-----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, OOQK6oHx8Mhk6c7allAczWI8u/hK6eyz0bZwaCVgE5x+CI29UgJ1/EEw+yK2pldv lRMnPvq3YLONeBwr5RiMxA== 0001047469-99-022771.txt : 19990625 0001047469-99-022771.hdr.sgml : 19990625 ACCESSION NUMBER: 0001047469-99-022771 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19990601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETGATEWAY INC CENTRAL INDEX KEY: 0001075736 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 870591719 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-79751 FILM NUMBER: 99638751 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 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NETGATEWAY, INC. (Exact name of Registrant as specified in its charter) DELAWARE 7373 87-0591719 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
------------------------ NETGATEWAY, INC. 300 OCEANGATE 5TH FLOOR LONG BEACH, CALIFORNIA 90802 (Address of principal place of business) ------------------------------ KEITH D. FREADHOFF Chairman of the Board of Directors DONALD M. CORLISS, JR. President DAVID BASSETT-PARKINS Chief Financial Officer and Chief Operating Officer Netgateway, Inc. 300 Oceangate 5th Floor Long Beach, California 90802 (562)308 0010/(562)308 0021 (Telecopy) KDFREADHOFF@NETGATEWAY.NET DMCORLISS@NETGATEWAY.NET DBPARKINS@NETGATEWAY.NET (Name, address, and telephone number of principal executive offices and agent for service) ------------------------------ COPIES TO: ROBERT STEVEN BROWN, ESQ. STEPHEN WEISS, ESQ. KIM ELLEN LEFKOWITZ, ESQ. LINDA MINTZ, ESQ. Brock Silverstein LLC Greenberg Traurig One Citicorp Center Met Life Building 153 East 53rd Street 200 Park Avenue New York, New York 10022-4611 New York, New York 10166 (212) 371-2000 / (212) 371-5500 (Telecopy) (212) 801-9200 / (212) 801-6400 (Telecopy) RBROWN@BROCKFIRM.COM WEISSS@GTLAW.COM KLEFKOWITZ@BROCKFIRM.COM MINTZL@GTLAW.COM
------------------------------ 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 2,875,000 Common Stock, par value, $.001 per share.......... shares(2) $14.625 $42,046,875 $11,689.04 250,000 Representative's Warrants......................... warrants(3) $0.001 $250.00 $0.07 Common Stock, par value, $.001 per share, issuable upon exercise of the Representative's Warrants........................................ 250,000 shares(4) $17.55 $4,387,500 $1,219.73 Total............................................. -- -- $46,434,625 $12,908.84
(1) Estimated solely for purposes of calculation of the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended. (2) Includes 375,000 shares of the Common Stock, par value $.001 per share, of the Registrant, which the underwriters have the option to purchase solely to cover over allotments, if any. (3) To be acquired by the Representative. (4) Issuable upon exercise of the Representative's Warrants. SUBJECT TO COMPLETION, DATED JUNE 1, 1999 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS 2,500,000 SHARES NETGATEWAY COMMON STOCK ------------------ We are a provider of turn-key electronic commerce, or eCommerce, services designed to enable clients to extend their business to the Internet. Our Internet Commerce Center provides our clients with a variety of features ranging from simple Internet storefronts to complex systems designed to enable them to conduct business-to-business eCommerce. Our common stock currently trades on the OTC Bulletin Board under the symbol "NGWY." We have applied to have the common stock quoted on the Nasdaq National Market under the symbol "NGWY." On May 25, 1999, the last reported sale price of our common stock on the OTC Bulletin Board was $14.625. INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS. --------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PER SHARE TOTAL Public Offering Price................................. $ $ Underwriting Discounts and Commissions................ $ $ Proceeds, before expenses, to Netgateway.............. $ $
The underwriters may, under certain circumstances, for 45 days after the date of this prospectus, purchase up to an additional 375,000 shares of common stock from us at the public offering price, less underwriting discounts and commissions. ------------------------ [LOGO] THE DATE OF THIS PROSPECTUS IS , 1999 INSIDE FRONT COVER PICTURES OR DIAGRAMS OF THE "HUB AND SPOKE" MODEL OF THE INTERNET COMMERCE CENTER, BRIEF SUMMARY OF SERVICES PROVIDED, AND IDENTIFICATION OF CERTAIN OF THE PUBLICLY RECOGNIZABLE CLIENTS OF NETGATEWAY. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary......................................................................................... 3 Risk Factors............................................................................................... 10 Use of Proceeds............................................................................................ 23 Dividend Policy............................................................................................ 24 Capitalization............................................................................................. 25 Dilution................................................................................................... 26 Selected Financial Data.................................................................................... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 28 Business................................................................................................... 32 Management................................................................................................. 43 Principal Stockholders..................................................................................... 50 Related Party Transactions................................................................................. 52 Description of Securities.................................................................................. 54 Shares Eligible for Future Sale............................................................................ 56 Underwriting............................................................................................... 57 Legal Matters.............................................................................................. 59 Experts.................................................................................................... 59 Additional Information..................................................................................... 59 Index to Financial Statements.............................................................................. F-1
PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND OUR BUSINESS AND THIS OFFERING FULLY, YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THE RELATED NOTES BEGINNING ON PAGE F-1. WHEN WE REFER IN THIS PROSPECTUS TO "NETGATEWAY," "THE COMPANY," "WE," "OUR," AND "US," WE MEAN NETGATEWAY, INC., A DELAWARE CORPORATION, TOGETHER WITH OUR SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS. NETGATEWAY OUR BUSINESS We provide turn-key eCommerce services designed to enable clients to extend their business to the Internet to conduct commercial transactions between business enterprises. The hub of our eCommerce solution is our proprietary Internet Commerce Center, which consists of the hardware, proprietary and licensed software, and the related technical services necessary for our clients to transact eCommerce. We also design and build custom interfaces, or SPOKES, to connect business clients to the ICC. Our ICC is a scalable solution which allows clients to select services ranging from a simple Internet storefront advertising their products and taking orders through e-mail to a highly complex system of secure client extranets allowing vendors to interact and transact business-to-business eCommerce with one or more specific customers. OUR SERVICES Our services currently include - Web site development and design, including the development of electronic storefronts for the conduct of eCommerce on the Internet, - Internet mall and secure client extranet development and design, - transaction processing and clearing through standardized order formats and commercial terms, - data warehousing and transaction reporting, - customer support services, and - connectivity solutions. We believe that our eCommerce services have a number of advantages over other currently available alternatives, in that - Our customers do not invest in hardware, software, and staffing, but rather connect to our existing Netgateway infrastructure, which we believe is a highly economic method to obtain and maintain an eCommerce presence. - Clients with existing Web sites can maintain their investment in the creation of that presence while seamlessly adding eCommerce capabilities. - Because our infrastructure permits scalable eCommerce solutions, we can offer incremental services to our clients through the activation of additional proprietary software modules in response to client growth or commercial requirements quickly and cost-effectively. - Because our proprietary and other software resides only on our servers, we can offer clients easy access to additional functionality on a test or temporary basis in order to permit our clients to try new or additional services with their respective customers on their Web sites, and can provide real time "best of breed" updates, patches, and fixes to software with no additional effort by the client. 3 OUR MARKET IDC, an industry research firm, forecasts that the market for Internet and eCommerce services worldwide will grow from $4.6 billion in 1997 to $43.7 billion by 2002. Forrester Research, another technology industry research firm, estimates that the market for Internet and eCommerce services will grow from $5.4 billion in 1998 to $32.7 billion by 2002. These projections represent a compound annual growth rate of more than 55% over these periods. As a result of the recent growth of eCommerce and its acceptance as a mainstream medium for commercial transactions, businesses are investing in the strategic use of Internet solutions to transform their core business and technology strategies. This, in turn, has created a significant and growing demand for third-party Internet professional services and has resulted in a proliferation of companies offering specialized solutions, such as connectivity, transaction reporting, security, and Web site design to business customers. This specialization has resulted in a fragmented market that often requires the business customer to seek solutions from a number of different providers using differing, or even contradictory, strategies, models, and designs. SIGNIFICANT RECENT DEVELOPMENTS XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS: XMCM), an eCommerce Web portal with over 7.8 million members. Under the terms of the agreement, we are the sole provider of a private labeled version of XOOM.com's Web storefront building and hosting products and services and are the sole provider of eCommerce processing services to XOOM.com's eCommerce customers. In addition, XOOM.com is reselling our eCommerce services and we are developing XOOM.com's Internet mall located at WWW.XOOMMEMBERSTORES.COM. CB RICHARD ELLIS. In March 1999, we entered into an electronic commerce services agreement with CB Richard Ellis (NYSE: CBG), one of the world's largest building management and real estate services companies with over 12,000 properties under management and over $1 billion of revenue during 1998. Under this agreement, we have been engaged to develop, manage, and service CB Richard Ellis' eCommerce mall and client extranet. This Web site is designed to permit CB Richard Ellis personnel to conduct all of their corporate materials purchasing, including computers and building and maintenance supplies, and all global facilities management by means of the Internet. In addition, CB Richard Ellis will be able to offer to the tenants in the buildings they manage volume purchasing services on the Internet for a variety of office products and supplies. In connection with this agreement, we issued to CB Richard Ellis warrants exercisable for up to 550,000 shares of our common stock at an exercise price of $11.00 per share, which warrants are earned and vest upon the achievement by CB Richard Ellis of designated eCommerce volume milestones through our ICC. GATEWAY. In March 1999, we entered into an agreement with Gateway Inc. (NYSE: GTW), a manufacturer of personal and business computers and service provider. Under the terms of this agreement, we will offer our Internet storefront services package, including Web site design, hosting, and transaction processing services, to Gateway customers. OTHER RESELLERS. We have also recently entered into reseller agreements, pursuant to which the reseller offers our services to their customers, with FedPage (www.fedpage.com), a division of Federal Business Council, Inc., the industry leader in the production of on site federal technology shows, Ayrix Technologies, OKC Webshopper, Country Wide Net, Hill Country Network, Encom Industries, Epicycle Business Solutions, Integrated Systems Solutions, and Looks Creative Designing Arts. OUR HISTORY AND STRUCTURE We were incorporated under the laws of the State of Nevada on April 13, 1995 under the name Video Calling Card, Inc. and on June 2, 1998 acquired all of the outstanding capital stock of 4 Netgateway, a Nevada corporation (formerly, eClassroom.com) in exchange for 5,900,000 shares of our common stock. Simultaneously with this acquisition, we acquired the assets of Infobahn, LLC d/b/a Digital Genesis, an eCommerce applications developer, in exchange for 400,000 shares of common stock. As of January 15, 1999, through our subsidiary StoresOnline.com, Ltd., an Alberta, Canada corporation, we acquired Spartan Multimedia, Inc., an Internet storefront developer and storefront service provider, in exchange for 371,429 shares of Class B common stock of StoresOnline.com, which shares are exchangeable for an aggregate of 371,429 shares of our common stock. We were reincorporated under the laws of the State of Delaware prior to the date of this prospectus. ------------------------ UNLESS OTHERWISE STATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO - THE REPRESENTATIVE'S WARRANTS OR THEIR EXERCISE, - THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR ITS EXERCISE, - UP TO 6,000,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE EXERCISE OF OPTIONS WHICH MAY BE GRANTED PURSUANT TO OUR EXISTING STOCK OPTION PLANS, OF WHICH, OPTIONS EXERCISABLE FOR AN AGGREGATE OF 3,771,921 SHARES OF COMMON STOCK HAVE BEEN GRANTED PRIOR TO THE DATE OF THIS PROSPECTUS AND - UP TO AN AGGREGATE OF 2,663,779 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF OUTSTANDING WARRANTS OR UPON THE CONVERSION OF CONVERTIBLE SECURITIES OR UPON THE EXCHANGE OF EXCHANGEABLE SECURITIES. UNLESS OTHERWISE STATED, THE INFORMATION IN THIS PROSPECTUS REFLECTS - ANY STOCK SPLITS TO DATE, AND - OUR SPRING 1999 PRIVATE PLACEMENTS OF SECURITIES. PLEASE SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES." 5 THE OFFERING Common stock offered............ 2,500,000 shares Common stock outstanding immediately prior to this offering...................... 9,843,404 shares(1) Common stock outstanding immediately following this offering...................... 12,343,404 shares(1) Use of proceeds................. We intend to use the net proceeds of this offering to repay indebtedness, to increase marketing and research and development, to acquire additional capital equipment, and for general corporate and working capital purposes, including possible acquisitions of, and investment in, businesses and technologies. See "Use of Proceeds." Proposed Nasdaq National Market trading symbol................ NGWY OTC Bulletin Board trading symbol........................ NGWY Risk factors.................... An investment in our common stock is highly speculative and involves a high degree of risk. You should read the "Risk Factors" section beginning on page 10.
