Subscriber represents and warrants that: (i) Subscriber's services, products, materials, data, and information used by Subscriber in connection with this Agreement as well as Subscriber's and its permitted customers' and users' use of the eCommerce Services (collectively, "SUBSCRIBER'S BUSINESS") does not as of the Operational Date, and will not during the term of this Agreement, operate in any manner that would violate any applicable law or regulation. (ii) Subscriber owns or has the right to use all material contained in the Subscriber's web site, including all text, graphics, sound, video, programming, scripts, and applets; and (iii) The use, reproduction, distribution, and transmission of the web site, or any information or materials contained in it does not (A) infringe or misappropriate any copyright, patent, trademark, trade secret, or any other proprietary rights of a third party; or (B) constitute false advertising, unfair competition, defamation, an invasion of privacy, or violate a right of publicity. (b) RULES AND REGULATIONS. Subscriber has read the Rules and Regulations (Section 10 below) and represents and warrants that Subscriber and Subscriber's Business are currently in full compliance with the Rules and Regulations, and will remain so at all times during the term of this Agreement. (c) BREACH OF WARRANTIES. In the event of any breach, or reasonably anticipated breach, of any of the foregoing warranties, in addition to any other remedies available at law or in equity, Netgateway will have the right immediately in Netgateway's reasonable discretion, to suspend any related eCommerce Services if deemed reasonably necessary by Netgateway to prevent any harm to Netgateway or its business. 5.2 WARRANTIES AND DISCLAIMERS BY NETGATEWAY. (a) NO OTHER WARRANTY. THE INTERNET SERVICES ARE PROVIDED ON AN "AS IS" BASIS, AND SUBSCRIBER'S USE OF THE INTERNET SERVICES IS AT ITS OWN RISK. NETGATEWAY DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL OTHER EXPRESS AND/OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT AND TITLE, AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE. NETGATEWAY DOES NOT WARRANT THAT THE ECOMMERCE SERVICES WILL BE UNINTERRUPTED, ERROR-FREE OR COMPLETELY SECURE. (b) DISCLAIMER OF ACTIONS CAUSED BY AND/OR UNDER THE CONTROL OF THIRD PARTIES. NETGATEWAY DOES NOT AND CANNOT CONTROL THE FLOW OF DATA TO OR FROM NETGATEWAY'S INTERNET COMMERCE CENTER AND OTHER PORTIONS OF THE INTERNET. SUCH FLOW DEPENDS IN LARGE PART ON THE PERFORMANCE OF INTERNET SERVICES PROVIDED OR CONTROLLED BY THIRD PARTIES. AT TIMES, ACTIONS OR INACTIONS CAUSED BY THESE THIRD PARTIES CAN PRODUCE SITUATIONS IN WHICH NETGATEWAY'S SUBSCRIBERS' CONNECTIONS TO THE INTERNET (OR PORTIONS THEREOF) MAY BE IMPAIRED OR DISRUPTED. ALTHOUGH NETGATEWAY WILL USE COMMERCIALLY REASONABLE EFFORTS TO TAKE ACTIONS IT DEEMS APPROPRIATE TO REMEDY AND AVOID SUCH EVENTS, NETGATEWAY CANNOT GUARANTEE THAT THEY WILL NOT OCCUR. ACCORDINGLY, NETGATEWAY DISCLAIMS ANY AND ALL LIABILITY RESULTING FROM OR RELATED TO SUCH EVENTS. 6. LIMITATIONS OF LIABILITY. 6.1 EXCLUSIONS. EXCEPT AS OTHER WISE PROVIDED HEREIN, IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER OR TO ANY THIRD PARTY FOR ANY CLAIMS ARISING OUT OF OR RELATED TO THIS AGREEMENT, SUBSCRIBER'S BUSINESS OR OTHERWISE, AND ANY LOST REVENUE, LOST PROFITS, REPLACEMENT GOODS, LOSS OF TECHNOLOGY, RIGHTS OR SERVICES, SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, LOSS OF DATA, OR INTERRUPTION OR LOSS OF USE OF SERVICE OR SUBSCRIBER'S BUSINESS, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE. 6.2 LIMITATIONS. NETGATEWAY, ITS AFFILIATES, EMPLOYEES, OFFICERS AND AGENTS SHALL NOT BE LIABLE TO SUBSCRIBER OR TO ANY THIRD PARTY FOR ANY LOSS OR DAMAGE, WHETHER DIRECT OR INDIRECT, RESULTING FROM DELAYS OR INTERRUPTIONS OF SERVICE DUE TO MECHANICAL ELECTRICAL OR WIRE DEFECTS OR DIFFICULTIES, STORMS, STRIKES, WALK-OUTS, EQUIPMENT OR SYSTEMS FAILURES, OR OTHER CAUSES (EXCEPT FINANCIAL) OVER WHICH NETGATEWAY, ITS AFFILIATES, EMPLOYEES, OFFICERS, OR AGENTS AGAINST WHOM LIABILITY IS SOUGHT, HAVE NO REASONABLE CONTROL, OR FOR LOSS OR DAMAGE, DIRECT OR INDIRECT, RESULTING FROM INACCURACIES, ERRONEOUS STATEMENTS, ERRORS OF FACTS, OMISSIONS, OR ERRORS IN THE TRANSMISSION OR DELIVERY OF INTERNET SERVICES, OR ANY DATA PROVIDED AS A PART OF THE INTERNET SERVICES PURSUANT TO THIS AGREEMENT, EXCEPT TO THE EXTENT CAUSED BY THE NEGLIGENCE OR WILFUL MISCONDUCT OF NETGATEWAY. 6.3 MAXIMUM LIABILITY. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NETGATEWAY'S MAXIMUM AGGREGATE LIABILITY TO SUBSCRIBER RELATED TO OR IN CONNECTION WITH THIS AGREEMENT WILL BE LIMITED TO THE TOTAL AMOUNT PAID BY SUBSCRIBER TO NETGATEWAY HEREUNDER. 6.4 TIME FOR MAKING CLAIMS. ANY SUIT OR ACTION BY SUBSCRIBER AGAINST NETGATEWAY, ITS AFFILIATES, OFFICERS, DIRECTORS, AGENTS EMPLOYEES, SUCCESSORS OR ASSIGNS, BASED UPON ANY ACT OR OMISSION ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR SERVICES PERFORMED HEREUNDER, OR ANY ALLEGED BREACH THEREOF, SHALL BE COMMENCED WITHIN TWO (2) YEARS OF THE OCCURRENCE GIVING RISE TO SUCH CLAIM OR BE FOREVER BARRED. THIS PROVISION DOES NOT MODIFY OR OTHERWISE AFFECT THE LIMITATION OF NETGATEWAY'S LIABILITY SET FORTH IN SECTION 6 OR ELSEWHERE IN THIS AGREEMENT. 6.5 SUBSCRIBER'S INSURANCE. [Reserved.] 