- ------------------------ (1) Does not reflect the representative's warrants or their exercise, the underwriters' over-allotment option or its exercise, up to 6,000,000 shares of common stock reserved for issuance upon the exercise of options which may be granted pursuant to our existing stock option plans, of which, options exercisable for an aggregate of 3,771,921 shares of common stock have been granted prior to the date of this prospectus, up to an aggregate of 2,207,350 shares of common stock issuable upon the exercise of outstanding warrants, and up to 456,429 shares of common stock issuable upon the conversion of convertible securities or upon the exchange of exchangeable securities. 6 SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following selected statements of operations data for the period from our inception on March 4, 1998 through June 30, 1998 and the selected balance sheet data as of June 30, 1998 are derived from our consolidated financial statements and related notes included elsewhere in this prospectus audited by KPMG LLP, our independent auditors. The statement of operations data for the nine months ended March 31, 1999 and the selected balance sheet data at March 31, 1999 are derived from the unaudited consolidated financial statements included elsewhere in this prospectus, and in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operation. The results of operations for any interim period are not necessarily to be expected for the entire year. The selected statement of operations data for the period from our inception on March 4, 1998 through June 30, 1998 includes the results of operations of Digital Genesis from June 2, 1998, its date of acquisition, and the pro forma selected statement of operations data for such period includes the operations of Digital Genesis and Spartan Multimedia, Inc. as if they were acquired by us on March 4, 1998. The selected statement of operations data for the nine months ended March 31, 1999 includes the results of operations of Spartan Multimedia, Inc. from January 15, 1999, its date of acquisition, and the pro forma selected statement of operations data for such period includes the operations of Spartan Multimedia, Inc. as if it was acquired by us on July 1, 1998. The pro forma balance sheet data as of March 31, 1999 is adjusted to reflect the net proceeds of $2,779,000 from our spring 1999 private placements of securities, and the pro forma, as adjusted balance sheet data as of March 31, 1999 is adjusted to reflect the following: - the net proceeds of $2,779,000 from our spring 1999 private placements of securities, and - the receipt of estimated net proceeds of approximately $32.0 million from the sale of our common stock at the assumed public offering price of $14.625 per share and the initial application of these proceeds as described under "Use of Proceeds." The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. 7
PERIOD FROM MARCH 4, 1998 CUMULATIVE PERIOD (INCEPTION) THROUGH NINE MONTHS ENDED FROM MARCH 4, 1998 JUNE 30, 1998 MARCH 31, 1999 (INCEPTION) ---------------------------- ---------------------------- THROUGH MARCH 31, ACTUAL PRO FORMA ACTUAL PRO FORMA 1999 ------------- ------------- ------------- ------------- ------------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues........................ $ 2,800 $ 90,993 $ 198,759 $ 202,200 $ 201,559 Total operating expenses........ 4,555,459 4,690,167 6,983,543 7,152,164 11,539,002 Interest expense................ 19,277 19,277 313,744 313,744 333,021 Net loss before extraordinary item.......................... (4,571,936) (4,618,451) (7,153,257 (1) (7,318,437 (1) (11,725,193)(1) Loss before extraordinary item per weighted average common share outstanding (basic and diluted)...................... (0.84) (0.81) (0.83 (1) (0.85 (1) (1.54)(1) Weighted average common shares outstanding (basic and diluted)...................... 5,416,242 5,721,327 8,659,851 8,659,851 7,628,895
MARCH 31, 1999 --------------------------------------- ACTUAL PRO FORMA PRO FORMA, JUNE 30, 1998 ------------ ----------- AS ADJUSTED ------------- (UNAUDITED) (UNAUDITED) ------------ (UNAUDITED) BALANCE SHEET DATA: Current assets........................................... $ 371,467 $ 325,928 2,579,730 32,510,355 Total assets............................................. 871,552 1,731,497 4,139,146 33,915,925 Working capital (deficit)................................ (1,959,776) (972,516) 2,824 31,471,911 Long-term debt........................................... 367,892 -- -- -- Stockholders' equity (deficit)........................... (1,827,583) 433,053 1,562,240 32,877,481
- ------------------------ (1) Before extraordinary gain of $1,853,232 relating to extinguishment of indebtedness of $.21, $.21, and $.24 per weighted-average common shares outstanding during the nine months ended March 31, 1999 actual, pro forma and the cumulative period from March 4, 1998 (inception) through March 31, 1999, respectively. 8 CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS This prospectus contains forward-looking statements and information relating to Netgateway. We intend to identify forward-looking statements in this prospectus by using words such as "believes," "intends," "expects," "may," "will," "should," "plan," "projected," "contemplates," "anticipates," "estimates," "predicts," "potential," "continue," or similar terminology. These statements are based on our beliefs as well as assumptions we made using information currently available to us. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. Some, but not all, of the factors that may cause such a difference include those which we discuss in the Risk Factors section of this prospectus beginning on page 10. 9 RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A HIGH DEGREE OF RISK, AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD A COMPLETE LOSS. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH THE OTHER INFORMATION IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. RISKS SPECIFIC TO NETGATEWAY WE HAVE HAD A DEFICIT IN STOCKHOLDERS' EQUITY AND WE ANTICIPATE FUTURE LOSSES We have incurred substantial losses since our inception and we anticipate continuing to incur substantial losses for the foreseeable future. As of June 30, 1998 and as of March 31, 1999, we had a working capital (deficit) of $(1,959,776), and $(972,516), respectively, and stockholders' equity (deficit) of $(1,827,583) at June 30, 1998. See our financial statements and the related notes. We generated revenues of $2,800 during the period from our inception on March 4, 1998 through June 30, 1998, and $198,759 for the nine months ended March 31, 1999. For the period from our inception on March 4, 1998 through June 30, 1998 and the nine months ended March 31, 1999, we incurred net losses of $(4,571,936), and $(5,300,025), respectively. We may never achieve profitability. In addition, during the period from our inception on March 4, 1998 through June 30, 1998 and during the nine months ended March 31, 1999, we recorded negative cash flows from operations of $(253,119) and $(2,982,683), respectively. To succeed, we must leverage our existing relationships and develop new relationships to substantially increase our revenue derived from more comprehensive eCommerce services. We have expended and will continue to expend significant resources to build our internal systems, to grow our infrastructure, to add additional participating companies and employees, and to establish access to the ICC platform for participating companies, directly and as resellers. These development expenses must be incurred well in advance of the recognition of revenue. Under generally accepted accounting principles we recognize revenue only upon completion of a customer transaction through the ICC. This requires the realization of expenses in advance of associated related revenue. Our performance will depend in large part upon our ability to estimate accurately these resource requirements and the revenues generated by customers engaging in the transactions through the ICC. To date, the volume of our transactions has been limited, and, accordingly, the revenue recognized has been minimal. We intend to continue to invest heavily in acquisitions, infrastructure, development, and marketing. As result, we may not be able to achieve or sustain profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--In General." BECAUSE WE HAVE BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME, THERE IS LIMITED INFORMATION UPON WHICH INVESTORS CAN EVALUATE OUR BUSINESS We began our operations in March 1998 and are currently a development stage company. Although we have recently entered into agreements with eCommerce resellers providing us with access to more than eight million potential clients, we are currently providing eCommerce transaction processing services to only approximately 550 clients. Consequently, we have a very limited operating history upon which you may base an evaluation of us and determine our prospects for achieving our intended business objectives. We are prone to all of the risks inherent to the establishment of any new business venture. You should consider the likelihood of our future success to be highly speculative in light of our limited operating history, as well as the limited resources, problems, expenses, risks, and complications frequently encountered by similarly situated companies in the early stages of development, particularly companies in new and rapidly evolving markets, such as eCommerce. To address these risks, we must, among other things: - maintain and increase our client base; - implement and successfully execute our business and marketing strategy; 10 - continue to develop and upgrade our technology and transaction processing systems; - continually update and improve our service offerings and features; - provide superior customer service; - respond to industry and competitive developments; and - attract, retain, and motivate qualified personnel. We may not be successful in addressing these risks. If we are unable to do so, our business prospects, financial condition, and results of operations would be materially and adversely affected. FLUCTUATIONS IN OUR OPERATING RESULTS MAY AFFECT OUR STOCK PRICE As a result of our limited operating history and the emerging nature of the markets in which we compete, we believe that quarter-to-quarter comparisons of results of operations for preceding quarters are not necessarily meaningful. You should not rely on the results of any interim as an indication of our future performance. Additionally, quarterly results of operations may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. If in some future quarter, whether as a result of such a fluctuation or otherwise, our results of operations fall below the expectations of securities analysts and investors, the trading price of our common stock would likely be materially and adversely affected. Factors that may cause our quarterly results to fluctuate include, among others: - our ability to retain existing clients and eCommerce resellers, to attract new clients and eCommerce resellers at a steady rate, and to maintain client satisfaction; - the announcement or introduction of new services and products by us and our competitors; - price competition or higher prices in the industry; - pricing of hardware and software required for the transaction of eCommerce; - the level of use of the Internet and online services and the rate of market acceptance of the Internet and other online services for transacting commerce; - our ability to upgrade and develop our systems and infrastructure in a timely and effective manner; - our ability to attract, train, and retain skilled management, strategic, technical, and creative professionals; - technical difficulties, system downtime, or Internet brownouts; - the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations, and infrastructure; - unanticipated technical, legal, and regulatory difficulties with respect to use of the Internet; and - general economic conditions and economic conditions specific to Internet technology usage and eCommerce. OUR MARKETING STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT IN SUCCESS To date, we have conducted limited marketing efforts directly and have relied substantially upon the marketing efforts of the eCommerce resellers with which we have contracts or strategic relationships. All of our marketing efforts, including our marketing through these resellers, have been largely untested in the marketplace, and may not result in sales of our products and services. To 11 penetrate our market, we will have to exert significant efforts to create awareness of, and demand for, our products and services. With respect to our marketing efforts conducted directly, we intend to begin to do the following after this offering: - advertise on the Internet; - advertise on television in selected markets; - direct mail; - targeted e-mail campaigns; - advertise in technology, financial, and business publications having wide readership; and - expand our sales staff. With respect to our marketing efforts conducted through resellers, we intend to do the following after this offering: - create a group within our sales staff trained to assist resellers in marketing our products and services to their customers, members, employees, and relationships; - create branded promotional brochures and other marketing materials to inform resellers and their constituencies as to our products and services, and - advertise in trade publications in strategic industries. Our failure to further develop our marketing capabilities and successfully market our products and services could have a material adverse effect on our business, prospects, financial condition, and results of operations. See "Use of Proceeds," "Business--Business Strategy," "Business--Clients and Strategic Relationships," and "Business--Sales and Marketing." IF WE ARE UNABLE TO UPGRADE OUR INFRASTRUCTURE, WE MAY BE UNABLE TO PROCESS AN INCREASED VOLUME OF TRANSACTIONS A key element of our strategy is to provide on a cost-effective basis the means by which our clients can generate a high volume of eCommerce transactions through the use of our hardware and software infrastructure. If the volume of transactions through our infrastructure substantially increases, we will have to expand and further upgrade our technology, transaction processing systems, and hardware and software infrastructure to accommodate these increases or our systems may suffer from unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality and speed of transaction processing, and delays in reporting accurate financial information. We may be unable to effectively upgrade and expand our hardware and software infrastructure or to integrate smoothly any newly developed or purchased software modules with our existing systems, which could have a material adverse effect on our business, prospects, financial condition, and results of operations. See "Business--Business Strategy." WE RELY ON INTERNALLY DEVELOPED SYSTEMS WHICH ARE INEFFICIENT, WHICH MAY PUT US AT A COMPETITIVE DISADVANTAGE We use an internally developed system for a portion of our transaction processing software, as well as the software required to interconnect our clients' systems with our own. As we developed these systems primarily to support the rapid growth of transaction submission volume and customer service and less on traditional accounts, control, and reporting, these systems are inefficient and require a significant amount of manual effort to prepare information for financial and accounting reporting. Such manual effort is time-consuming and costly and may place us at a competitive disadvantage when compared to competitors with more efficient systems. We intend to upgrade and expand our claims 12 processing systems and to integrate newly-developed and purchased modules with our existing systems in order to improve the efficiency of our reporting methods and support increased transaction volume, although we are unable to predict whether these upgrades will improve our competitive position when compared to our competitors. BECAUSE OUR MANAGEMENT WILL CONTINUE TO OWN A SUBSTANTIAL PORTION OF OUR COMMON STOCK FOLLOWING THIS OFFERING, INVESTORS MAY HAVE DIFFICULTY OBTAINING THE NECESSARY STOCKHOLDER VOTE FOR CORPORATE ACTIONS CONTRARY TO THE WISHES OF MANAGEMENT Upon the completion of this offering, our current directors and executive officers will together beneficially own approximately 3,085,000, or 24.6%, of the outstanding shares of common stock, or approximately 23.9% of the outstanding shares of our common stock if the underwriters' over-allotment option is exercised in full. As a result of their stock ownership: - our current officers and directors will have the ability to substantially influence the outcome of all matters on which stockholders are entitled to vote, including the elections of our directors and the approval of significant corporate transactions; and - investors in this offering may have difficulty obtaining the necessary stockholder vote required for corporate actions contrary to the wishes of management. See "Principal Stockholders." INVESTORS WILL NOT HAVE THE OPPORTUNITY TO REVIEW THE SPECIFIC ALLOCATION OF THE NET PROCEEDS OF THIS OFFERING IN DECIDING WHETHER TO PURCHASE OUR COMMON STOCK Management has allocated approximately $27.2 million, or 85.0%, of the estimated net proceeds of this offering for marketing, research and development, and general corporate and working capital purposes. Accordingly, our management will have broad discretion in how to use the net proceeds of this offering, and investors will not have the opportunity to review the specific allocation of our net proceeds in deciding whether to purchase our common stock. The failure of management to apply these proceeds effectively could have a material adverse affect on our business, prospects, financial condition, and results of operation. See "Use of Proceeds." OUR MANAGEMENT TEAM IS RELATIVELY NEW, WE HAVE LIMITED SENIOR MANAGEMENT RESOURCES, AND WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL; WE MAY BE UNABLE TO EFFECTIVELY MANAGE GROWTH WITH OUR LIMITED RESOURCES From our inception on March 4, 1998 to June 30, 1998, and during the nine months ended March 31, 1999, we expanded from seven to 16 employees and from 16 to 47 employees, respectively. Some of our officers have no prior senior management experience in public companies. Our new employees include a number of key managerial, technical, financial, marketing, and operations personnel who have not yet been fully integrated into our operations and we expect to add additional key personnel in the near future. We expect the expansion of our business to place a significant strain on our limited managerial, operational, and financial resources. We will be required to expand our operational and financial systems significantly and to expand, train, and manage our work force in order to manage the expansion of our operations. Our failure to fully integrate our new employees into our operations could have a material adverse effect on our business, prospects, financial condition, and results of operations. Our future success will depend in large part on our ability to attract, train, and retain additional highly skilled executive level, management, creative, technical, and sales personnel. Competition is intense for these types of personnel from other technology companies and more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms, or at all. If we are not successful 13 in attracting and retaining these personnel, our business, prospects, financial condition, and results of operations will be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Business Strategy," and "Business-- Employees." WE DEPEND UPON OUR SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY COULD PUT US AT A COMPETITIVE DISADVANTAGE AS OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER HAS PLEDGED HIS STOCK, WE MAY EXPERIENCE A CHANGE OF CONTROL Our success depends largely on the skills of certain key management and technical personnel. The loss or unavailability of any of these individuals for any significant period of time could have a material adverse effect on our business, prospects, financial condition, and results of operations. We have obtained, own, and are the sole beneficiary of, key-person life insurance in the amount of $1,000,000 on the life each of Keith D. Freadhoff, our Chairman of the Board of Directors and Chief Executive Officer, Donald M. Corliss, Jr., our President and a Director, and David Bassett-Parkins, our Chief Operating Officer, Chief Financial Officer, and a Director. We cannot guarantee that we will be able to replace any of these key individuals in the event their services are unavailable. See "Management-- Employment Agreements." Mr. Freadhoff has pledged 825,000 shares of common stock held by him as security for his personal financial obligations. At the date of this prospectus, these obligations are approximately $1,100,000. If Mr. Freadhoff defaults on these obligations, Mr. Freadhoff may lose beneficial ownership of these shares, which could result in a change of control of Netgateway and would have a material adverse effect on our business, prospects, financial condition, and results of operations. See "Principal Stockholders." WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE LIABLE FOR INFRINGING ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS Our ability to compete effectively will depend on our ability to maintain the proprietary nature of our services and technologies, including our proprietary software and the proprietary software of others with which we have entered into software licensing agreements. We hold no patents and rely on a combination of trade secrets and copyright laws, nondisclosure, and other contractual agreements and technical measures to protect our rights in our technological know-how and proprietary services. We depend upon confidentiality agreements with our officers, directors, employees, consultants, and subcontractors to maintain the proprietary nature of our technology. These measures may not afford us sufficient or complete protection, and others may independently develop know-how and services similar to ours, otherwise avoid our confidentiality agreements, or produce patents and copyrights that would materially and adversely affect our business, prospects, financial condition, and results of operations. We believe that our services are not subject to any infringement actions based upon the patents or copyrights of any third parties; however, our know-how and technology may in the future be found to infringe upon the rights of others. Others may assert infringement claims against us, and if we should be found to infringe upon their patents or copyrights, or otherwise impermissibly utilize their intellectual property, our ability to continue to use our technology could be materially restricted or prohibited. If this event occurs, we may be required to obtain licenses from the holders of this intellectual property, enter into royalty agreements, or redesign our products and services so as not to utilize this intellectual property, each of which may prove to be uneconomical or otherwise impossible. Licenses or royalty agreements required in order for us to use this technology may not be available on terms acceptable to us, or at all. These claims could result in litigation, which could materially adversely affect our business, prospects, financial condition, and results of operations. See "Business-- Intellectual Property." 14 WE MAY BE HELD LIABLE FOR ONLINE CONTENT PROVIDED BY THIRD PARTIES We may face potential liability for defamation, negligence, copyright, patent, or trademark infringement and other claims based on the nature and content of the materials that appear on storefronts and Web pages that utilize our services. Claims of this type have been brought, and sometimes successfully pursued, against online services. Although we carry general liability insurance, our insurance may not cover all claims or may not be adequate to indemnify us for any liability that may be imposed. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of our insurance coverage, could have a material adverse effect on our reputation, business, prospects, financial condition, and results of operations. WE INTEND TO USE FUNDS WHICH WE WOULD OTHERWISE USE FOR GROWTH TO REPAY INDEBTEDNESS TO INVESTORS IN OUR MAY 1999 PRIVATE PLACEMENT, WHICH COULD LIMIT OUR ABILITY TO EXPAND We intend to use approximately $2,080,000, or 6.5%, of the net proceeds of this offering to repay the promissory notes issued in our private placement which closed in May 1999. As a result, we will be unable to utilize these funds for growth, which could limit our ability to implement our current plans for expansion. See "Use of Proceeds" "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING We believe that the net proceeds from this offering, together with anticipated revenues from operations, will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 18 months. Our belief is based on our operating plan which in turn is based on assumptions, which may prove to be incorrect. As a result, our financial resources may not be sufficient to satisfy our capital requirements for this period. In addition, we may need to raise significant additional funds sooner in order to support our growth, develop new or enhanced services and products, respond to competitive pressures, acquire or invest in complementary or competitive businesses or technologies, or take advantage of unanticipated opportunities. If our financial resources are insufficient and, in any case, after this 18-month period, we will require additional financing in order to meet our plans for expansion. We cannot be sure that this additional financing, if needed, will be available on acceptable terms or at all. Furthermore, any additional debt financing, if available, may involve restrictive covenants, which may limit our operating flexibility with respect to business matters. If additional funds are raised through the issuance of equity securities, the percentage ownership of our existing stockholders will be reduced, our stockholders may experience additional dilution in net book value per share, and such equity securities may have rights, preferences, or privileges senior to those of our existing stockholders. If adequate funds are not available on acceptable terms, we may be unable to develop or enhance our services and products, take advantage of future opportunities, repay debt obligations as they become due, or respond to competitive pressures, any of which would have a material adverse effect on our business, prospects, financial condition, and results of operations. See "Use of Proceeds," "Dilution," and "Business--Business Strategy." WE COULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL THIRD PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT Many currently installed computer systems and software products are coded to accept only two-digit entries to identify a year in the date code field. Consequently, on January 1, 2000, many of these systems could fail or malfunction because they may not be able to distinguish between 20th century dates and 21st century dates. Accordingly, in the coming year, many companies, including our customers, potential customers, vendors, and strategic partners, may need to upgrade their systems to comply with applicable "Year 2000" requirements. 15 Because we and our clients are dependent, to a very substantial degree, upon the proper functioning of our and their computer systems, a failure of our or their systems to correctly recognize dates beyond December 31, 1999 could materially disrupt our operations, which could materially and adversely affect our business, prospects, financial condition, and results of operations. Additionally, our failure to provide Year 2000 compliant products and services to our clients could result in financial loss, harm to our reputation, and legal liability. Likewise, the failure of the computer systems and products of the third parties with which we transact business to be Year 2000 compliant could materially disrupt their and our operations, which could materially and adversely affect our business, prospects, financial condition, and results of operations. We have already completed an internal review, and we are conducting a formal assessment to determine the Year 2000 readiness of our proprietary software. We are also in the process of contacting third party vendors, licensors of hardware, software, and services and clients regarding their Year 2000 readiness. Following our assessment and after contacting these third parties, we will be able to make an evaluation of our state of readiness, risks, and costs, and determine whether a contingency plan is necessary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." BECAUSE WE WILL NOT PAY CASH DIVIDENDS, INVESTORS MAY HAVE TO SELL THEIR SHARES IN ORDER TO REALIZE THEIR INVESTMENT We have not paid any cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements into which we may enter with institutional lenders may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, and any other factors that the board of directors decides is relevant. See "Dividend Policy" and "Description of Securities--Common Stock." BECAUSE WE DEPEND UPON A SINGLE SITE FOR OUR COMPUTER AND COMMUNICATIONS SYSTEMS WE ARE MORE VULNERABLE TO THE EFFECTS OF NATURAL DISASTERS, COMPUTER VIRUSES, AND SIMILAR DISRUPTIONS Our ability to successfully process transactions and provide high-quality customer service largely depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. Our proprietary and licensed software resides solely on our servers, all of which, as well as all of our communications hardware, are located in a monitored server facility in Irvine, California. Our systems and operations are in a secured facility with hospital-grade electrical power, redundant telecommunications connections to the Internet backbone, uninterruptible power supplies, and generator back-up power facilities. In addition, we maintain redundant systems for backup and disaster recovery. Despite these safeguards, we remain vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake, and similar events. In addition, we do not, and may not in the future, carry sufficient business interruption insurance to compensate us for losses that may occur. Despite our implementation of Internet security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, which could lead to interruptions, delays, loss of data, or the inability to process client transactions. The occurrence of any of these events could have a material adverse effect on our business, prospects, financial condition, and results of operations. See "Business--Facilities." USERS MAY CONFUSE OTHER COMPANIES' DOMAIN NAMES WITH OUR OWN We have registered with the InterNIC registration service the Internet domain names: www.netgateway.net, www.netgateway.org, www.federalbuyersmall.com, www.storesonlinemall.com, www.solint.net, www.solint.netwww.Clevelandstores.com, www.Clevelande-mall.com, www.Clevelandemall.com, www.E-Cart.com, www.golfmate.com, www.openemail.net, 16 www.opentrade.net, www.eknowledge.net, www.dgenesis.com, www.paulrodriguez.com, www.communicationsgroup.com, www.quickgrill.com, www.flashgrill.com, www.afisteaks.com, and www.storesonline.com. We have registered with Internic.com the Internet domain names: www.millenniumemall.com, AND www.millenniumemall.net. However, there are other substantially similar domain names which are registered by companies which may compete with us. In addition, new domains may be added in the future, allowing combinations and similar domain names that may be confusingly similar to our own. There can be no assurance that 17 potential users and advertisers will not confuse our domain name with other similar domain names. If that confusion occurs, - we may inadvertently lose business to a competitor, - we may have to adjust our advertising rates and service fees accordingly, or - some users of our services may have negative experiences with other companies on their Web sites that those users erroneously associate with us. See "Business--Intellectual Property." SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER TAKEOVER ATTEMPTS Some of the provisions of our certificate of incorporation and our by-laws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. See "Description of Securities." RISKS SPECIFIC TO OUR INDUSTRY INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS The processing of eCommerce transactions by means of our hardware and software infrastructure involves the transmission and analysis of confidential and proprietary information of the consumer, the merchant, or both, as well as our own confidential and proprietary information. The compromise of our security or misappropriation of proprietary information could have a material adverse effect on our business, prospects, financial condition, and results of operations. We rely on encryption and authentication technology licensed from other companies to provide the security and authentication necessary to effect secure Internet transmission of confidential information, such as credit information and proprietary consumer information. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the technology used by us to protect client transaction data. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations, as well as the operations of the merchant. We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. Concerns over the security of the Internet and other electronic transactions and the privacy of consumers and merchants may also inhibit the growth of the Internet and other online services generally, especially as a means of conducting commercial transactions. To the extent that our activities or the activities of others involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our security measures may not prevent security breaches. Our failure to prevent these security breaches may have a material adverse effect on our business, prospects, financial condition, and results of operations. WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF ECOMMERCE CONTINUES TO GROW Our future revenues and any future profits are substantially dependent upon the widespread acceptance and use of the Internet and other online services as an effective medium of commerce by merchants and consumers. Rapid growth in the use of, and interest in, the Internet, the Web, and online services is a recent phenomenon, and may not continue on a lasting basis. In addition, customers may not adopt, and continue to use, the Internet and other online services as a medium of commerce. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and few services and products have generated profits. For us to be successful, consumers of both retail and business to business services must be willing to accept and use novel and cost efficient ways of conducting business and exchanging information. 18 In addition, the public in general may not accept the Internet and other online services as a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. To the extent that the Internet and other online retail and business to business services continue to experience significant growth in the number of users, their frequency of use, or in their bandwidth requirements, the infrastructure for the Internet and online services may be unable to support the demands placed upon them. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. Significant issues concerning the commercial use of the Internet and online services technologies, including security, reliability, cost, ease of use, and quality of service, remain unresolved and may inhibit the growth of Internet business solutions that utilize these technologies. Changes in, or insufficient availability of, telecommunications services to support the Internet or other online services also could result in slower response times and adversely affect usage of the Internet and other online services generally and our product and services in particular. If use of the Internet and other online services does not continue to grow or grows more slowly than we expect, if the infrastructure for the Internet and other online services does not effectively support the growth that may occur, or if the Internet and other online services do not become a viable commercial marketplace, our business, prospects, financial condition, and results of operations could be materially adversely affected. WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ECOMMERCE, THE ECOMMERCE SERVICES INDUSTRY, AND CUSTOMER DEMANDS CONTINUE TO EVOLVE The Internet, the eCommerce, and the eCommerce services industry are characterized by: - rapid technological change; - changes in user and customer requirements and preferences; - frequent new product and service introductions embodying new technologies; and - the emergence of new industry standards and practices that could render proprietary technology and hardware and software infrastructure obsolete. Our success will depend, in part, on our ability to: - enhance and improve the responsiveness and functionality of our online transaction processing services; - license or develop technologies useful in our business on a timely basis, enhance our existing services, develop new services and technology that address the increasingly sophisticated and varied needs of our prospective or current customers; and - respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of additional proprietary technology and the development of additional services will involve significant technical and business risks. We may not be able to successfully adapt to these demands. Our failure to respond in a timely manner to changing market conditions or client requirements would have a material adverse effect on our business, prospects, financial condition, and results of operations. See "Business--Business Strategy." 19 WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY While the market for eCommerce services is relatively new, it is already highly competitive and characterized by an increasing number of entrants that have introduced or developed products and services similar to those offered by us. We believe that competition will intensify and increase in the future. Our target market is rapidly evolving and is subject to continuous technological change. As a result, our competitors may be better positioned to address these developments or may react more favorably to these changes, which could have a material adverse effect on our business, prospects, financial condition, and results of operations. We compete on the basis of a number of factors, including the attractiveness of the eCommerce services offered, the breadth and quality of these services, creative design and systems engineering expertise, pricing, technological innovation, and understanding clients' strategies and needs. Many of these factors are beyond our control. Existing or future competitors may develop or offer eCommerce services that provide significant technological, creative, performance, price, or other advantages over the services offered by us. Our competitors can be divided into several groups: - large systems integrators; - Internet service providers and portals; - large information technology consulting services providers; - computer hardware and service vendors; and - strategic consulting firms. We also may compete with telecommunications companies. Although most of these types of competitors to date have not offered a full range of Internet professional services, many are currently offering these services or have announced their intention to do so. These competitors at any time could elect to focus additional resources in our target markets, which could materially adversely affect our business, prospects, financial condition, and results of operations. Many of our current and potential competitors have longer operating histories, larger customer bases, longer relationships with clients, and significantly greater financial, technical, marketing, and public relations resources than we do. Competitors that have established relationships with large companies, but have limited expertise in providing Internet solutions, may nonetheless be able to successfully use their client relationships to enter our target market or prevent our penetration into their client accounts. We believe that our primary competitors currently include, without limitation, Broadvision, Open Market, Commerce One, Intel, Microsoft, AT&T, Intershop, MCI, Yahoo! Stores, ICAT, GE Information Services, IBM, and smaller Internet services providers. Additionally, in pursuing acquisition opportunities we may compete with other companies with similar growth strategies, certain of which may be larger and have greater financial and other resources than we have. Competition for these acquisition targets likely could also result in increased prices of acquisition targets and a diminished pool of companies available for acquisition. There are relatively low barriers to entry into our business. We have no patented, and only a limited amount of other proprietary technology that would preclude or inhibit competitors from entering the eCommerce services market. Therefore, we must rely on the skill of our personnel and the quality of our client service. The costs to develop and provide eCommerce services are relatively low. Therefore, we expect that we will continually face additional competition from new entrants into the market in the future, and we are subject to the risk that our employees may leave us and may start competing businesses. The emergence of these enterprises could have a material adverse effect on our business, prospects, financial condition, and results of operations. See "Business--Industry Background--ECommerce Services Industry" and "Business--Competition." 19 REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS We are not currently subject to direct regulation by any government agency other than laws or regulations applicable generally to eCommerce, but we process information which must, of necessity, remain confidential. Due to the increasing popularity and use of the Internet and other online services, federal, state, and local governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services. Furthermore, the growth and development of the market for eCommerce may prompt calls for more stringent consumer protection laws to impose additional burdens on companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for our services and increase our cost of doing business, or otherwise have a material adverse effect on our business, prospects, financial condition, and results of operations. Moreover, the relevant governmental authorities have not resolved the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership and personal privacy and it may take time to resolve these issues definitively. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services, could have a material adverse effect on our business, prospects, financial condition, and results of operations. RISKS SPECIFIC TO THIS OFFERING OUR COMMON STOCK TRADES SPORADICALLY, THE OFFERING PRICE OF OUR COMMON STOCK IS ARBITRARY, THE MARKET PRICE OF OUR SECURITIES MAY BE VOLATILE, AND WE MUST SATISFY THE APPLICABLE REQUIREMENTS FOR OUR COMMON STOCK TO TRADE ON THE NASDAQ NATIONAL MARKET. Our common stock currently trades sporadically on the OTC Bulletin Board. We have applied to have our common stock quoted on the Nasdaq National Market commencing on the date of this prospectus. Even if our common stock were quoted on the Nasdaq National Market, the market for our common stock may not be an active market. Accordingly, unless and until an active public market develops, you may have difficulty selling your shares of common stock at a price that is attractive to you. The initial public offering price of the shares was arbitrarily determined by negotiations between the underwriters and us principally on the basis of the market price for our common stock prior to the date of this prospectus. See "Underwriting." From time to time after this offering, the market price of our common stock may experience significant volatility. Our quarterly results, failure to meet analysts expectations, announcements by us or our competitors regarding acquisitions or dispositions, new procedures or technology, changes in general conditions in the economy, and general market conditions could cause the market price of the common stock to fluctuate substantially. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many technology companies. These price and volume fluctuations often have been unrelated to the operating performance of the affected companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. This type of litigation, regardless of the outcome, could result in substantial costs and a diversion of management's attention and resources, which could materially adversely affect our business, prospects, financial condition, and results of operations. Under the currently effective criteria for initial listing of securities on the Nasdaq National Market, a company must have at least $75 million in market capitalization, a minimum bid price of $5.00 per share, and securities in the hands of the public with a market value of at least $20 million. For 20 continued listing, a company must maintain $50 million in market value, a minimum bid price of $5.00, and a public float of at least $15 million. If we cannot maintain the standards for continued listing, our common stock could be subject to delisting from the Nasdaq National Market. Trading, if any, in our common stock would then be conducted in either the Nasdaq SmallCap Market or in the over-the-counter market on the OTC Bulletin Board established for securities that do not meet the Nasdaq SmallCap Market listing requirements or in what are commonly referred to as the "pink sheets." As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, our shares. YOU MAY HAVE DIFFICULTY SELLING YOUR SHARES OF COMMON STOCK AND THE MARKET PRICE OF THE COMMON STOCK MAY DECLINE IF CRUTTENDEN ROTH DISCONTINUES MAKING A MARKET FOR ANY REASON A significant number of the shares sold in this offering may be sold to customers of the underwriters. These customers may engage in transactions for the sale or purchase of the shares through or with the underwriters. Although it has no obligation to do so, Cruttenden Roth intends to make a market in the shares and may otherwise effect transactions in the common stock. If Cruttenden Roth participates in the market, it may influence the market, if one develops, for our common stock. Cruttenden Roth may discontinue making a market in the common stock at any time. Moreover, if Cruttenden Roth sells the shares of common stock issuable upon exercise of the representatives' warrants, it may be required under the Exchange Act to temporarily suspend its market-making activities. The price and liquidity of the common stock may be significantly affected by the degree, if any, of its direct or indirect participation in the market. INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION The initial public offering price per share exceeds the net tangible book value per share of the outstanding common stock immediately after the offering. Accordingly, if you purchase shares in this offering, you will - pay a price per share which substantially exceeds the value of our assets after subtracting our intangible assets and liabilities and - contribute 76% of the total amount invested to date to fund us, but will only own 20.2% of the shares of common stock outstanding. We also have outstanding a large number of stock options and warrants to purchase common stock with exercise prices significantly below the estimated public offering price of the common stock. To the extent such options or warrants are exercised, there will be further dilution. In addition, in the event that any future financing should be in the form of, be convertible into, or exchangeable for, equity securities, and upon the exercise of options and warrants, investors may experience additional dilution. See "Dilution." FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT OUR STOCK PRICE The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. After this offering, we will have outstanding 12,343,404 shares of common stock. Of these shares, an aggregate of 2,950,000 shares, including the 2,500,000 shares being offered in this offering, will be freely tradeable. Our directors and officers and a number of our stockholders who hold shares in the aggregate have entered into lock-up agreements by which they have agreed that they will not sell, directly or indirectly, any shares of common stock without the prior written consent of the underwriters for a period of six months from 21 the date of this prospectus. The number of shares of common stock and the dates when these shares will become freely tradeable in the market is as follows:
NUMBER OF SHARES DATE - ----------------- ----------------------------------------------------------------------------------------------- 7,230,204 Six months from the date of this prospectus 1,713,200 Between six and twelve months from the date of this prospectus
As of the date of this prospectus, we have reserved an aggregate of 2,113,779 shares of common stock issuable upon the exercise of outstanding warrants and convertible securities. Following this offering, we intend to file a registration statement to register for issuance and resale the 6,000,000 shares of common stock reserved for issuance under our existing stock option plans described in "Management--Stock Option Plans." We expect that registration statement to become effective immediately upon filing. Shares issued upon the exercise of stock options granted under the our stock option plans will be eligible for resale in the public market from time to time subject to vesting and, in the case of some options, the expiration of the lock-up agreements referred to in the preceding paragraph. Some of our stockholders, holding approximately 1,731,400 shares of common stock or holding securities convertible into or exercisable or exchangeable for shares of common stock, have the right, subject to a number of conditions and limitations, to include their shares in registration statements relating to our securities. By exercising their registration rights and causing a large number of shares to be registered and sold in the public market, these holders may cause the market price of the common stock to fall. In addition, any demand to include these shares in our registration statements could have an adverse effect on our ability to raise needed capital. 22 USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $32.0 million from the sale of the common stock offered by us in this offering, assuming a public offering price of $14.625 per share. If the underwriters exercise their over-allotment option in full, we will receive net proceeds of approximately $36.9 million. These estimates are after deducting estimated underwriting discounts and commissions and other fees and expenses payable by us. We intend to use approximately $2,080,000, or 6.5%, of the net proceeds of this offering to repay indebtedness incurred in connection with our May 1999 private placement of $2,000,000 principal amount of Series A 12% Senior Notes due 2000 and 200,000 shares of common stock. The notes are due on the earlier of April 30, 2000 or completion of this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." We intend to use approximately $9.6 million, or 30.0%, of the estimated net proceeds of this offering to expand our marketing efforts. See "Risk Factors -- Our Marketing Strategy Has Not Been Tested and May Not Result in Success." We intend to use approximately $9.6 million, or 30.0%, of the estimated net proceeds of this offering for research and development and for the continued enhancement of our ICC eCommerce transaction processing system. We intend to use approximately $4.8 million, or 15.0%, of the estimated net proceeds of this offering for the acquisition of capital equipment to purchase or otherwise acquire computers, servers, communication hardware and software, and networking equipment. The balance of the net proceeds, estimated to be approximately $6.0 million, or 18.5%, of the estimated net proceeds of this offering will be used for general corporate and working capital purposes to fund the ongoing cash flow and capital requirements associated with our growth, including the retention and training of additional personnel. We may also use a portion of the net proceeds allocated for general corporate and working capital purposes to acquire, or invest in, businesses and technologies. From time to time we evaluate such potential acquisitions and we anticipate continuing to make such evaluations. In this regard, we are currently evaluating certain acquisition and investment opportunities; however, we cannot assure you that we will identify suitable acquisition or investment candidates or that we will, in fact, complete any acquisition or investment. We believe that the net proceeds from this offering, together with anticipated revenues from operations, will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 18 months. Our belief is based on our operating plan which in turn is based on assumptions, which may prove to be incorrect. As a result, our financial resources may not be sufficient to satisfy our capital requirements for this period. In addition, we may need to raise significant additional funds sooner in order to support our growth, develop new or enhanced services and products, respond to competitive pressures, acquire or invest in complementary or competitive businesses or technologies, or take advantage of unanticipated opportunities. If our financial resources are insufficient and, in any case, after this 18-month period, we will require additional financing in order to meet our plans for expansion. We cannot be sure that this additional financing, if needed, will be available on acceptable terms or at all. Furthermore, any additional debt financing, if available, may involve restrictive covenants, which may limit our operating flexibility with respect to business matters. If additional funds are raised through the issuance of equity securities, the percentage ownership of our existing stockholders will be reduced, our stockholders may experience additional dilution in net tangible book value per share, and such equity securities may have rights, preferences, or privileges senior to those of our existing stockholders. If adequate funds are not available on acceptable terms, we may be unable to develop or enhance our services and products, take advantage of future opportunities, repay debt obligations as they become due, or respond to competitive pressures, any of 23 which would have a material adverse effect on our business, prospects, financial condition, and results of operations. See "Risk Factors--We Cannot Predict Our Future Capital Needs And May Not Be Able to Secure Additional Financing," "Use of Proceeds," "Dilution," and "Business--Business Strategy." Although, based upon our contemplated operations, business plan, and current economic and industry conditions, the above is our best estimate of the amount, timing, and allocation of the expenditures of the net proceeds of this offering, such estimated amounts are subject to reallocation within the listed categories or to new categories in response to a number of unanticipated events. These may include changes in our business plans, new government regulations, changing industry conditions, and future revenues and expenditures. DIVIDEND POLICY We have never paid or declared any cash dividends. We currently expect to retain future earnings, if any, to finance the growth and development of our business. Therefore, we do not anticipate paying any cash dividends on our shares in the foreseeable future. 24 CAPITALIZATION The following table sets forth, as of March 31, 1999: - our actual short-term debt and capitalization, - our as adjusted capitalization, giving effect to our receipt of net proceeds of approximately $2,779,000 from our spring 1999 private placements, and - our as further adjusted capitalization, adjusted to give effect to our receipt of proceeds of approximately $2,779,000 from our spring 1999 private placements and our receipt of net proceeds of approximately $32.0 million from the sale of the shares in this offering at the assumed public offering price of $14.625 per share and the initial application of the net proceeds of this offering as described under the heading "Use of Proceeds." The data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes and other financial information included elsewhere in this prospectus.