6.6 BASIS OF THE BARGAIN; FAILURE OF ESSENTIAL PURPOSE. Subscriber acknowledges that Netgateway has set its prices and entered into this Agreement in reliance upon the limitations of liability and the disclaimers of warranties and damages set forth herein, and that the same form an essential basis of the bargain between the parties. The parties agree that the limitations and exclusions of liability and disclaimers specified in this Agreement will survive and apply even if found to have failed of their essential purpose. 7. INDEMNIFICATION. 7.1 NETGATEWAY'S INDEMNIFICATION OF SUBSCRIBER. (a) Netgateway will indemnify, defend and hold Subscriber, its directors, officers, affiliates, employees and agents harmless from and against any and all third party claims for any costs, liabilities, losses and expenses (including, but not limited to, reasonable attorneys' fees) resulting from or arising out of Netgateway's breach of any provision of this Agreement. (b) Netgateway will indemnify, defend and hold Subscriber harmless from and against any and all costs, liabilities, losses and expenses (including, but not limited to, reasonable attorneys' fees) (collectively, "LOSSES") resulting from any claim, suit, action, or proceeding (each, an "ACTION") brought against Subscriber alleging the infringement of any third party registered U.S. copyright or issued U.S. patent resulting from the provision of Internet Services pursuant to this Agreement (but excluding any infringement contributorily caused by Subscriber's Business). PAGE 2 7.2 SUBSCRIBER'S INDEMNIFICATION OF NETGATEWAY. Subscriber will indemnify, defend and hold Netgateway, its affiliates and customers harmless from and against any and all Losses resulting from or arising out of Subscriber's breach of any provision of this Agreement or any Action brought against Netgateway, its directors, employees, affiliates or Subscribers alleging with respect to the Subscriber's Business: (a) infringement or misappropriation of any intellectual property rights; (b) defamation, libel, slander, obscenity, pornography or violation of the rights of privacy or publicity; (c) spamming, or any other offensive, harassing or illegal conduct or violation of the Rules and Regulations; or (d) any violation of any other applicable law or regulation. 7.3 NOTICE. Each party will provide the other party, prompt written notice of the existence of any such event of which it becomes aware, and an opportunity to participate in the defense thereof. 8. DISPUTE RESOLUTION. 8.1 PROCEDURES. It is the intent of the parties that all disputes arising under this Agreement be resolved expeditiously, amicably, and at the level within each party's organization that is most knowledgeable about the disputed issue. The parties understand and agree that the procedures outlined in this Paragraph 8 are not intended to supplant the routine handling of inquiries and complaints through informal contact with customer service representatives or other designated personnel of the parties. Accordingly, for purposes of the procedures set forth in this paragraph, a "DISPUTE" is a disagreement that the parties have been unable to resolve by the normal and routine channels ordinarily used for such matters. Before any dispute arising under this Agreement, other than as provided in paragraph 8.5 below, may be submitted to arbitration, the parties shall first follow the informal and escalating procedures set forth below. (a) The complaining party's representative will notify the other party's representative in writing of the dispute, and the non-complaining party will exercise good faith efforts to resolve the matter as expeditiously as possible. (b) In the event that such matter remains unresolved thirty (30) days after the delivery of the complainant party's written notice, a senior representative of each party shall meet or confer within ten (10) business days of a request for such a meeting or conference by either party to resolve such matter. (c) In the event that the meeting or conference specified in (b) above does not resolve such matter, the senior officer of each party shall meet or confer within ten (10) business days of the request for such a meeting or conference by either party to discuss and agree upon a mutually satisfactory resolution of such matter. (d) If the parties are unable to reach a resolution of the dispute after following the above procedure, or if either party fails to participate when requested, the parties may proceed in accordance with paragraph 8.2 below. 8.2 BINDING ARBITRATION. Except as provided in paragraph 8.5 below, any dispute arising under this Agreement shall, after utilizing the procedures in paragraph 8.1, be resolved by final and biding arbitration in Los Angeles, California, before a single arbitrator selected by, and in accordance with the rules of commercial arbitration of, the American Arbitration Association or as otherwise provided in Paragraph 11.6. Each party shall bear its own costs in the arbitration, including attorneys' fees, and each party shall bear one-half of the cost of the arbitrator. Arbitrators will be bound to apply California law, and where applicable, federal statutory law. The parties will be afforded a reasonable period of time to conduct discovery prior to the arbitration. A court reporter will be present at all arbitration proceedings in order to transcribe them and such transcription will be the official record of such proceedings for purposes of any judicial enforcement or review proceeding. 8.3 ARBITRATOR'S AUTHORITY. The arbitrator shall have the authority to award such damages as are not prohibited by this Agreement and may, in addition and in a proper case, declare rights and order specific performance, but only in accordance with the terms of this Agreement. The arbitrators' decision will specify the basis for any award and the types of damages awarded. 8.4 ENFORCEMENT OF ARBITRATOR'S AWARD. Any Party may apply to a court of general jurisdiction to enforce a arbitrator's award, and if enforcement is ordered, the party against which the order is issued shall pay the costs and expenses of the other party in obtaining such order, including responsible attorneys' fees. 8.5 ACCESS TO COURTS. Notwithstanding the provisions of paragraphs 8.1 and 8.2 above, any action by Netgateway to enforce its rights under Paragraph 10.3 of this Agreement or to enjoin any infringement of the same by Subscriber, an action to compel compliance with Paragraph 4 or this Paragraph 8 or an action seeking injunctive or equitable relief may be commenced in the state of federal courts of Los Angeles, California, and each party consents to personal jurisdiction and venue in such courts for such actions. 9. TERM AND TERMINATION. 9.1 TERM. This Agreement will be effective on the date first above written and will terminate three (3) years ("INITIAL TERM") from the date Subscriber begins processing live data through Netgateway ICC-TM-, unless earlier terminated according to the provisions of this Section 9. This Agreement will automatically renew for an additional term of one (1) year unless a party hereto elects not to so renew and notifies the other party in writing of such election by a date, which is six (6) months prior to the lapse of the Initial Term. 9.2 TERMINATION. Either party will have the right to terminate this Agreement if: (i) the other party breaches any material term or condition of this Agreement and fails to cure such breach within ten (10) days after receipt of written notice of the same, except in the case of failure to pay fees, which must be cured within five (5) days after receipt of written notice, in which case the non- breaching party may terminate this Agreement by giving the breaching party ninety (90) days' written notice of its intent to terminate; (ii) the other party becomes the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors; or (iii) the other party becomes the subject of an involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within sixty (60) days of filing. 9.3 NO LIABILITY FOR TERMINATION. Neither party will be liable to the other for any termination or expiration of this Agreement in accordance with its terms. 9.4 EFFECT OF TERMINATION. Upon the effective date of expiration or termination of this Agreement: (a) Netgateway will immediately cease providing the Internet Services; (b) any and all payment obligations of Subscriber under this Agreement will become due immediately; and (c) within thirty (30) days after such expiration or termination, each party will return all Confidential Information of the other party in its possession at the time of expiration or termination and will not make or retain any copies of such Confidential Information except as required to comply with any applicable legal or accounting record keeping requirement. 9.5 SURVIVAL. The following provisions will survive any expiration or termination of the Agreement: Sections 2, 3, 4, 5, 6, 7, 8, 9 and 10. 10. USE OF INTERNET SERVICES - RULES AND REGULATIONS. 10.1 PROPRIETARY SYSTEMS. (a) Except as set forth in Section 10.1(b) hereof, Subscriber acknowledges that the software systems utilized by Netgateway in the provision of Internet Services hereunder, including all enhancements thereto, and all screens and formats used in connection therewith are the exclusive proprietary property of Netgateway, and Subscriber shall not publish, disclose, display, provide access to or otherwise make available any Netgateway software or products thereof, or any screens, formats, reports or printouts used, provided, produced or supplied from or in connection therewith, to any person or entity other than an employee of Subscriber without the prior written consent of, and on terms acceptable to Netgateway, which consent shall not be unreasonably withheld; provided, however, that Subscriber may disclose to a governmental or regulatory agency or to customers of Subscriber any information expressly prepared and acknowledge in writing by Netgateway as having been prepared for disclosure to such governmental or regulatory agency or to such customers. Neither party shall disclose Subscriber's use of Internet Services in any advertising or promotional materials without the prior written consent to such use, and approval of such materials, by the other. (b) If Netgateway's business operations shall cease for any reason other than in connection with a sale of all or substantially all of its capital stock or assets, then solely with respect to the Internet Services that are being provided to Subscriber pursuant to the eCommerce Services Order Form No. 1 (the "Licensed Services"), and at any time with respect to the license granted under Paragraph 1.5(d), Netgateway hereby grants to Subscriber, subject to the terms and conditions of this Agreement, the non-exclusive, non-transferable right to use and to permit third parties to use in connection with providing Internet services in perpetuity the software systems related to the Licensed Services, including all software source for compiled programs, all stored procedures and application files and databases and all documentation and relevant explanations relating thereto. 