MARCH 31, 1999 --------------------------------------------------------- AS FURTHER ADJUSTED AS ADJUSTED AFTER AFTER SPRING 1999 SPRING 1999 PRIVATE PRIVATE PLACEMENTS AND INITIAL ACTUAL PLACEMENTS PUBLIC OFFERING ------------- ----------------- ----------------------- Short-term debt...................................... $ 497,500 $ 1,775,962 $ 287,500 Long-term debt....................................... -- Stockholders' equity Common stock--$0.001 par value, authorized--40,000,000 shares; issued and outstanding--9,357,900 shares, actual; 9,795,834 shares as adjusted; and 12,295,834 shares, as further adjusted................................. 9,358 9,796 12,296 Additional paid-in capital........................... 10,308,156 11,436,905 43,445,030 Deferred compensation................................ (12,500) (12,500) (12,500) Accumulated deficit.................................. (9,871,961) (9,871,961) (10,567,345) ------------- ----------------- ------------ Total stockholders' equity........................... 433,053 1,562,240 32,877,481 ------------- ----------------- ------------ Total capitalization................................. $ 930,553 $ 3,338,201 $ 33,114,981 ------------- ----------------- ------------ ------------- ----------------- ------------
25 DILUTION As of March 31, 1999, our tangible net book value (deficit) was ($768,203) or approximately $(0.08) per share of common stock based on 9,357,900 shares of common stock outstanding. Our pro forma net tangible book value, was $207,137, or approximately $.02 per share of common stock based on 9,795,834 shares of common stock outstanding, giving effect to our spring 1999 private placements of securities of $2,779,000. The pro forma net tangible book value per share represents the amount of our total assets less the amount of our intangible assets and our liabilities, divided by the number of shares of common stock outstanding at March 31, 1999, giving effect to these private placements. After giving effect to our receipt of net proceeds of approximately $2,779,000 from our spring 1999 private placements and to the estimated net proceeds from our sale of 2,500,000 shares of common stock offered in this offering at the assumed public offering price per share of $14.625 and the initial application of those proceeds as described under the heading "Use of Proceeds," our pro forma as adjusted net tangible book value at March 31, 1999 would have been $31,676,224, or approximately $2.58 per share of common stock. This represents an increase in the pro forma as adjusted net tangible book value of $2.56 per share to existing stockholders and an immediate dilution in the pro forma as adjusted net tangible book value of $12.05 per share, or 82%, to investors in this offering. The following table illustrates the per share dilution:
PER SHARE OF COMMON STOCK -------------------- Assumed public offering price.................................................................. $ 14.63 Actual tangible book value at March 31, 1999................................................. $ (0.08) Increase in net tangible book value, giving effect to our spring 1999 private placements..... .10 --------- Pro forma net tangible book value at March 31, 1999, giving effect to our spring 1999 private placements................................................................................. .02 Increase in net tangible book value.......................................................... 2.56 --------- Pro forma as adjusted net tangible book value after this offering.............................. 2.58 --------- Dilution of net tangible book value to new investors........................................... $ 12.05 --------- ---------
The following table sets forth, as of the date of this prospectus: - the number of shares of common stock purchased, - the percentage of total shares of common stock purchased, - the total consideration paid, - the percentage of total consideration paid, and - the average price per share of common stock paid by the investors in this offering and our current stockholders.
SHARES OF COMMON STOCK PURCHASED TOTAL CONSIDERATION AVERAGE -------------------------- -------------------------- PRICE PER NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE ------------- ----------- ------------- ----------- --------- Existing stockholders........................... 9,843,404 79.8% $ 11,576,701 24% $ 1.18 New investors................................... 2,500,000 20.2 36,562,500 76 14.625 ------------- ----------- ------------- ----- --------- Total........................................... 12,343,404 100.0% $ 48,142,201 100.0% $ 3.90 ------------- ----------- ------------- ----- --------- ------------- ----------- ------------- ----- ---------
26 SELECTED FINANCIAL DATA The following selected statements of operations data for the period from our inception on March 4, 1998 through June 30, 1998 and the selected balance sheet data as of June 30, 1998 are derived from our consolidated financial statements and related notes included elsewhere in this prospectus audited by KPMG LLP, our independent auditors. The statement of operations data for the nine months ended March 31, 1999 and the selected balance sheet data at March 31, 1999 are derived from the unaudited consolidated financial statements included elsewhere in this prospectus, and in the opinion of management, include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operation. The results of operations for any interim period are not necessarily to be expected for the entire year. The selected statement of operations data for the period from our inception on March 4, 1998 through June 30, 1998 includes the results of operations of Digital Genesis from June 2, 1998, its date of acquisition, and the pro forma selected statement of operations data for such period includes the operations of Digital Genesis and Spartan Multimedia, Inc. as if they were acquired by us on March 4, 1998. The selected statement of operations data for the nine months ended March 31, 1999 includes the results of operations of Spartan Multimedia, Inc. from January 15, 1999, its date of acquisition, and the pro forma selected statement of operations data for such period includes the operations of Spartan Multimedia, Inc. as if it was acquired by us on July 1, 1998. The pro forma balance sheet data as of March 31, 1999 is adjusted to reflect the net proceeds of $2,779,000 from our spring 1999 private placements of securities, and the pro forma, as adjusted balance sheet data as of March 31, 1999 is adjusted to reflect the following: - the net proceeds of $2,779,000 from our spring 1999 private placements of securities, and - the receipt of estimated net proceeds of approximately $32.0 million from the sale of our common stock at the assumed public offering price of $14.625 per share and the initial application of these proceeds as described under "Use of Proceeds." The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.
PERIOD FROM MARCH 4, 1998 CUMULATIVE PERIOD (INCEPTION) THROUGH NINE MONTHS ENDED FROM MARCH 4, 1998 JUNE 30, 1998 MARCH 31, 1999 (INCEPTION) ---------------------- ---------------------- THROUGH MARCH 31, ACTUAL PRO FORMA ACTUAL PRO FORMA 1999 ---------- ---------- ---------- ---------- ------------------ (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues.................................. $ 2,800 $ 90,993 $ 198,759 $ 202,200 $ 201,559 Total operating expenses.................. 4,555,459 4,690,167 6,983,543 7,152,164 11,539,002 Interest expense.......................... 19,277 19,277 313,744 313,744 333,021 Net loss before extraordinary item........ (4,571,936) (4,618,451) (7,153,257 (1) (7,318,437 (1) (11,725,193)(1) Loss before extraordinary item per weighted average common share outstanding (basic and diluted)......... (0.84) (0.81) (0.83 (1) (0.85 (1) (1.54)(1) Weighted average common shares outstanding (basic and diluted)..................... 5,416,242 5,721,327 8,659,851 8,659,851 7,628,895
MARCH 31, 1999 ------------------------------------- ACTUAL PRO FORMA PRO FORMA, JUNE 30, 1998 ----------- ----------- AS ADJUSTED ------------- (UNAUDITED) (UNAUDITED) ----------- (UNAUDITED) BALANCE SHEET DATA: Current assets............................................. $ 371,467 $ 325,928 2,579,730 32,510,355 Total assets............................................... 871,552 1,731,497 4,139,146 33,915,925 Working capital (deficit).................................. (1,959,776) (972,516) 2,824 31,471,911 Long-term debt............................................. 367,892 -- -- -- Stockholders' equity (deficit)............................. (1,827,583) 433,053 1,562,240 32,877,481
- ------------------------ (1) Before extraordinary gain of $1,853,232 relating to extinguishment of indebtedness of $.21, $.21, and $.24 per weighted-average common shares outstanding during the nine months ended March 31, 1999 actual, pro forma and the cumulative period from March 4, 1998 (inception) through March 31, 1999, respectively. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THIS FORWARD-LOOKING INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. IN GENERAL We provide turn-key eCommerce services designed to enable clients to extend their business to the Internet for a wide variety of purposes, including the advertising and sale of products or services by retailers and the conduct of commercial transactions between business enterprises. As at March 31, 1999, we had a working capital deficiency of $(972,516) and stockholders' equity of $433,053. We generated revenues of $2,800 during the period from our inception on March 4, 1998 through June 30, 1998, and revenues of $198,759 for the nine months ended March 31, 1999. We have incurred net losses since inception and expect to continue to generate operating losses for the foreseeable future. There can be no assurance that we will ever achieve profitability. In addition, during the period from our inception on March 4, 1998 through June 30, 1998, and the nine months ended March 31, 1999, we incurred negative cash flows from operations of $(253,119) and $(2,982,683), respectively. We are in the early stage of operations and, as a result, the relationships between revenue, cost of revenue, and operating expenses reflected in the financial information included in this prospectus do not represent future expected financial relationships. Much of the cost of revenue and operating expenses reflected in our financial statements are relatively fixed costs. We expect that these expenses will increase with the escalation of sales and marketing activities and transaction volumes, but at a much slower rate of growth than the corresponding revenue increase. Accordingly, we believe that, at our current stage of operations period to period comparisons of results of operations are not meaningful. Our strategic focus is on the business-to-business Internet commerce market, and we believe that our success will depend in large part on our ability - to develop products and technologies that can enable businesses to transact business-to-business Internet commerce efficiently and effectively, and - to identify and position ourselves as a significant player in the business-to-business Internet commerce market. Accordingly, we intend to continue to invest in product, technology, and operating infrastructure development, as well as in the acquisition of companies that offer development or technological resources. Because we have a limited operating history, given planned investment levels, our achieving profitability depends upon our ability to obtain sufficient numbers of new customers and sufficient numbers of Internet commerce transactions using our services. This can be accomplished by signing up sufficient numbers of customers for services through our ICC and/or attaining a significant volume of transactions through our ICC. Our revenues will also be dependent on determining and obtaining sufficient levels of fees for the services offered. In the event that we are unable to attain one or more of these goals, we may continue to incur substantial operating losses for the foreseeable future. 28 FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY In view of the rapidly evolving nature of our business and its limited operating history, we believe that period-to-period comparisons of our operating results, including our gross profit and operating expenses as a percentage of net sales, are not necessarily meaningful and should not be relied upon as an indication of future performance. See "Risk Factors--Fluctuations In Our Operating Results May Affect Our Stock Price." We cannot predict the degree to which we will experience seasonality in our business because of our limited operating history, and the fact that we cannot identify which companies, if any, we will acquire in the foreseeable future. RESULTS OF OPERATIONS We have had no meaningful operating results to date, as we have focused on the development of our ICC services. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses consist of payroll and related expenses for executive, sales, marketing accounting, and administrative personnel, recruiting, professional fees, research and development and other general corporate expenses. We expect selling, general, and administrative expenses to increase in absolute dollars as we expand our staff and incur additional costs related to the growth of our business. INTEREST EXPENSE Interest expense of $313,744 was incurred during the nine months ended March 31, 1999, primarily related to amortization of debt issuance costs. INCOME TAXES We have not generated any taxable income to date and therefore have not paid any federal income taxes since our inception. Utilization of our net operating loss carry forwards, which begin to expire in 2013, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999 our cash was $137,233. Net cash used by operating activities was $(2,982,683) for the nine months ended March 31, 1999. MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998 Net cash used in operations was $(253,119) from March 4, 1998 (inception) through June 30, 1998, which resulted from net losses of $(4,571,936) from inception reduced principally by $3,822,000 in amortization and write-off of license fees and $371,680 of stock based compensation. See "Related Party Transactions." Net cash used in investing activities from March 4, 1998 (inception) through June 30, 1998, was related to the purchase of $(102,034) of fixed assets and $(75,000) of loans to customers. Net cash provided by financing activities March 4, 1998 (inception) through June 30, 1998 of $681,429 resulted from $649,000 of private placements of common stock, $132,429 from the issuance of notes payable, and the repayment of notes payable in the amount of $100,000. NINE MONTHS ENDED MARCH 31, 1999 Net cash used in operations was $(2,982,683) for the nine months ended March 31, 1999, which resulted principally from net losses of $(5,300,025) for such period and gain on extinguishment of 29 indebtedness of $(1,853,232) reduced principally by common stock issued for services in the amount of $901,800, compensation expense for contributed capital of $400,000, interest expense on warrants issued as debt issue $303,374, options and warrants issued for services in the amount of $1,604,560, and accounts payable and accrued liabilities of $644,007. Net cash provided by investing activities for the nine months ended March 31, 1999 was related to the purchase of equity securities in the amount of $(100,733) and the purchase of $(91,303) of fixed assets. Net cash provided by financing activities during the nine months ended March 31, 1999 of $2,956,571 resulted from $2,164,800 of private placements of common stock, $264,200 from the exercise of warrants, $1,160,000 from the issuance of notes payable and convertible debentures, $100,000 from the issuance of notes payable to related parties, and the repayment of notes payable in the amount of $(732,429). By June 30, 1998, $126,000 had been received for our June 1998 private placement of common stock at $2.00 per share, which closed on July 10, 1998. We later commenced an offering of 1,022,800 units, each consisting of one share of common stock at $2 per share and one warrant, expiring on October 9, 1998, to purchase one additional share of common stock at $4.00 per share. As of September 30, 1998, 1,022,800 units had been issued, and $2,045,600 had been received. In March 1999, we received $1,000,000 from the sale of convertible debentures at a conversion price of $2.50 per share. During March 1999 through May 1999, we sold 326,334 shares in a private placement for $3.00 per share and received gross proceeds of $979,000. In May 1999, we sold in a private placement a total of $2,000,000 of our 12% notes due on the earlier of April 30, 2000, or completion of this offering. As part of such transaction, we issued to the investors a total of 200,000 shares of our common stock. In connection with the ProSoft licenses, we assumed notes issued by the previous holders of those licenses in the amount of $3,300,000. In December 1998, the remaining balance of $1.8 million was cancelled. As of March 31, 1999, our principal sources of liquidity consisted of $137,233 of cash. As of that date, our principal commitments consisted of operating leases, and commitments for advertising and promotional arrangements. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures and lease commitments consistent with anticipated growth in operations, infrastructure and personnel. We were established as eClassroom and, shortly thereafter, acquired two exclusive sublicenses to sell proprietary ProSoft I-Net Solutions courseware to the federal government and educational markets, respectively. To date, we have not been successful at generating any revenue from these sublicenses. These licenses have since been terminated and we believe that we have no further obligations to make additional payments under such licenses. We wrote off $3,822,000 in the period ended June 30, 1998, representing the carrying cost of such licenses. In May 1999, the sublicensors paid an additional $200,000 to ProSoft to terminate these license agreements and to settle all obligations relating to them. See "Related Party Transactions." YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are unable to distinguish between 20th century dates and 21st century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced to comply with these "Year 2000" requirements. Our business is dependent on the operation of numerous systems that could potentially be impacted by Year 2000 related problems. Those systems include, among others: - hardware and software systems used by us to process transactions and deliver other services to our clients, including our proprietary software systems, as well as hardware and software supplied by third parties; 30 - communications networks, such as the Internet and private intranets, on which we depend to permit eCommerce electronic transactions by our clients; - the internal systems of our clients and suppliers; - the hardware and software systems used internally by us in the management of our business; and - non-information technology systems and services used by us in our business, such as telephone systems and building systems. We have internally reviewed the proprietary software systems we use to process transactions and deliver other services to our clients. Although we believe that our internally developed applications and systems are designed to be Year 2000 compliant, we utilize third-party equipment and software that may not be Year 2000 compliant. Failure of third-party or currently owned equipment or software to operate properly with regard to the Year 2000 could require us to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on our business, prospects, financial condition, and results of operations. We do not believe that our expenditures to upgrade our internal systems and applications will be material to our business, prospects, financial condition, and results of operations. Furthermore, the success of our efforts may depend on the success of our clients in dealing with their Year 2000 issues. Many of these organizations are not Year 2000 compliant, and the impact of widespread client failure on our systems is difficult to determine. Customer difficulties due to year 2000 issues could interfere with eCommerce transactions or information, which might expose us to significant potential liability. If client failures result in the failure of our systems, our business, prospects, financial condition, and results of operations would be materially adversely affected. Furthermore, the purchasing patterns of these customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to become Year 2000 compliant. The costs of becoming Year 2000 compliant for current or potential customers may result in reduced funds being available to purchase and implement our applications and services. We are conducting a formal assessment of our Year 2000 exposure in order to determine what steps beyond those identified by our internal review may be advisable. We do not presently have a contingency plan for handling Year 2000 problems that are not detected and corrected prior to this occurrence. Our failure to address any unforeseen Year 2000 issue could materially adversely affect our business, prospects, financial condition, and results of operations. 