10.2 USE OF SERVICES PERSONAL TO SUBSCRIBER. [RESERVED.] 10.3 SURVIVAL OF OBLIGATIONS. The obligations of this paragraph 10 shall survive termination of this Agreement. Subscriber understands that the unauthorized publication or disclosure of any of Netgateway' software or copies thereof, or the unauthorized use of Internet Services would cause irreparable harm to Netgateway for which there is no adequate remedy at law. Subscriber therefore agrees that in the event of such unauthorized disclosure or use, Netgateway may, at its discretion and at Subscriber's expense, terminate this Agreement, obtain immediate injunctive relief in a court of competent jurisdiction, or take such other steps as it deems necessary to protect its rights. If Netgateway, in its reasonable, good faith judgement, determines that there is a material risk of such unauthorized disclosure or use, it may demand immediate assurances, satisfactory to Netgateway, that there will be no such unauthorized disclosure or use. In the absence of such assurance, Netgateway may immediately terminate this Agreement and take such other steps as it deems necessary. The rights of Netgateway hereunder are in addition to any other remedies provided by law. 11. MISCELLANEOUS PROVISIONS. 11.1 FORCE MAJEURE. Except for the obligation to pay money, neither party will be liable for any failure or delay in its performance under this Agreement due to any cause beyond its reasonable control, including act of war, acts of God, earthquake, flood, embargo, riot, sabotage, labor shortage or dispute, governmental act or failure of the PAGE 3 Internet, provided that the delayed party: (a) gives the other party prompt notice of such cause; and (b) uses its reasonable commercial efforts to correct promptly such failure or delay in performance. 11.2 NO LEASE. This Agreement is a services agreement and is not intended to and will not constitute a lease of any real or personal property. Subscriber acknowledges and agrees that (i) it has been granted only a license to use Netgateway's ICC and any equipment provided by Netgateway in accordance with this Agreement, (ii) Subscriber has not been granted any real property interest in the Netgateway's ICC, and (iii) Subscriber has no rights as a tenant or otherwise under any real property or landlord/tenant laws, regulations, or ordinances. 11.3 MARKETING. Subscriber agrees that Netgateway may refer to Subscriber by trade name, and may briefly describe Subscriber's Business, in Netgateway's marketing materials and web site. 11.4 GOVERNMENT REGULATIONS. Subscriber will not export, re-export, transfer, or make available, whether directly or indirectly, any regulated item or information to anyone outside the U.S. in connection with this Agreement without first complying with all export control laws and regulations which may be imposed by the U.S. Government and any country or organization of nations within whose jurisdiction Subscriber operates or does business. 11.5 NON-SOLICITATION. During the period beginning on the Operational Data and ending on the first anniversary of the termination or expiration of this Agreement in accordance with its terms, each of Subscriber and Netgateway agrees that it will not, and will ensure that its affiliates do not, directly or indirectly, solicit or attempt to solicit for employment any persons employed by the other party to this Agreement during such period. 11.6 GOVERNING LAW; SEVERABILITY; WAIVER. This Agreement is made under and will be governed by and construed in accordance with the laws of the State of California (without regard to that body of law controlling conflicts of law) and specifically excluding from application to this Agreement that law known as the United Nations Convention on the International Sale of Goods. In the event any provision of this Agreement is held by a tribunal of competent jurisdiction to be contrary to the law, the remaining provisions of this Agreement will remain in full force and effect. The waiver of any breach or default of this Agreement will not constitute a waiver of any subsequent breach or default, and will not act to amend or negate the rights of the waiving party. 11.7 ASSIGNMENT; NOTICES. Neither Netgateway nor Subscriber may assign its rights or delegate its duties under this Agreement, either in whole or in part, without prior written consent, except that either party may assign this Agreement in whole as part of a corporate reorganization, consolidation, merger or sale of substantially all of its assets. Any attempted assignment or delegation without such consent will be void. This Agreement shall be binding and inure to the benefit of each party's successors and permitted assigns. Any notice or communication required or permitted to be given hereunder may be delivered by hand, deposited with an overnight courier, sent by confirmed facsimile, or mailed by registered or certified mail, return receipt requested, postage prepaid, in each case to the address of the receiving party indicated on the signature page hereof, or at such other address as may hereafter be furnished in writing by either party hereto to the other. Such notice will be deemed to have been given as of the date it is delivered, mailed or sent, whichever is earlier. 11.8 RELATIONSHIP OF PARTIES. Netgateway and Subscriber are independent contractors and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise or agency between Netgateway and Subscriber. Neither Netgateway nor Subscriber will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent, except as otherwise expressly provided herein. 11.9 SUBCONTRACTORS. The provision of Internet Services hereunder shall be completed by Netgateway. To the extent that Netgateway seeks to subcontract all or a portion of the Internet Services to a third party provider, such subcontractor shall be approved by Subscriber, which approval shall not be unreasonable withheld. 11.10 NO CONFLICT. To the best of Netgateway's knowledge, there exists no actual or potential conflict between Netgateway and Subscriber, in connection with their business or the Internet Services. To the extent that such an actual or potential conflict shall arise during the term of this Agreement, Netgateway shall immediately inform Subscriber of such actual or potential conflict in writing. To the best of Subscriber's knowledge, there exists no actual or potential conflict between Netgateway and Subscriber, in connection with their business or the Internet Services. To the extent that such an actual or potential conflict shall arise during the term of this Agreement, Subscriber shall immediately inform Netgateway of such actual or potential conflict in writing. 11.11 EQUAL EMPLOYMENT OPPORTUNITY. Netgateway is an equal opportunity employer. Netgateway has and shall continue to comply with all applicable federal and state laws prohibiting discrimination in all aspects of its business, including the provision of the Internet Services hereunder. 11.12 ENTIRE AGREEMENT; AMENDMENTS; COUNTERPARTS. This Agreement, including all documents incorporated herein by reference, constitutes the complete and exclusive agreement between the parties with respect to the subject matter hereof, and supersedes and replaces any and all prior or contemporaneous discussions, negotiations, understandings and agreements, written and oral, regarding such subject matter. This Agreement shall not be amended or modified except by a written agreement signed by the parties hereto; provided, however, that Subscriber may amend the general scope of the Internet Services to be provided hereunder upon thirty (30) days' written notice to Netgateway; and provided further, that in the event of such amendment, the parties shall make such adjustment to price and/or delivery as the parties shall deem necessary and appropriate. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. Subscriber's and Netgateway's authorized representatives have read the foregoing and all documents incorporated therein and agree and accept such terms effective as of the date first above written. SUBSCRIBER Signature: Signature: ------------------------- -------------------------- Print Name: Print Name: ------------------------- ------------------------ Title: ------------------------- NETGATEWAY Signature: Signature: ------------------------- -------------------------- Print Name: Print Name: ------------------------- ------------------------ Title: ------------------------- PAGE 4 EXHIBIT "A" INTERNET SERVICES ORDER FORM NETGATEWAY INTERNET SERVICES ORDER FORM CUSTOMER NAME: BERGEN BRUNSWIG CORPORATION FORM DATE: OCTOBER 25, 1999 FORM NO.: 001 GENERAL INFORMATION: 1. By submitting this Internet Services Order Form ("FORM") to Netgateway, Subscriber hereby places an order for the Internet Services described herein pursuant to the terms and conditions of the Internet Services Agreement between Subscriber and Netgateway (the "IS AGREEMENT"). 2. Billing, with the exception of Development Fees, will commence on the Operational Date set forth below or the date that Subscriber first begins to process transactions through the Netgateway Internet Commerce Center, whichever occurs first. 3. Netgateway will provide the Internet Services pursuant to the terms and conditions of the IS Agreement, which incorporates this Form. The terms of this Form supersede, and by accepting this Form Netgateway hereby rejects, any conflicting or additional terms provided by Subscriber in connection with Netgateway's provision of the Internet Services. If there is a conflict between this Form and any other Form provided by Subscriber and accepted by Netgateway, the Form with the latest date will control. 4. Netgateway will not be bound by or required to provide Internet Services pursuant to this Form or the IS Agreement until each is signed by an authorized representative of Netgateway. SUBSCRIBER HAS READ, UNDERSTANDS AND HEREBY SUBMITS THIS ORDER. Submitted By: Operational Date: ---------------------------- --------------- (AUTHORIZED SIGNATURE) Print Name: ---------------------------- Title: ---------------------------- NETGATEWAY ACCEPTANCE Date: - ------------------------------------------- ---------------------------- (AUTHORIZED SIGNATURE: NETGATEWAY INTERNET SERVICES ORDER FORM CUSTOMER NAME: BERGEN BRUNSWIG CORPORATION FORM DATE: OCTOBER 25, 1999 FORM NO.: 001 TERMS: 1. DEVELOPMENT FEES. The development fees for the Internet Services shall be as set forth on the Statement of Work and Project Specifications annexed hereto as Schedule 1, and shall be payable in accordance with the terms set forth thereon. 2. PROJECT SPECIFICATIONS. A Statement of Work and Project Specifications for the Internet Services is annexed hereto as Schedule 1 and incorporated herein by this reference. 3. ADDITIONAL FEES. Additional fees, including without limitation, pharmacy set-up fees, supported content changes and domain name registrations shall be as set forth on Schedule 1 hereto. 