31 BUSINESS IN GENERAL We provide turn-key eCommerce services designed to enable clients to extend their business to the Internet to conduct commercial transactions between business enterprises. The HUB of our eCommerce solution is our proprietary ICC, which consists of the hardware, proprietary and licensed software, and the related technical services necessary for our clients to transact eCommerce. We also design and build custom interfaces, or SPOKES, to connect business clients to the ICC. Our ICC is a scalable solution which allows clients to select services ranging from a simple Internet storefront advertising their products and taking orders through e-mail to a highly complex system of secure client extranets allowing vendors to interact and transact business-to-business eCommerce with one or more specific customers. INDUSTRY BACKGROUND THE INTERNET The Internet has grown rapidly in recent years, spurred by developments such as - inexpensive, readily available, and user-friendly Web browsers, - a large and growing installed base of advanced personal computers, - the adoption of faster and more cost efficient networks, - the emergence of compelling Web-based content and commerce applications, and - the growing sophistication of the user base. According to International Data Corp. ("IDC"), a leading research firm, the number of Internet users was 98 million worldwide at the end of 1998 and will continue to grow to 320 million by the end of 2002. The broad acceptance of the Internet has led to the emergence of secure Web sites accessible only within a given company, known as INTRANETS, and specialized intranets also available to select outsiders, such as clients, suppliers, or vendors, known as EXTRANETS, as new global communications and commerce environments, representing a significant opportunity for enterprises to interact in new, different, and highly efficient ways with customers, employees, suppliers, and partners. ECOMMERCE The Internet presents opportunities to transform businesses and entire industries as organizations exploit their potential to extend and enhance their business activities and gain competitive advantage. Companies are using the Internet to communicate and transact business on a one-to-one basis with existing customers and to target and acquire new customers. At the same time, companies are using the Internet to collaborate with their supply-chain partners and manage distribution and other strategic relationships. The Internet has also allowed businesses to identify new product and service offerings which extend and complement their core markets. A number of organizations have projected that the volume of business transacted by means of eCommerce will grow substantially from present levels. The United States Department of Commerce has estimated that business-to-business commerce by means of the Internet will be a $300 billion dollar marketplace by the year 2002. IDC has estimated that the total value of goods and services purchased over the Internet grew from $318 million in 1995 to an annualized amount of $5.4 billion in December 1996, and that sales are projected to increase to $95 billion in 2000 and to $400 billion by 2002. This firm has also projected that by the year 2002, 78% of all Internet commerce will occur in 32 the business-to-business sector. Currently, KPMG LLP estimates that business to business Internet commerce doubles approximately every 90 days. ECOMMERCE SERVICES MARKET IDC forecasts that the market for Internet and eCommerce services worldwide will grow from $4.6 billion in 1997 to $43.7 billion by 2002. Forrester Research, another technology industry research firm, estimates that the market for Internet and eCommerce services will grow from $5.4 billion in 1998 to $32.7 billion by 2002. These projections represent a compound annual growth rate of more than 55% over these periods. As a result of the recent growth of eCommerce and its acceptance as a mainstream medium for commercial transactions, businesses are investing in the strategic use of Internet solutions to transform their core business and technology strategies. This, in turn, has created a significant and growing demand for third-party Internet professional services and has resulted in a proliferation of companies offering specialized solutions, such as connectivity, transaction reporting, security, and Web site design to business customers. This specialization has resulted in a fragmented market that often requires the business customer to seek solutions from a number of different providers using differing, or even contradictory, strategies, models, and designs. The successful adoption of, and adaptation to, the Internet by companies and the conduct of commerce by means of the Internet pose significant challenges, including systems engineering, technical, commercial, strategic, and creative design challenges and an understanding of how the Internet transforms relationships between businesses and their internal organizations, customers, and business partners. Companies facing technology investment decisions often need outside technical expertise to recognize viable Internet tools, develop feasible architectures, and implement strategies. Companies must also be able to integrate new Internet applications with their existing systems. Finally, a successful solution requires that the Internet application, particularly the user interface, be engaging and easy to use. We believe that few of the existing eCommerce service providers have the range of skills required to assist their clients in a coordinated transformation of the way they use technology and implement Internet solutions. Accordingly, we believe that organizations are increasingly searching for professional services firms offering turn-key eCommerce solutions, including integrated strategy, technology and creative design, connectivity, transaction processing, data warehousing, transaction reporting, help desk, and consulting and training. Furthermore, we believe that organizations will increasingly look to Internet solutions providers that can leverage industry and client practices, increase predictability of success for Internet solutions, and decrease risks associated with implementation by providing low-cost, scalable solutions with minimal lead-time. THE NETGATEWAY SOLUTION IN GENERAL We have structured the ICC to provide scalable, fully integrated, turn-key solutions. We develop customized interfaces to connect our clients' Web sites, whether created and maintained by us or others on behalf of the clients, with the ICC and our eCommerce servers. As a result of our HUB and SPOKE structure, we can offer rapidly deployed, low cost eCommerce services, which incorporate the sales and other practices of our clients and their industries, as well as maintain our clients' prior investment in creating and maintaining a Web presence. 33 [GRAPHIC DEPICTION OF HUB AND SPOKE STRUCTURE WITH CORRESPONDING LABELS] THE ICC HUB The ICC consists of hardware and proprietary and licensed software, as well as related technical services, which are necessary in order to transact eCommerce. We have developed the ICC based upon an object-oriented, modular strategy. As a result, we are able to reuse functional software components of the ICC across different clients and industries, as well as allow introduction of new capabilities and services without adversely effecting existing systems. The following features are designed to provide more complete eCommerce services by overcoming limitations in external systems. - - INVENTORY MANAGEMENT - - ORDER STATUS AND HISTORY - - CUSTOMER SUPPORT FORUMS - - PURCHASE ACTIVITY REPORTING - - SECURE, WEB BROWSER BASED SYSTEM ADMINISTRATION - - REPORTING - - UNIVERSAL CLIENT DIRECTORY MANAGEMENT - - SALES AUTOMATION - - CUSTOMER SURVEY SYSTEM - - BUDGET REPORTING - - CUSTOMER SELF-ADMINISTRATION - - ORDER MANAGEMENT - - SYSTEM STATUS MONITORING - - PRODUCT CATALOG MANAGEMENT THE INTERFACE SPOKE We have the capability to rapidly design and deploy proprietary software interfaces which permit client Web sites, networks, and enterprise resource planning systems to connect with, receive relevant information from, and provide relevant information to, the ICC. Data integration between the ICC and the buyer or seller is managed in the SPOKE. Product catalogs, order information, order status, customer data, etc. can be transferred between the HUB and the buyer/seller by means of the SPOKE. Each interface or SPOKE is specific to a client and industry and contains knowledge about specific products and services as well as processes and business rules, including - - CUSTOM PRICING - - PURCHASING WORKFLOW - - UNIQUE ORDER HEADER FOR EACH CUSTOMER - - PRODUCT CONFIGURATION - - GRAPHICAL INTERFACE - - SPECIAL REPORTING NEEDS - - PRODUCT VARIATION RULES - - WORKFLOW WITH ROUTING AND APPROVALS All spokes are developed according to a common methodology so that, as clients in similar industries are added to the ICC, the cost and time of development is reduced by duplicating previously created modules. We have developed a substantial library of SPOKES which are available for future use. Customization, or SPOKE development, for clients can include: - - WEB SITE INTEGRATION - - THIRD PARTY AND CUSTOMER DEVELOPED SYSTEMS - - ORDER MANAGEMENT - - ACCOUNTING - - SHIPPING - - ENTERPRISE RESOURCE PLANNING SYSTEMS 34 ADVANTAGES We believe that the following are significant advantages of our eCommerce solution over other currently available alternatives: - Our customers do not invest in hardware, software, and staffing, but rather connect to our existing Netgateway infrastructure, which we believe is a highly economic method to obtain and maintain an eCommerce presence. - Clients with existing Web sites can maintain their investment in the creation of that presence while seamlessly adding eCommerce capabilities. - Because our infrastructure permits scalable eCommerce solutions, we can offer incremental services to our clients through the activation of additional proprietary software modules in response to client growth or commercial requirements quickly and cost-effectively. - Because our proprietary and other software resides only on our servers, we can offer clients easy access to additional functionality on a test or temporary basis in order to permit our clients to try new or additional services with their respective customers on their Web sites, and can provide real time "best of breed" updates, patches, and fixes to software with no additional effort by the client. BUSINESS STRATEGY Key elements of our strategy are described below. - IMPLEMENT COST EFFECTIVE SERVICES WITH BROAD APPEAL. We have designed our operations and business model to focus upon the eCommerce services of highest value to our clients. These are services which require high levels of investment of resources or technical expertise by clients in the event that these clients were to decide to provide these services themselves. By offering these services to a number of clients simultaneously and by creating and utilizing reusable software modules, we are able to spread the relatively fixed costs associated with the creation, purchase, or customization of the software, processes, procedures, or computer hardware over a larger volume of eCommerce transactions, permitting us to offer these services to our clients on a highly cost effective basis. - LEVERAGE RELATIONSHIPS WITH RESELLERS TO MAXIMIZE GROWTH. We have embraced a channel strategy for distribution of our Internet storefront services. We have found that this particular service offering matches well with any organization that has existing business relationships whereby adding an eCommerce solution will strengthen the relationship. Examples of our resellers include Internet portal companies, telecommunications companies, Internet service providers, cable companies, overnight delivery companies, banks, and computer hardware manufactures. See "Business--Clients and Strategic Relationships." - PROVIDE EASY ACCESS TO SCALABLE ECOMMERCE FUNCTIONALITY. We have designed the ICC and our hardware and software infrastructure to permit scalable eCommerce solutions and can offer incremental services to our clients through the activation of additional proprietary software modules which provide additional services and added functionality in response to client growth or commercial requirements quickly. - OFFER ADDITIONAL FUNCTIONALITY OF ICC SERVICES. Our HUB and SPOKE approach constantly generates new features for our ICC clients. For example, as the SPOKE features become dominant in a particular industry, that feature is integrated into the HUB to become a new standard feature of the ICC, benefitting all ICC users in that industry. 35 - USE OF TECHNOLOGY TO CREATE ECOMMERCE HUBS. We have improved the attractiveness of our services by creating eCommerce HUBS in the form of (1) private label Internet malls, where eCommerce sites sponsored by a common reseller or of similar product offerings are grouped together for convenient retail use by the public, or (2) secure client extranets. - INCORPORATE CLIENT AND INDUSTRY PRACTICES AND MAINTAIN CLIENTS' PRIOR INVESTMENT. We have structured the ICC and our hardware and software infrastructure, and have developed proprietary software, to permit the easy interconnection of client Web sites, whether prepared and maintained by us or others on behalf of our clients, with our eCommerce servers. As a result, we can offer eCommerce services which incorporate the sales and other practices of our clients and their industries, as well as maintain the clients' prior investment in creating and maintaining a Web presence. - SEEK STRATEGIC ACQUISITIONS AND INVESTMENTS. We intend to seek strategic acquisitions of, and investments in, businesses and technologies which we believe will enhance the functionality of our services, operations, and competitive position. We have entered into a letter of intent providing for the acquisition of the technology of ShoppingPlanet, an eCommerce applications developer, which we believe will enhance our functionality. See "Risk Factors" and "Use of Proceeds." SERVICES OFFERED We offer our eCommerce services which range, in general, from simple Internet storefronts to highly complex systems. We currently offer the following specific services to our clients: - WEB SITE DEVELOPMENT AND DESIGN; DEVELOPMENT OF ELECTRONIC STOREFRONTS. We believe that a professionally designed Web site is critical to the success of business customers desiring to transact eCommerce. We offer Web site development, design, and maintenance solutions to our business customers, including the development and design of the graphical interfaces and applications necessary to fully integrate each customer's Web site with its order and payment processing, order confirmation, and fulfillment centers. Our proprietary software for Web site and electronic storefront development features its own template system, multiple product search engines, multiple price sets and catalogues, and support for multiple currencies. Following this offering, we intend to further develop and enhance this solution and to aggressively market these services through our channel marketing strategy. - INTERNET MALL DEVELOPMENT AND DESIGN. We believe that the use of "INTERNET MALLS" is critical to create an effective eCommerce marketplace. Through the creation and use of private labelled Internet malls, users of our services can take advantage of both the pre-existing relationships and marketing efforts of the reseller sponsoring this private labeled mall, thereby increasing traffic to, and exposure of, their site. In addition, we have developed and feature a proprietary eCommerce search engine that searches within each Internet mall, as well as across all Internet malls served by our ICC. We believe the use of malls and the availability of our robust eCommerce search engine adds substantial value to individual stores and resellers alike. For our customers not otherwise affiliated with any mall, we provide access to our own mall as a value-added service. - TRANSACTION PROCESSING. We offer solutions which capture and transact customer orders according to the business rules and specific "back office" needs of the particular client. Our eCommerce system solution allows us to receive and process orders and payments, provide order confirmation and reporting, and organize order fulfillment. We also have the ability to provide support for eCommerce transactions using checks, credit cards, electronic funds transfers, purchase orders, and other forms of payment. We are currently providing this capability in conjunction with certain third-party vendors, including Payment Net in San Jose, California, 36 Authorized Net in Salt Lake City, Utah, Clear Commerce in Austin, Texas, eCommerce Exchange in Laguna Hills, California and Card Services International in Agoura Hills, California. Following this offering, Netgateway plans to pursue its own secured transaction clearing solutions as well as a strategic alliance or acquisition of a secured transaction-processing center. - DATA WAREHOUSING AND TRANSACTION REPORTING. We anticipate that, as our business continues to grow, we will compile large amounts of transactional and other data with respect to our clients and their businesses, markets, customers, and eCommerce transactions. We have the capability to automatically generate reports relating to order confirmation, inventory tracking, fulfillment, transaction details, customer data, market research, and other sophisticated management reports based on the transactions facilitated through our hardware and software infrastructure. Following this offering, we plan to further develop these capabilities. - CUSTOMER SUPPORT SERVICES. We provide our clients with 24 X 7 customer service and support through our customer support staff of 17 individuals. - ADVERTISING. We have signed an agreement with 24/7, Inc. to manage national banner advertising in our Internet malls. We share advertising revenues with the respective mall owner on whose Web site the advertisement resides. - CONNECTIVITY SOLUTIONS. In order for business customers to effectively engage in eCommerce, they must be connected to the Internet. We assist our business customers in structuring and obtaining high-speed Internet connectivity solutions to improve their business-to-business communication by means of the Internet. We provide these connectivity solutions to our business customers in conjunction with third party Internet access providers. Our connectivity solutions also include the ability to host clients' Web sites and provide clients with security measures necessary for secure transmissions over the Internet. We support our hosted Web sites by a connectivity enhancing, high-performance, high-bandwidth server system. SALES AND MARKETING IN GENERAL We sell and market our services by means of a combination of direct sales and authorized resellers. We maintain a direct sales force of six full-time employees. We anticipate increasing our sales force substantially following this offering, including creating a group within our sales force trained to assist resellers in marketing our products and services. If a client requiring these more sophisticated services is provided by a Netgateway reseller, we ordinarily pay a finders fee to the reseller. For entry level ICC services, such as simple Internet storefronts, we have developed, and are continuing to develop, a series of channel partners to distribute these services. Potential resellers include telecommunication companies, value-added resellers, cable companies, Internet portals, and Internet service providers. Reseller pricing has generally been dependent upon volume and commitments from the reseller. We will "private label" the Internet storefront service and establish private branded Internet malls for resellers in order to provide the resellers with the means to drive traffic to these storefronts. The storefronts and mall will have a customized "look and feel" of the reseller. For purposes of branded equity, such as XOOM.com's Internet mall located at WWW.XOOMMEMBERSTORES.COM, all sites will have the "STORESONLINE.COM" logo as well as "POWERED BY NETGATEWAY" designation. We will establish and maintain the mall for the reseller as long as the reseller drives traffic to the mall by means of their marketing and advertising efforts. 37 PACKAGED SERVICES While clients can select ICC services and particular features individually, we generally market our services through the use of packaged services. Below is a table which summarizes the features of each of our service packages followed by a detailed description of each package.
FEATURES PACKAGE ONE PACKAGE TWO PACKAGE THREE - -------------------------------------------------- --------------- --------------- ----------------- - --------------------------------------------------------------------------- Web Account Access - - - Static Webpages................................... - - - - --------------------------------------------------------------------------- 24/7 E-Mail support - - - Custom Templates.................................. - - - - --------------------------------------------------------------------------- WYSIWYG - - n/a 24/7 Phone Technical Support...................... - - - --------------------------------------------------------------------------- Shopping Cart - - Real-Time Credit Card Transactions................ - - - --------------------------------------------------------------------------- Multiple Price-Sets - - Custom Shipping Rules............................. - - - --------------------------------------------------------------------------- Order Status and Tracking - - Store Statistical Reporting....................... - - - --------------------------------------------------------------------------- Unique Domain Name/Virtual Hosting - - Custom Forms...................................... - - - --------------------------------------------------------------------------- Import and Export Data - - Search and Browse Functionality................... - - - --------------------------------------------------------------------------- E-Mail Confirmation to Customers - - Featured Products and Sale Items.................. - - - --------------------------------------------------------------------------- Printable Coupons - - Unlimited Products and Categories................. - - - --------------------------------------------------------------------------- Inventory Tracking - - Integration with Existing Web Site................ - - - --------------------------------------------------------------------------- Custom Price Discount Methods - - Multimedia Support................................ - - --------------------------------------------------------------------------- Unique Catalog Per Customer - Assigned Access Rights............................ - - --------------------------------------------------------------------------- Multiple Order Methods - Integration with External System.................. -
SERVICE PACKAGE ONE Clients can design a professional three page Web site, choosing from a selection of over 25 templates. This entry level service is available through our resellers as an introduction to eCommerce, and the sites are static in nature. While we do not offer free help desk support or credit card processing with this package, e-mail based customer support is available. 38 SERVICE PACKAGE TWO--STORESONLINE.COM PACKAGE This package is sold by means of authorized Netgateway resellers and permits clients to have a fully functional Internet commerce store quickly and easily. This service requires no investment in hardware or software and clients can quickly and dynamically generate sales. SERVICE PACKAGE THREE--BUSINESS TO BUSINESS ECOMMERCE For businesses that need more robust eCommerce services for business to business applications, the Netgateway ICC offers additional highly customized features, including those described under the heading "Business--The Netgateway Solution--The ICC Hub," designed to meet the requirements of our clients in an extranet setting. These features are sold directly by our sales professionals as each business to business opportunity involves different uses of these features. CLIENTS AND STRATEGIC RELATIONSHIPS We view our clients as both the sponsor or owner of the eCommerce site in question and our resellers. We are currently processing eCommerce transactions for over 550 clients. The clients are geographically dispersed and represent a mix of businesses. We require each client using our services to enter into a standard subscription agreement. Each subscription agreement provides that the client pays us both monthly subscription fees for the services requested and specified fees per transaction. These contracts are terminable by the client upon 30 days prior written notice. In addition, we enter into agreements with its resellers. These agreements vary significantly by reseller based on the levels of service the reseller will distribute and other factors. The following are descriptions of a number of the contracts into which we have recently entered: XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS: XMCM), an eCommerce Web portal with over 7.8 million members. Under the terms of the agreement: - we are the sole provider of a private labeled version of XOOM.com's Web storefront building and hosting products and services; - we developed XOOM.com's Internet mall located at WWW.XOOMMEMBERSTORES.COM; - we are the sole provider of eCommerce processing services to XOOM.com's eCommerce customers; and - we will utilize XOOM.com as a Netgateway reseller to provide eCommerce solutions and services to its member companies. CB RICHARD ELLIS. In March 1999, we entered into an electronic commerce services agreement with CB Richard Ellis (NYSE: CBG), one of the world's largest building management and real estate services companies with over 12,000 properties under management and over $1 billion in revenue during 1998. Under this agreement, we have been engaged to develop, manage, and service CB Richard Ellis' eCommerce mall and client extranet. This Web site is designed to permit CB Richard Ellis personnel to conduct all of their corporate materials purchasing, including computers and building and maintenance supplies, and all global facilities management by means of the Internet. In addition, CB Richard Ellis will offer to the tenants in the buildings they manage volume purchasing services on the Internet for a variety of office products and supplies. In connection with this agreement, we issued to CB Richard Ellis warrants exercisable for up to 550,000 shares of our common stock at an exercise price of $11.00 per share, which warrants are earned and vest upon the achievement by CB Richard Ellis of designated eCommerce volume milestones through our ICC. These warrants expire on June 30, 2001. 39 GATEWAY. In March 1999, we entered into an agreement with Gateway Inc. (NYSE: GTW), a manufacturer of personal and business computers and service provider. Under the terms of this agreement, we will offer our Internet storefront services package, including Web site design, hosting, and transaction processing services, to Gateway customers. OTHER RESELLERS. We have also recently entered into reseller agreements, pursuant to which the reseller offers our services to their customers, with FedPage (WWW.FEDPAGE.COM), a division of Federal Business Council, Inc., the industry leader in the production of on site federal technology shows, Ayrix Technologies, OKC Webshopper, Country Wide Net, Hill Country Network, Encom Industries, Epicycle Business Solutions, Integrated Systems Solutions, and Looks Creative Designing Arts. Initial customer service and support for our customers will be provided through our customer support staff of 17 individuals that provides telephone customer service and support 24 hours a day, 365 days a year. We can also provide customers with access to information and customer support services by means of the Internet. COMPETITION The eCommerce services market is intensely competitive and characterized by rapidly evolving technologies. We currently face substantial competition in all of our product and service lines. We expect such competition to continue and to increase in the future, as new competitors enter the Internet market and existing competitors expand their product and service offerings. Our target market is rapidly evolving and is subject to continuous technological change. As a result, our competitors may be better positioned to address these developments or may react more favorably to these changes, which could have a material adverse effect on our business, prospects, financial condition, and results of operations. We compete on the basis of a number of factors, including the attractiveness of the eCommerce services offered, the breadth and quality of these services, creative design, engineering expertise, pricing, technological innovation, and understanding clients' strategies and needs. Many of these factors are beyond our control. Existing or future competitors may develop or offer eCommerce services that provide significant technological, creative, performance, price, or other advantages over the services offered by us. Our current and potential competitors include (1) Internet integrators and Web presence providers, such as IBM, iXL, Organic Online, Proxicom, and USW; (2) large information technology consulting service providers, such as Andersen Consulting, Cambridge Technology Partners, and EDS; (3) Internet commerce providers, such as Yahoo! Stores; (4) software development companies, such as Microsoft, Broadvision, Open Market, and InterShop; (5) telecommunications companies, such as AT&T and MCI; (6) application service providers, such as US Internetworking and the recently announced EDS/SAP relationship, and (7) Internet and online service providers, such as America Online, Lycos, and Earthlink. Although most of these types of competitors to date have not offered a full range of Internet professional services, many are currently offering these services or have announced their intention to do so. These competitors at any time could elect to focus additional resources in our target markets, which could materially adversely affect our business, prospects, financial condition, and results of operations. Many of our current and potential competitors have longer operating histories, larger customer bases, longer relationships with clients, and significantly greater financial, technical, marketing, and public relations resources than we do. Competitors that have established relationships with large companies, but have limited expertise in providing Internet solutions, may nonetheless be able to successfully use their client relationships to enter our target market or prevent our penetration into their client accounts. 40 Additionally, in pursuing acquisition opportunities, we may compete with other companies with similar growth strategies, certain of which competitors may be larger and have greater financial and other resources than we have. Competition for these acquisition targets likely could also result in increased prices of acquisition targets and a diminished pool of companies available for acquisition. There are relatively low barriers to entry into our business. We have limited proprietary technology that would preclude or inhibit competitors from entering the eCommerce services market. Therefore, we must rely on the skill of our personnel and the quality of our client service. The costs to develop and provide eCommerce services are low. Therefore, we expect that we will continually face additional competition from new entrants into the market in the future, and we are subject to the risk that our employees may leave us and start competing businesses. The emergence of these enterprises could have a material adverse effect on our business, prospects, financial condition, and results of operations. INTELLECTUAL PROPERTY Our success is dependent upon our proprietary technology and other intellectual property and on our ability to protect our proprietary technology and other intellectual property rights. In addition, we must conduct our operations without infringing on the proprietary rights of third parties. We also intend to rely upon unpatented trade secrets and the know-how and expertise of our employees. To protect our proprietary technology and other intellectual property, we rely primarily on a combination of the protections provided by applicable copyright, trademark, and trade secret laws as well as on confidentiality procedures and licensing arrangements. We have applications pending with the United States Patent and Trademark Office for NETGATEWAY, NETGATEWAY ICC, NETGATEWAY INTERNET COMMERCE CENTER, NETGATEWAY "WHERE BUSINESS DOES BUSINESS ON THE INTERNET," STORESONLINE, STORESONLINE.COM, NETGATEWAY KNOWLEDGE AND COMMERCE OF THE DIGITAL AGE, NETGATEWAY, THE POWER OF ORGANIZED INTERNET COMMERCE, and two NETGATEWAY logos. Although we believe that we have taken appropriate steps to protect our unpatented proprietary rights, including requiring that our employees and third parties who are granted access to our proprietary technology enter into confidentiality agreements with us, there can be no assurance that these measures will be sufficient to protect our rights against third parties. Others may independently develop or otherwise acquire unpatented technologies or products similar or superior to ours. We license from third parties certain software and Internet tools that we include in our services and products. If any of these licenses were terminated, we could be required to seek licenses for similar software and Internet tools from other third parties or develop these tools internally. We may not be able to obtain such licenses or develop such tools in a timely fashion, on acceptable terms, or at all. Companies participating in the software and Internet technology industries are frequently involved in disputes relating to intellectual property. We may in the future be required to defend our intellectual property rights against infringement, duplication, discovery, and misappropriation by third parties or to defend against third-party claims of infringement. Likewise, disputes may arise in the future with respect to ownership of technology developed by employees who were previously employed by other companies. Any such litigation or disputes could result in substantial costs to, and a diversion of effort by us. An adverse determination could subject us to significant liabilities to third parties, require us to seek licenses from, or pay royalties to, third parties, or require us to develop appropriate alternative technology. Some or all of these licenses may not be available to us on acceptable terms or at all, and we may be unable to develop alternate technology at an acceptable price or at all. Any of these events could have a material adverse effect on our business, prospects, financial condition, and results of operations. 41 EMPLOYEES As of the date of this prospectus, we had 63 full-time employees: 13 engaged in sales and marketing, 22 engaged in the development of our eCommerce solutions, 17 in customer support, and 11 in general administration and finance. We intend to hire additional key personnel in the near future. FACILITIES Our headquarters are located at 300 Oceangate, Suite 500, Long Beach, California 90802. These premises, which occupy 9,100 square feet, are subject to a lease between Netgateway and an unaffiliated third party. The lease expires on July 9, 2001 and our monthly payments under this lease are currently approximately $10,000. We believe that, in the event alternative or larger offices are required, such space is available at competitive rates. To house and support the ICC, Netgateway maintains its equipment in Exodus' state-of-the-art data center, which provides a 24x7 environment with multiple redundant high-speed connections to the Internet backbone. This data center features raised floors, HVAC temperature control systems, and seismically braced racks. All systems are connected to high capacity uninterruptable power supplies, which are in turn backed by a high output diesel generator. Main power is provided to the facility through connectivity to two separate power grids. Non-stop connectivity is provided through multiple fiber egresses using different bandwidth providers. Facility security includes 24x7 keycard access, video monitors, motion sensors, and staff members on-site. GOVERNMENTAL REGULATION We are not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to access to, or commence on, the Internet. However, due to the increasing popularity and use of the Internet, it is possible that various laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing, and characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our products or services, our cost of doing business or otherwise have an adverse effect on our business, prospects, financial condition, or results of operations. Moreover, the applicability to the Internet of existing laws governing issues, such as property ownership, libel, and personal privacy is uncertain. Future federal or state legislation or regulation could have a material adverse effect on our business, prospects, financial condition, and results of operations. LEGAL MATTERS We are not a party to any material litigation or legal proceeding relating to our products and services or otherwise. We are not aware of any material legal proceedings threatened against us. 42 MANAGEMENT OUR DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of Netgateway, their ages, and their positions held with Netgateway are as follows:
NAME AGE POSITION - --------------------------------------- --- ---------------------------------------------- Keith D. Freadhoff..................... 40 Chairman of the Board and Chief Executive Officer Donald M. Corliss, Jr. ................ 49 President and Director David Bassett-Parkins.................. 38 Chief Financial Officer, Chief Operating Officer, and Director Hanh Ngo............................... 28 Executive Vice President--Operations Craig Gatarz........................... 37 General Counsel Scott Beebe............................ 47 Director Ronald Spire........................... 49 Director
The following is certain summary information with respect to the directors, director-nominee, and executive officers of Netgateway. KEITH D. FREADHOFF, has served as Chairman of the Board of Directors and the Chief Executive Officer of Netgateway since our inception. From November 1994 to November 1997, Mr. Freadhoff was the co-founder, Chairman of the Board of Directors, and Chief Executive Officer of Prosoft I-Net Solutions, a public company. From November 1993 to November 1994, Mr. Freadhoff has served as the Executive Director of Career Planning Center, a community based organization serving disadvantage populations with job training and social services. From 1993 to 1994, he also served as President of the Focus Institute, a California based Microsoft Authorized Training and Education Center. From 1991 to 1992, Mr. Freadhoff served as a Vice President of Frojen Advertising, an advertising and marketing firm. From 1987 to 1991, Mr. Freadhoff founded and served as President of Oasis Corporate Education and Training, a customized training company that developed courseware for manufacturing, financial, service, and public organizations. Mr. Freadhoff completed graduate level work at the University of Southern California and earned his undergraduate degree at the University of Nebraska. DONALD M. CORLISS, JR., has served as the President and a Director of Netgateway since March 1998. From 1993 to June 1998, Mr. Corliss was an independent investor and owned, developed, and served in senior management positions with several business and development ventures. As co-founder in many of these projects, responsibilities included the operation, management, structuring, and implementation of business strategies and plans, as well as the development and implementation of the general business and accounting systems necessary for such business operations. From 1977 to 1993, Mr. Corliss was engaged in private law practice. Mr. Corliss earned a LLM in Taxation from New York University, his Juris Doctorate degree from the University of Santa Clara, and a Bachelor of Arts degree from the University of California at Santa Barbara. Of the ventures of Mr. Corliss, two real estate development ventures, Westover Hills Development, Inc. and Inglehame Farms Ltd., sought protection from creditors pursuant to Chapter 11 of the United States Bankruptcy Code in 1997 and 1998, respectively. Mr. Corliss has served as a director and executive officer of Westover, and a director and executive officer of one of the general partners of Inglehame, until mid 1998 when he resigned. Westover has since emerged from Chapter 11 and has commenced operations. DAVID BASSETT-PARKINS, has served as Chief Financial Officer, Chief Operating Officer, and a Director of Netgateway since our inception in March 1998. From February 1992 to May 1998, Mr. Bassett-Parkins held various senior management positions at Wedbush Morgan Securities, a privately held regional securities firm, including Vice President of Management Information Systems, Vice President of Customer Services, and Vice President of Client Banking Services. From 1988 to 43 February 1992, Mr. Bassett-Parkins served as a Director of Automation for ISD, a privately held Interior Architecture firm based in Chicago. From 1985 to 1988, Mr. Bassett-Parkins was managing partner for Architectural CADD Systems, a privately held software developer and reseller. Mr. Bassett-Parkins holds a B.S. in Management from California State Polytechnic University, Pomona and an Executive Education Certificate from University of California at Los Angeles. HANH NGO, has served as Executive Vice President--Operations of Netgateway since June 1998. Prior to joining Netgateway, Ms. Ngo held the position in Financial Planning and Analysis as a Financial Analyst for Nissan Motor Corporation from June 1997 to June 1998. From March 1992 to June 1997, Ms. Ngo worked in various capacities at Wedbush Morgan Securities, a privately held regional securities firm, including as a business analyst for the vice president and as a client banking officer and licensed stockbroker. Ms. Ngo holds a M.B.A. in Finance from California State University, Northridge, and a B.A. in Economics from University of California, Irvine. CRAIG GATARZ, has served as General Counsel of Netgateway since April 1999. From 1987 until April 1999, Mr. Gatarz was an attorney at Jones, Day, Reavis & Pogue, a law firm, and specialized in corporate law, particularly corporate restructurings and asset-based lending transactions. Mr. Gatarz received his law degree in 1987 from the University of Virginia School of Law and is admitted to practice in New York, New Jersey, and California. Mr. Gatarz serves on the board of directors of BBMG Entertainment, Inc., a California-based film production company. SCOTT BEEBE, has served as a Director of Netgateway since June 1998. From April 1987 through June 1998, Mr. Beebe served as the managing partner of Steps, an investment and consulting firm specializing in high tech growth companies. Mr. Beebe was a registered representative in the securities industry from 1982 through 1998. Mr. Beebe graduated from the University of California at Berkeley in 1973. RONALD SPIRE has served as a Director of Netgateway from September 1998 to December 1998 and since April 1999. Since September 1989 Mr. Spire has been retired. From June 1984 to September 1989, Mr. Spire was the co-founder and an executive of PCI Group, Inc., a subcontractor for aerospace manufacturers. From December 1981 to June 1984 Mr. Spire was a partner with Wolfgang Puck in Chinois on Main, Inc. and other restaurants in the Los Angeles area. Mr. Spire earned his Juris Doctorate degree from Southwestern University School of Law, and his Bachelor or Arts degree from the University of California at Los Angeles. ELECTION OF OFFICERS Officers are elected annually by the board of directors and hold office at the discretion of the board of directors. There are no family relationships among our directors and executive officers. COMMITTEES OF THE BOARD OF DIRECTORS In September 1998, the board of directors created a compensation committee, which will, upon the closing of the offering, be comprised of Messrs. Freadhoff, Beebe, and Spire. The compensation committee has (1) full power and authority to interpret the provisions of, and supervise the administration of, our stock option plans and (2) the authority to review all of our compensation matters. In April 1999, the board of directors created an audit committee, which is currently comprised of Messrs. Corliss, Beebe, and Spire. The audit committee is responsible for reviewing the results of the audit engagement with the independent auditors; reviewing the adequacy, scope, and results of the internal accounting controls and procedures; reviewing the degree of independence of the auditors; reviewing the auditors' fees; and recommending the engagement of auditors to the full board of directors. 44 EXECUTIVE COMPENSATION None of our executive officers received cash compensation during the period from our inception on March 4, 1998 to June 30, 1998 or for the six months ended December 31, 1998. In December 1998, Messrs. Freadhoff, Corliss, and Bassett-Parkins and Ms. Ngo were granted stock options exercisable for 400,000 shares, 400,000 shares, 400,000 shares, and 266,667 shares of common stock, respectively, under our 1998 stock option plan for senior executives. For a description of the current compensation arrangements for our executive officers, please see "Management--Employment Agreements." DIRECTOR COMPENSATION To date, directors have received no compensation for their services other than reimbursement of expenses relating to attending meetings of the board of directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We did not have a compensation committee during the period from our inception on March 4, 1998 through September 29, 1998. On December 15, 1998 the compensation committee determined to accrue salary retroactively for the executive officers of Netgateway commencing July 1, 1998. The executive officers of Netgateway have since waived this salary. There were no interlocking relationships between us and other entities that might affect the determination of the compensation of our directors and executive officers. EMPLOYMENT AGREEMENTS The table below is a summary of the provisions of the employment agreements of our executive officers.