4. DEVELOPMENT TIMELINE. Development of the Internet Services shall be completed on or before December 31, 1999. Netgateway intends to begin deploying on-line pharmacies immediately after December 31, 1999. 5. PUBLICITY. Both parties are public companies and can be affected by the manner or content of public announcements concerning this relationship. Neither party shall make any public announcement of this Agreement or of the relationship they have entered into without the prior written consent of the other. SUBSCRIBER'S INITIALS ________ SCHEDULE 1 STATEMENT OF WORK AND PROJECT SPECIFICATIONS PROJECT APPROACH AND SCOPE In support of the myGNP.com objectives, an approach to activities, deliverables and timing has been developed. We intend to execute this project in as rapid a manner as possible in order to launch as many pharmacy sites as possible before the end of the year. The following timeline depicts major MYGNP.COM project activities with appropriate milestones requiring client written approval: [GRAPH] The above timeline is very aggressive and will need to be carefully managed. In order for the project to be completed on time and within budget, Netgateway will require Bergen Brunswig's support and cooperation to prevent and resolve issues. SCOPE Requirements for the project were detailed in the RFP. These requirements are listed below with any additional commentary. IF ADDITIONAL REQUIREMENTS ARE UNCOVERED Schedule 1 - Statement of work and project specification page 2 DURING THE FIRST SET OF ACTIVITIES, THEY WILL BE SCOPED AND BILLED IN ACCORDANCE TO THEIR COMPLEXITY. ADDITIONALLY, THEIR IMPACT ON THE TIMELINE WILL BE COMMUNICATED BROADLY. As defined, myGNP.com is a standalone system requiring no real-time interfaces to production systems. The system will however be linked to other Bergen Brunswig applications using http protocols. IF INTEGRATION POINTS ARE UNCOVERED, THEY WILL BE SCOPED AND BILLED IN ACCORDANCE TO THEIR COMPLEXITY. We will provide burstible at 1 megabit per second capacity bandwidth for Bergen Brunswig's website at no additional charge. Should Bergen Brunswig need additional bandwidth, we will provide or make arrangements to provide such additional bandwidth to Bergen Brunswig at our cost and invoice Bergen Brunswig for such excess bandwidth and/or use beyond a 1 megabit per second burstible line. We will provide traffic reports to Bergen Brunswig with respect to burstible capacity.
- --------------------------------------------------------------------------------------------------------------------- OBJECTIVE 1 COMMENTS - --------------------------------------------------------------------------------------------------------------------- Year 2000 compliant. We have recently completed a review of all third party development tools and have certified that all tools are Y2K compliant - --------------------------------------------------------------------------------------------------------------------- Provision for non-technical, complete, and This documentation will be developed specifically for Bergen easy-to-read user documentation. (Welcome Brunswig. Production costs will be an additional cost. Package) - --------------------------------------------------------------------------------------------------------------------- Provision for on-line user documentation. Standard feature of our underlying technology platform - --------------------------------------------------------------------------------------------------------------------- Ability to limit a store's participation and OPTION 1: Pharmacist will have no direct access to the system. functions based on the option for which they Changes will be made by Bergen Brunswig and submitted to Netgateway have opted. OPTION 2: Pharmacists will be able to change taglines, update images, and choose from 3 or more program spots OPTION 3: Pharmacists will have all functionality defined in Option 2, access National Coupons, add additional content pages, and link to the prescription system Core store information is only changeable by Bergen Brunswig. Change requests will go to Netgateway daily. - --------------------------------------------------------------------------------------------------------------------- Ability to format new pharmacy web sites with Will be available via links and forms text and graphics from a secure site. - --------------------------------------------------------------------------------------------------------------------- Dynamic update ability for National Specials All option 3 stores will be propagated with National Specials including coupons and product images. - --------------------------------------------------------------------------------------------------------------------- Dynamic update ability for store specials Fully supported including coupons and product images. - --------------------------------------------------------------------------------------------------------------------- Schedule 1 - Statement of work and project specification page 3 - --------------------------------------------------------------------------------------------------------------------- Ability to produce standard reports on web Each option 2 and 3 store will be able to retrieve site statistic site activity. including page views for each individual page General admin system will report at the aggregate level all activity, billing information and change activity (including monies paid to Netgateway directly) - --------------------------------------------------------------------------------------------------------------------- Password