CONTRACT COMMENCEMENT CONTRACT NAME DATE TERMINATION DATE PER ANNUM SALARY BONUS ARRANGEMENTS - --------------------------- -------------- ----------------- ------------------ --------------------------- Keith D. Freadhoff, January 1, December 31, 2001 $185,000 through $57,500 payable in July Chairman of the Board of 1999 June 30, 1999 1999 Directors and Chief $201,500 Eligible for bonus of up to Executive Officer thereafter $28,750 for each of the three month periods ended September 30, 1999 and December 31, 1999 upon satisfaction of earnings milestones Otherwise as determined by the board of directors Donald M. Corliss, Jr., January 1, December 31, 2001 $185,000 through $55,000 payable in July President and Director 1999 June 30, 1999 1999 $192,500 Eligible for bonus for each thereafter of the three month periods ended September 30, 1999 and December 31, 1999 upon satisfaction of earnings milestones Otherwise as determined by the board of directors
45
CONTRACT COMMENCEMENT CONTRACT NAME DATE TERMINATION DATE PER ANNUM SALARY BONUS ARRANGEMENTS - --------------------------- -------------- ----------------- ------------------ --------------------------- David Bassett-Parkins, January 1, December 31, 2001 $175,000 $50,000 payable in July Chief Operating Officer, 1999 1999 Chief Financial Officer, Eligible for bonus of up to and Director $25,000 for each of the three month periods ended September 30, 1999 and December 31, 1999 upon satisfaction of earnings milestones Otherwise as determined by the board of directors Hanh Ngo, January 1, December 31, 2001 $135,000 $25,000 payable in July Executive Vice President-- 1999 1999 Operations Eligible for bonus of up to $12,500 for each of the three month periods ended September 30, 1999 and December 31, 1999 upon satisfaction of earnings milestones Otherwise as determined by the board of directors Craig Gatarz, April 5, 1999 April 5, 2002 $120,000 through As determined by the board General Counsel December 31, 1999 of directors. $150,000 thereafter
In the event of a change in control of Netgateway, as defined in each of these employment agreements, all options previously granted to these individuals which remain unvested will automatically vest immediately. Upon a termination of the employment of any of these individuals following a change in control for any reason other than the relevant officer's death or disability or for cause (as defined in the respective employment agreement), we are required to pay to such individual in the case of Messrs. Freadhoff, Corliss, and Bassett-Parkins, a lump sum severance payment equal to three times the sum of (1) his then current annual salary and (2) his highest bonus in the three year period preceding the change in control, and in the case of Ms. Ngo or Mr. Gatarz, a lump sum severance payment equal to two times the sum of (1) her or his then current annual salary and (2) her or his highest bonus in the two year period preceding the change in control. If this severance payment results in the imposition of an excise tax on the relevant individual, we are required to gross up this individual for such excess tax and any income taxes arising as a result of the gross up payment. In addition, if the relevant individual's employment is terminated by us without cause (as defined in the relevant employment agreement) or by the relevant individual with good reason (as defined in the relevant employment agreement), then we are required to pay the relevant individual a lump sum severance payment equal to his or her current annual salary for the remainder of the employment period (as defined in the relevant employment agreement). The relevant individual may terminate his or her employment at any time upon at least 30 days written notice to us. Upon the termination of such agreement, the relevant individual is subject to non-compete, non-disclosure, and non-solicitation provisions for one year. STOCK OPTION PLANS 1998 STOCK OPTION PLAN FOR SENIOR EXECUTIVES In December 1998, the board of directors adopted, subject to approval by our stockholders, the 1998 stock option plan for senior executives. This plan provides for the grant of options to purchase up 46 to 5,000,000 shares of common stock to senior executives of Netgateway. Options may be either "incentive stock options" or non-qualified stock options under Federal tax laws. This plan will be administered by the compensation committee of the board of directors, a majority of the members of which consist of "non-employee directors" of the board of directors. The committee will determine, among other things, the individuals who shall receive options, the time period during which the options may be partially or fully vested and exercisable, the number of shares of common stock issuable upon the exercise of each option, and the option exercise price. The exercise price per share of common stock subject to an incentive option may not be less than the fair market value per share of common stock on the date the option is granted. The per share exercise price of the common stock subject to a non-qualified option may be established by the committee, but shall not be less than 50% of the fair market value per share of common stock on the date the option is granted. The aggregate fair market value of common stock for which any person may be granted incentive stock options which first become exercisable in any calendar year may not exceed $100,000 on the date of grant. No stock option may be transferred by an optionee other than by will or the laws of descent and distribution or, if permitted, pursuant to a qualified domestic relations order and, during the lifetime of the optionee, the option will be exercisable only by the optionee. In the event of termination of employment by reason of death, disability, or by us for cause (as defined in each optionee's employment agreement), the optionee will have no more than 365 days after such termination during which the optionee shall be entitled to exercise the vested options, unless otherwise determined by the board of directors. Upon termination of employment by us without cause or by the optionee for good reason (as defined in the optionee's employment agreement), the optionee's options remain exercisable to the extent the options were exercisable on the date of such termination until the expiration date of the options pursuant to the option agreement. We may grant options under this plan within ten years from the effective date of the plan. The effective date of this plan is December 31, 1998. Holders of incentive stock options granted under this plan cannot exercise these options more than ten years from the date of grant. Options granted under this plan generally provide for the payment of the exercise price in cash and may provide for the payment of the exercise price by delivery to us of shares of common stock already owned by the optionee having a fair market value equal to the exercise price of the options being exercised, or by a combination of these methods. Therefore, if it is provided in an optionee's option agreement, the optionee may be able to tender shares of common stock to purchase additional shares of common stock and may theoretically exercise all of his stock options with no additional investment other than the purchase of his original shares. Any unexercised options that expire or that terminate upon an optionee's ceasing to be employed by us become available again for issuance under this plan. On the date of this prospectus, options exercisable for an aggregate of 2,596,667 shares of common stock have been granted pursuant to this plan at a weighted average exercise price of $4.14 per share. 1998 STOCK COMPENSATION PROGRAM In July 1998, the board of directors adopted the 1998 stock compensation program. This program provides for the grant of options to purchase up to 1,000,000 shares of common stock to officers, employees, directors, and independent contractors and agents of Netgateway. Options may be either "incentive stock options" or non-qualified stock options under Federal tax laws. This program will be administered by the board of directors, or, if options are being granted to one or more of our executive officers by a committee of the board a majority of the members of which shall consist of "non-employee directors" of the board of directors. The board of directors or the 47 committee, as the case may be, will determine, among other things, the individuals who shall receive options, the time period during which the options may be partially or fully vested and exercisable, the number of shares of common stock issuable upon the exercise of each option, and the option exercise price. The exercise price per share of common stock subject to an option may not be less than the fair market value per share of common stock on the date the option is granted. The aggregate fair market value of common stock for which any person may be granted incentive stock options which first become exercisable in any calendar year may not exceed $100,000 on the date of grant. No stock option may be transferred by an optionee other than by will or the laws of descent and distribution or, if permitted, pursuant to a qualified domestic relations order and, during the lifetime of the optionee, the option will be exercisable only by the optionee. In the event of termination of employment for reasons other than the death or disability of the optionee, the option shall terminate immediately, provided, however, that the board of directors may, in its sole discretion, allow the option to be exercised, to the extent exercisable on the date of termination of employment or service, at any time within 60 days from the date of termination of employment or service. In the event of termination of employment by reason of the death or disability of the optionee, the option may be exercised, to the extent exercisable on the date of death or disability, within one year from such date. We may grant options under this program within ten years from the effective date of the plan. The effective date of this program is July 31, 1998. Holders of incentive stock options granted under this program cannot exercise these options more than ten years from the date of grant. Options granted under program generally provide for the payment of the exercise price in cash and may provide for the payment of the exercise price by delivery to us of shares of common stock already owned by the optionee having a fair market value equal to the exercise price of the options being exercised, or by a combination of these methods. Therefore, if that is provided in an optionee's option agreement, the optionee may be able to tender shares of common stock to purchase additional shares of common stock and may theoretically exercise all of his stock options with no additional investment other than the purchase of his original shares. Any unexercised options that expire or that terminate upon an optionee's ceasing to be employed by us become available again for issuance under this program. Although this program permits us to grant, in addition to incentive stock options and non-qualified stock options, (1) rights to purchase shares of our common stock to employees, (2) restricted shares of our common stock, (3) stock appreciation rights, and (4) performance shares of common stock, we have not issued any other type of compensation under this program other than non-qualified stock options and have agreed not to do so in the future. On date of this prospectus, options exercisable for an aggregate of 981,030 shares of common stock have been granted pursuant to this plan at a weighted average exercise price of $1.69 per share. DIRECTORS' LIMITATION OF LIABILITY Our certificate of incorporation and/or by-laws include provisions to (1) indemnify the directors and officers to the fullest extent permitted by the Delaware General Corporation Law including circumstances under which indemnification is otherwise discretionary and (2) eliminate the personal liability of directors and officers for monetary damages resulting from breaches of their fiduciary duty, except for liability for breaches of the duty of loyalty, acts, or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, violations under Section 174 of the Delaware General Corporation Law or for any transaction from which the director derived an improper personal benefit. We believe that these provisions are necessary to attract and retain qualified persons as directors and officers. 48 We have applied for directors and officers liability insurance in an amount of not less than $2 million. Insofar as indemnification for liability arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions or otherwise, we have been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 49 PRINCIPAL STOCKHOLDERS The following table sets forth, as of this prospectus, - each person who is known by us to be the owner of record or beneficial owner of more than 5% of the outstanding common stock, - each of our directors and executive officers, and - all of our directors and executive officers as a group, the number of shares of common stock beneficially owned by each such person and such group and the percentage of the outstanding shares owned by each such person and such group. Except as otherwise noted below, the address of each of the persons in the table is c/o Netgateway, Inc., 300 Oceangate, 5(th) Floor, Long Beach, California 90802.
OPTIONS GRANTED UNDER OUR PERCENT PRIOR PERCENT AFTER STOCK OPTION NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES TO OFFERING OFFERING PLANS - ------------------------------------------------- ----------------- --------------- --------------- ------------ Keith D. Freadhoff............................... 1,725,000(1) 17.7% 14.1% 338,000 Donald M. Corliss, Jr............................ 150,000 1.5 1.2 332,000 David Bassett-Parkins............................ 185,000 1.9 1.5 320,000 Hanh Ngo......................................... 100,000 1.0 * 233,333 Craig Gatarz..................................... 0 0 0 161,821 Scott Beebe...................................... 900,000(2) 9.1 7.3 0 Ronald Spire..................................... 100,000(3) 1.0 * 0 Michael Khaled................................... 700,000(4) 7.0 5.6 0 Donald Danks..................................... 699,999(5) 7.0 5.6 0 Michael Vanderhoff............................... 602,500(6) 6.1 4.8 0 All directors and executive officers of Netgateway as a group (six persons)............ 3,085,000(1) (3) 30.7 24.6 1,385,154
- ------------------------ * Less than one percent. (1) Includes 750,000 shares of common stock currently held by the Individual Trusts, of which Mr. Freadhoff is trustee and over which Mr. Freadhoff has beneficial ownership and warrants exercisable for an aggregate of 50,000 shares of common stock. Of the 925,000 shares of common stock owned directly by Mr. Freadhoff, 825,000 have been pledged to secure personal financial obligations of Mr. Freadhoff. If Mr. Freadhoff defaults on these obligations, Mr. Freadhoff may lose beneficial ownership of these shares, which could result in a change of control of Netgateway. See "Risk Factors--We Depend On Our Senior Management And Their Loss or Unavailability Could Put Us At A Competitive Disadvantage; As Our Chairman and Chief Executive Has Pledged His Stock, We May Experience A Change Of Control" and "Related Party Transactions." (2) Includes warrants exercisable for an aggregate of 50,000 shares of common stock. (3) Includes warrants exercisable for an aggregate of 100,000 shares of common stock. (4) Includes warrants exercisable for an aggregate of 100,000 shares of common stock. (5) Includes warrants exercisable for an aggregate of 100,000 shares of common stock. 50 (6) Includes warrants exercisable for an aggregate of 50,000 shares of common stock. As used in the table above and elsewhere in this prospectus, the term BENEFICIAL OWNERSHip with respect to a security consists of sole or shared voting power, including the power to vote or direct the vote, and/or sole or shared investment power, including the power to dispose or direct the disposition, with respect to the security through any contract, arrangement, understanding, relationship, or otherwise, including a right to acquire such power(s) during the next 60 days following the date of this prospectus. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated. Because the table above provides information with respect to the securities of Netgateway beneficially owned by the persons indicated, we have segregated from this information the information relating to securities of Netgateway owned, but not beneficially owned, by the persons indicated according to this definition. At the date of this prospectus, these securities consist of shares of common stock issuable upon the exercise of options granted under our stock option plans described in "Management--Stock Option Plans." None of these stock options is exercisable within 60 days following the date of this prospectus. In addition, we have excluded from the beneficial ownership of Messrs. Corliss and Bassett-Parkins and Ms. Ngo the shares of common stock currently in the Individual Trusts, as described under "Related Party Transactions." Except as otherwise noted below, the address of each of the persons in the table is c/o Netgateway, Inc., 300 Oceangate, 5th floor, Long Beach, California 90802. 51 RELATED PARTY TRANSACTIONS In July 1998 and August 1998, we loaned $600,000 and an additional $200,000, respectively, to Admor Memory Corp., a California-based computer memory maker, during our then pending acquisition of Admor, which acquisition was not consummated. This loan is due and payable on December 31, 1999 and accrues interest at the rate of 9.5% per annum until October, 1999 and 10% thereafter per annum. In August, 1998, we agreed to subordinate this obligation to a credit facility obtained by Admor and to receive payment of this obligation from the net income and the proceeds of equity sales of Admor. Subsequently, Admor defaulted on this credit facility and entered receivership. We have reduced the value of this loan in our financial statements to $0 effective December 31, 1998. Keith D. Freadhoff, our Chairman of the Board of Directors and Chief Executive Officer, and Scott Beebe, one of our Directors, beneficially own less than 1% and 2.89%, respectively, of the outstanding capital stock of Admor. Donald Danks, the beneficial owner of 699,000 shares of our common stock, was also a stockholder of Admor. Such individuals did not directly or indirectly receive any of the proceeds of these loans. We have entered into sublicensing agreements related to proprietary courseware of ProSoft, an Internet training solutions provider based in Austin, Texas. ProSoft entered into a courseware reproduction and licensing agreement with Steps granting this firm the exclusive right to sell courseware to the Federal government. This licensing obligation was personally guaranteed by Scott Beebe. ProSoft also entered into a courseware reproduction and licensing agreement with Training Resources International, granting an exclusive right to sell courseware in the education market. This licensing obligation was personally guaranteed by Michael Khaled. We, with the consent of ProSoft, entered into exclusive sublicense agreements with each of Steps and Training Resources. In consideration of the sublicense from Training Resources, we agreed to assume the minimum royalty payments required under their master license, totally $1,600,000. In consideration of the sublicense from Steps, we (1) assumed the minimum royalty payments required under their master license, totally $1,500,000, (2) assumed Steps' $200,000 obligation to Vision Holdings, Inc., which had advanced funds to Steps in connection with its master license, and (3) issued 1,000,000 shares of common stock to Steps. Of this aggregate obligation of $3,300,000, we paid approximately $1,500,000. Due to a lack of revenue derived from these licenses, we terminated the licenses and, in December 1998, entered into a settlement agreement with such corporation pursuant to which we have been released from all further obligation with respect to the remaining amounts payable. Steps is substantially owned by Scott Beebe, one of our Directors and significant stockholders. Training Resources is owned by Michael Khaled, another significant stockholder of Netgateway. Mr. Freadhoff was a founder of ProSoft and ProSoft's Chief Executive Officer and a director until his resignation in November 1997. Mr. Freadhoff beneficially owns approximately 3.32% of the outstanding common stock of ProSoft. Donald M. Corliss, Jr., our President and a Director, and Scott Beebe, one of our Directors' each beneficially owns less than 1%, of the outstanding common stock of ProSoft. Donald Danks, the beneficial owner of 699,000 shares of our common stock, was an officer, director, and significant stockholder of ProSoft until early 1998. During the period from March 4, 1998 through June 30, 1998, Mr. Freadhoff loaned us $132,429, $100,000 of which was converted into a capital contribution in June 1998. The remaining balance of $32,429 is not interest bearing and is repayable upon demand. During the period from March 4, 1998 through June 30, 1998, Michael Khaled, Donald Danks and Lynn Turnbow, stockholders of Netgateway, paid on our behalf to ProSoft pursuant to its master licenses $200,000, $100,000 and $100,000, respectively, in exchange for 600,000 shares of common stock. In March 1999, Mr. Freadhoff loaned us $100,000, which loan is non-interest bearing. This loan was repaid with a portion of the proceeds of our May 1999 private offering. 