security at store, and GO levels. Implement division #, account #, and NABP # and password - --------------------------------------------------------------------------------------------------------------------- Provide links to other sites (health content, Part of the template system E-commerce, etc.) based on store specific Online advertising management system will be covered in a separate options. proposal - --------------------------------------------------------------------------------------------------------------------- Provide capability for consumers to send Via fill out forms that can be faxed or emailed to pharmacies Email to the stores, based on store specific options. - --------------------------------------------------------------------------------------------------------------------- Dynamic update ability for free form pages Yes we can do the work in house at $75/hour. including text and graphics, based on store We will work with Bergen to develop alternative costing packages specific options. All work will be billed directly to the pharmacy. This billing will be reported to Bergen monthly. - --------------------------------------------------------------------------------------------------------------------- Provide maintenance for the entire site on a Schedule and costing will be determined by Netgateway and Bergen minimum schedule of twice per year to keep Brunswig the site looking fresh and the navigation current. - --------------------------------------------------------------------------------------------------------------------- Ability to link to the store locator function Fully supported using the store addresses provided and maintained by Bergen Brunswig. - --------------------------------------------------------------------------------------------------------------------- Link store specific URL's to the store's home Fully supported page on request. - ---------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------- OBJECTIVE 2 COMMENTS - --------------------------------------------------------------------------------------------------------------------- Provide administrative support to GNP Fully operational design staff in house. Initial setup is part of pharmacies for initial development of web "set-up fees." Additional support will be charged at $75/hour and pages. billed to the pharmacy directly - --------------------------------------------------------------------------------------------------------------------- Provide ongoing support to GNP pharmacies for Fully supported maintenance of existing web pages. - --------------------------------------------------------------------------------------------------------------------- Ability to accept requests via Email, phone, Fully supported fax or letter. - --------------------------------------------------------------------------------------------------------------------- Ability to turn around maintenance requests Netgateway has a dedicated department to building stores. within 48 hours. Reasonable SLA will be determined at a later date. - --------------------------------------------------------------------------------------------------------------------- Schedule 1 - Statement of work and project specification page 4 - --------------------------------------------------------------------------------------------------------------------- Provide confirmation of update to GNP store Processes, procedures and service level agreements will be with a copy to GNP department in Orange. established - ---------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------- OBJECTIVE 3 COMMENTS - --------------------------------------------------------------------------------------------------------------------- Provide 24 by 7 availability for the GNP web Owners will be able to make changes or updates at anytime site. - --------------------------------------------------------------------------------------------------------------------- Provide 24 by 7 help line support for Bergen Optional private branding can also be provided by our wholly owned Brunswig technical departments. (First line centers. Pricing will be determined based on specific requirements. customer support will be provided by the Bergen Brunswig Help Desk.) - ---------------------------------------------------------------------------------------------------------------------
PROJECT FEES: Per our original response to your RFP, we agree to a fixed bid development cost of $205,000. This price includes hosting the application, building all site functionality contained within the RFP, developing the administration components, and setting up a support account with our call center. Direct project expenses will be billed at cost. ADDITIONAL COSTS ARE PROVIDED IN THE TABLE BELOW:
- --------------------------------------------------------------------------------------------------------------------- Cost Component One Time Cost Recurring cost - --------------------------------------------------------------------------------------------------------------------- Option 2 Pharmacy Setup $180 $15.95/Month - --------------------------------------------------------------------------------------------------------------------- Option 3 Pharmacy Setup $230 $34.95/Month - --------------------------------------------------------------------------------------------------------------------- Netgateway supported content changes $75/hr - --------------------------------------------------------------------------------------------------------------------- Personalized domain name $120/store* registration - --------------------------------------------------------------------------------------------------------------------- Training in addition to 3 days $500/day provided - --------------------------------------------------------------------------------------------------------------------- Private call center branding TBD TBD - --------------------------------------------------------------------------------------------------------------------- Outsourced system administration TBD TBD - ---------------------------------------------------------------------------------------------------------------------
* this price includes a 2-year Internic Registration Fee As agreed in our meeting on October 5th, 1999, payment terms regarding all development fees will be as follows: 1. DEVELOPMENT FEES*:
- --------------------------------------------------------------------------------------------------------------------- % of work Complete Corresponding $ Remitted $ Milestone Target Date amount - --------------------------------------------------------------------------------------------------------------------- Schedule 1 - Statement of work and project specification page 5 - --------------------------------------------------------------------------------------------------------------------- 15% $30,750 $15,375 Signoff - Functional November 15, 1999 Design - --------------------------------------------------------------------------------------------------------------------- 30% $61,500 $30,750 Signoff - System Design November 26, 1999 - --------------------------------------------------------------------------------------------------------------------- 40% $82,000 $41,000 User Acceptance Test December 13, 1999 - --------------------------------------------------------------------------------------------------------------------- 15% $30,750 $15,375 + Pharmacies Loaded December 17, 1999 - --------------------------------------------------------------------------------------------------------------------- $102,500 Post Implementation December 31, 1999 Review - --------------------------------------------------------------------------------------------------------------------- Total $102,500 $205,000 - ------------------------------------------------------------
* if additional scope is added, it will be billed on a separate payment schedule 2. STORE SETUP AND MONTHLY FEES: Will be billed monthly for completed work. 3. DIRECT EXPENSES Normal project expenses (e.g. travel, copying fees, etc) will be billed at cost and receipts will be provided upon request. Pharmacy changes will be billed directly to the requesting pharmacy. Monthly billing activity reports will be provided to Bergen Brunswig. EX-23.1 18 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Netgateway, Inc: We consent to the use of our reports included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. Our report dated August 23, 1999, contains an explanatory paragraph that states that the Company's planned principal operations have commenced, however, minimal revenues have been generated. Additionally, the Company continues to incur net losses and has continuing financial needs. These matters raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Los Angeles, California November 10, 1999 EX-23.2 19 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS The Members Infobahn Technologies, LLC (dba Digital Genesis): We consent to the use of our reports included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. /s/ KPMG LLP Los Angeles, California November 10, 1999 EX-23.3 20 EXHIBIT 23.3 EXHIBIT 23.3 November 10, 1999 To Spartan Multimedia, Inc. Dear Sirs: RE: NETGATEWAY, INC. I refer to the prospectus of the above company with the filing no. of 333-79751 relating to the sale and issue of Netgateway common stock. I consent to the use in the above mentioned prospectus of my report dated April 19, 1999 to the shareholders of Spartan Multimedia Inc. on the following financial statements: Balance sheet as at August 31, 1998: Statements of earnings and retained earnings and changes in financial position for the period ended August 31, 1998. I consent to reference to my firm under the heading "Experts" in the prospectus. I report that I have read the prospectus and have no reason to believe that there are any misrepresentations in the information contained therein that is derived from the financial statements upon which I have reported or that is within my knowledge as a result of my audit of such financial statements. /s/ Allan Hogenson - ---------------- Allan Hogenson CHARTERED ACCOUNTANT EX-23.4 21 EXHIBIT 23.4 EXHIBIT 23.4 The Board of Directors Video Calling Card, Inc. We consent to the inclusion of our reports dated January 21, 1998 and September 12, 1997, with respect to the balance sheets of Video Calling Card, Inc. (a development stage company) as of December 31, 1997 and 1996, December 31, 1996 and 1995, respectively, and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1997, 1996 and the period from inception (April 13, 1995) through December 31, 1995, which reports appear in the Form S-1 of Netgateway, reference number: 333-79751 and reference to our firm under the heading "Experts" in the prospectus. /s/ Ted A. Madsen Certified Public Accountant Dated: November 10, 1999 -----END PRIVACY-ENHANCED MESSAGE-----