52 In November 1998, we issued warrants exercisable for an aggregate of 300,000 shares of common stock, 50,000 shares of common stock to each of Messrs. Freadhoff, Beebe, Danks, and Vanderhoff, and 100,000 shares of common stock to Michael Khaled, a significant stockholder of Netgateway. The warrants were issued in order to reimburse Messrs. Freadhoff, Beebe, Danks, and Vanderhoff for voluntarily transferring to Mr. Khaled an equal number shares of common stock in order to settle a dispute among Netgateway and Mr. Khaled. These warrants are exercisable at $1.00 per share and expire in November 2000. In December 1998, Messrs. Freadhoff, Beebe, Danks, and Vanderhoff, contributed to a trust (the "Master Trust") 450,000, 100,000, 100,000, and 100,000 shares of common stock, respectively. The trustee of the Master Trust is Mr. Freadhoff and these individuals are the beneficiaries of this trust. This trust sold 350,000 of these shares to each of two trusts the trustee of which is Mr. Freadhoff and the beneficiary of one of which is Donald M. Corliss, Jr., our President and one of our Directors and the beneficiary of one of which is David Bassett-Parkins, our Chief Financial Officer and Chief Operating Officer, and one of our Directors, in exchange for a promissory note from each of these trusts in the principal amount of $350,000. Each of these individuals has delivered to their respective trust a promissory note in the principal amount of $350,000. The Master Trust sold the remaining 50,000 of these shares to a trust the trustee of which is Mr. Freadhoff and the beneficiary of which is Hanh Ngo, our Executive Vice President--Operations, in exchange for a promissory note from this trust in the principal amount of $50,000. Ms. Ngo has delivered to this trust a promissory note in the principal amount of $350,000. The trusts (the "Individual Trusts") of which Messrs. Corliss and Bassett-Parkins and Ms. Ngo are beneficiaries are, by their terms, permitted to deliver the shares of common stock to their beneficiaries in three equal installments for a purchase price of $1.00 per share on or after January 1, 2000, 2001, and 2002 (subject to acceleration in the event of a change of control), provided that the individual beneficiary of the Individual Trust in question has not voluntarily terminated their employment with us prior to these dates. These individuals will satisfy the purchase price for their shares by means of the repayment of their respective promissory note to the respective Individual Trust. In the event that any of these beneficiaries should so terminate their employment with us prior to these dates, the trustee of the respective Individual Trust will return these shares in such Individual Trust to the Master Trust in satisfaction of the promissory note from this Individual Trust to the Master Trust. The Master Trust will then deliver these shares to its beneficiaries in proportion to their contributions of shares of common stock to the Master Trust. During April and May 1999, Netgateway conducted its May 1999 private offering. Cruttenden Roth acted as one of the placement agents of that offering and received compensation for their services in the form of $ in cash and warrants exercisable for an aggregate of shares of common stock for a period of four years commencing one year after the initial closing of that offering at the exercise price of $10.00 per share. We have amended our bylaws and agreed with Cruttenden Roth Incorporated, as representative of the several underwriters, that all future transactions between us and any of our officers, directors, and 5% stockholders will be on terms no less favorable to us than can be obtained from unaffiliated third parties and will be approved by a majority of our independent and disinterested directors. 53 DESCRIPTION OF SECURITIES The following description of our capital stock and certain provisions of our certificate of incorporation and bylaws is a summary and is qualified in its entirety by the provisions of our certificate of incorporation and bylaws, which have been filed as exhibits to our registration statement of which this prospectus is a part. IN GENERAL We are authorized by our certificate of incorporation to issue an aggregate of 40,000,000 shares of common stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per share. As of March 31, 1999, giving effect to our spring 1999 private placements, 9,795,834 shares of common stock were outstanding and held of record by approximately 240 stockholders and no shares of preferred stock were outstanding. COMMON STOCK Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Holders of the common stock do not have cumulative voting rights, which means that the holders of more than one half outstanding shares of common stock, subject to the rights of the holders of preferred stock, can elect all of our directors, if they choose to do so. In this event, the holders of the remaining shares of common stock would not be able to elect any directors. Subject to the prior rights of any class or series of preferred stock which may from time to time be outstanding, if any, holders of common stock are entitled to receive ratably, dividends when, as, and if declared by the board of directors out of funds legally available for that purpose and, upon our liquidation, dissolution, or winding up, are entitled to share ratably in all assets remaining after payment of liabilities and payment of accrued dividends and liquidation preferences on the preferred stock, if any. Holders of common stock have no preemptive rights and have no rights to convert their common stock into any other securities. The outstanding common stock is validly authorized and issued, fully-paid, and nonassessable. In the event we were to elect to sell additional shares of common stock following this offering, investors in this offering would have no right to purchase additional shares. As a result, their percentage equity interest in us would be diluted. The shares of our common stock offered in this offering will be, when issued and paid for, fully paid and not liable for further call and assessment. Except as otherwise directed by Delaware law, and subject to the rights of the holders of preferred stock, all stockholder action is taken by the vote of a majority of the outstanding shares of common stock voted as a single class present at a meeting of stockholders at which a quorum consisting of a majority of the outstanding shares of common stock is present in person or proxy. PREFERRED STOCK We may issue preferred stock in one or more series and having the rights, privileges, and limitations, including voting rights, conversion privileges, and redemption rights, as may, from time to time, be determined by the board of directors. Preferred stock may be issued in the future in connection with acquisitions, financings, or other matters as the board of directors deems appropriate. In the event that we determine to issue any shares of preferred stock, a certificate of designation containing the rights, privileges, and limitations of this series of preferred stock shall be filed with the Secretary of the State of the State of Delaware. The effect of this preferred stock is that our board of directors alone, and subject to Federal securities laws and Delaware law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control of Netgateway without further action by the stockholders, and may adversely affect the voting and other rights of the holders of the common stock. The issuance of preferred stock with voting and 54 conversion rights may also adversely affect the voting power of the holders of common stock, including the loss of voting control to others. REGULATION OF THE INTRODUCTION OF BUSINESS AT ANNUAL MEETINGS OF STOCKHOLDERS Our by-laws include provisions which regulate the submission by persons other than the board of directors of matters to a vote of stockholders. Generally, at an annual meeting of the stockholders, the only business conducted must be brought before the annual meeting either by, or at the direction of, the board of directors or by any of our stockholders who is a stockholder of record at the time of giving of notice for such meeting, who shall be entitled to vote at such annual meeting, and who complies with the notice procedures set forth in the by-laws. For business to be properly brought before an annual meeting by a stockholder, the stockholder must be given timely notice thereof in writing to our Secretary. To be timely, a stockholder's notice must be delivered or mailed to, and received at, our principal executive offices not less than 60 days nor more than 90 days prior to the annual meeting, regardless of any postponement, deferrals, or adjournments of that meeting to a later date; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the annual meeting is given or made to stockholders, notice by the stockholder to be timely must be received no later than the close of business on the 10(th) day following the day on which notice of the date of the annual meeting was mailed or public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting the following: - a brief description of the business desired to be brought before the annual meeting and the reasons for conducting this business at the annual meeting, - the name and address, as they appear on our books, of the stockholder proposing this business, - the class and number of our shares which are beneficially owned by the stockholder, and - any material interest of the stockholder in the business he wishes to bring before the annual meeting. Notwithstanding anything in the by-laws to the contrary, no business shall be conducted at the stockholder meeting, except in accordance with the procedures set forth in the by-laws. The chairman of the meeting, as determined in accordance with the by-laws, shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and, in accordance with the provisions of these by-laws, and if he should so determine, he shall so declare to the meeting and any business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing, a stockholder shall also comply with all applicable requirements of the Exchange Act with respect to the above. QUOTATION ON NASDAQ NATIONAL MARKET We have applied to have our common stock quoted on the Nasdaq National Market under the symbol "NGWY." Our common stock currently trades on the OTC Bulletin Board under this symbol. TRANSFER AGENT The transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004. 55 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have 12,343,404 shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option, and no exercise of outstanding options or warrants, no conversion of any outstanding convertible securities, and no exchange of any outstanding exchangeable securities. Of these shares, 2,950,000 shares, including the 2,500,000 shares offered in this offering, will be freely tradeable without further registration under the Securities Act. All of our officers and directors and certain of our current stockholders holding an aggregate of shares of our common stock have agreed not to sell, or otherwise dispose of, any of our securities for a period of at least six months from the date of this offering without the underwriters' prior written consent. Of the presently outstanding 9,893,404 shares of common stock, 9,443,404 are "restricted securities" within the meaning of Rule 144 under the Securities Act and, if held for at least one year, would be eligible for sale in the public market in reliance upon, and in accordance with, the provisions of Rule 144 following the expiration of such one-year period. In general, under Rule 144 as currently in effect, a person or persons whose shares are aggregated, including a person who may be deemed to be an "affiliate" of ours as that term is defined under the Securities Act, would be entitled to sell within any three month period a number of shares beneficially owned for at least one year that does not exceed the greater of (1) 1% of the then outstanding shares of common stock, or (2) the average weekly trading volume in the common stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice, and the availability of current public information about us. However, a person who is not deemed to have been an affiliate of us during the 90 days preceding a sale by such person and who has beneficially owned such shares of common stock for at least two years may sell such shares without regard to the volume, manner of sale, or notice requirements of Rule 144. Following this offering, we cannot predict the effect, if any, that sales of shares of common stock pursuant to Rule 144 or otherwise, or the availability of such shares for sale, will have on the market price prevailing from time to time. Nevertheless, sales by the current stockholders of a substantial number of shares of common stock in the public market could materially adversely affect prevailing market prices for the common stock. In addition, the availability for sale of a substantial number of shares of common stock acquired through the exercise of the representative's warrants or the outstanding options under our existing stock option plans or outstanding warrants or convertible securities could materially adversely affect prevailing market prices for our common stock. See "Risk Factors--Future Sales of Common Stock By Our Existing Stockholders Could Adversely Affect Our Stock Price." Some of our stockholders, holding in the aggregate approximately 1,731,400 shares of common stock or holding securities convertible into or exercisable or exchangeable for shares of common stock, have the right, subject to a number of conditions and limitations, to include their shares in registration statements relating to our securities. Stockholders holding an aggregate of of these shares of common stock have waived these rights with respect to this offering. By exercising their registration rights and causing a large number of shares to be registered and sold in the public market, these holders may cause the market price of the common stock to fall. Up to 250,000 additional shares of common stock may be purchased by the underwriters during the period commencing on the first anniversary of the date of this prospectus and terminating on the fifth anniversary of the date of this prospectus through the exercise of the representative's warrants. Any and all securities purchased upon the exercise of the representative's warrants may be freely tradeable, provided that we satisfy certain securities registration and qualification requirements in accordance with the terms of the representative's warrants. See "Underwriting." 56 UNDERWRITING Subject to the terms and conditions contained in the underwriting agreement, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which Cruttenden Roth is acting as representative, has severally, and not jointly, agreed to purchase the number of shares offered hereby set forth opposite their respective names below.
NUMBER OF NAME SHARES - --------------------------------------------------------------------------------- ---------- Cruttenden Roth Incorporated..................................................... Total............................................................................ 2,500,000
A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus is a part. The underwriting agreement provides that the obligation of the underwriters to purchase the shares is subject to some conditions. The underwriters shall be obligated to purchase all of the shares (other than those covered by the underwriters' over-allotment option described below), if any are purchased. The representative has advised us that the underwriters propose initially to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and that they may allow certain dealers who are members of the NASD, and some foreign dealers, concessions not in excess of $ per share, of which amount a sum not in excess of $ per share may in turn be reallowed by such dealers to other dealers who are members of the NASD and to some foreign dealers. After the commencement of this offering, the offering price, the concession to selected dealers, and the reallowance to other dealers may be changed by the representative. We have agreed to indemnify the underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the underwriters may be required to make in respect. We have agreed to pay to the representative an expense allowance, on a non-accountable basis, equal to % of the gross proceeds derived from the sale of 2,500,000 shares offered in this offering, or 2,875,000 shares if the underwriters' over-allotment option is exercised in full. We paid an advance on this allowance in the amount of $25,000. We have also agreed to pay some of the representative's expenses in connection with this offering, including expenses in connection with qualifying the shares offered hereby for sale under the laws of such states as the representative may designate and the placement of tombstone advertisements. In connection with this offering, we have granted the representative the right, for the three-year period commencing on the closing date of this offering, to appoint an observer to attend all meetings of our board of directors. This designee has the right to notice of all meetings of the board of directors and to receive reimbursement for all out-of-pocket expenses incurred in attending these meetings. In addition, such designee will be entitled to indemnification to the same extent as our directors. The representative has advised us that the underwriters do not intend to confirm sales of the shares of common stock offered hereby to any account over which they exercise discretionary authority. We and our officers, directors, and certain of our current stockholders, have agreed not to offer, assign, issue, sell, hypothecate, or otherwise dispose of any shares of our common stock, our securities convertible into, or exercisable or exchangeable for, shares of our common stock, or shares of our common stock received upon conversion, exercise, or exchange of such securities, to the public without the prior written consent of Cruttenden Roth for a period of at least six months after the date of this prospectus. 57 Prior to this offering, the common stock traded on the OTC Bulletin Board. We have applied to have the common stock quoted on the Nasdaq National Market. The public offering price for the shares has been determined by arms-length negotiations between us and the representative principally on the basis of the market price for our common stock prior to the date of this prospectus. The factors considered in such negotiations were prevailing market conditions, our history and prospects, and the history and prospects of the industry in which we compete, an assessment of our management, our capital structure, and such other factors deemed relevant. We have also granted to the underwriters an option, exercisable during the 45-day period commencing on the date of this prospectus, to purchase at the public offering price per share, less underwriting discounts and commissions, up to an aggregate of 375,000 shares of common stock. To the extent this option is exercised, the underwriters will become obligated, subject to some conditions, to purchase additional shares of common stock. The underwriters may exercise such right of purchase only for the purpose of covering over-allotments, if any, made in connection with the sale of shares. Purchases of shares of common stock upon exercise of the over-allotment option will result in the realization of additional compensation by the underwriters. In connection with this offering, we have agreed to sell to the representative, individually and not as representative of the several underwriters, at the price of $.001 per warrant, the representative's warrants to purchase an aggregate of 250,000 shares of common stock. The representative's warrants are exercisable for a period of four years commencing one year after the date of this prospectus at an exercise price per share equal to $ . The representative's warrants may not be sold, transferred, assigned, pledged, or hypothecated for a period of 12 months from the date of the prospectus, except to members of the selling group and to officers and partners of the representative and members of the selling group. The representative's warrants contain anti-dilution provisions providing for adjustments of the exercise price and number of shares issuable on exercise of the representatives' warrants, upon the occurrence of specified events, including stock dividends, stock splits, and recapitalizations. The holders of the representative's warrants have no voting, dividend, or other rights as stockholders of Netgateway with respect to shares of common stock underlying the representative's warrants, unless the representative's warrants shall have been exercised. A new registration statement or post-effective amendment to the registration statement will be required to be filed and declared effective under the Securities Act before distribution to the public of the representative's warrants and the underlying shares. We have agreed, on one occasion during the period beginning one year after the date of this prospectus and ending five years after the date of this prospectus, if requested by the holders of a majority of the representative's warrants or shares of common stock issued upon their exercise, to make all necessary filings to permit a public offering of the representative's warrants and underlying shares and to use our best efforts to cause such filing to become effective under the Securities Act and to remain effective for at least 12 months, at our sole expense. In addition, we have agreed to give advance notice to holders of the representative's warrants and the underlying shares of common stock of our intention to file a registration statement, and in such case, holders of the representative's warrants and the underlying shares shall have the right to require us to include such shares of common stock in such registration statement at our expense (subject to specified limitations). During and after this offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with this offering. The underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the common stock sold in this offering for their account may be reclaimed by the syndicate if such shares are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain, or otherwise affect the market price of the common stock, which may be higher than the price that might otherwise prevail in the open market. Neither we nor 58 the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor the underwriters make any representation that the underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued at any time. LEGAL MATTERS Certain legal matters with respect to the validity of the issuance of the shares of common stock offered hereby will be passed upon for us by Brock Silverstein LLC, New York, New York. Certain legal matters in connection with the offering will be passed upon for the underwriters by Greenberg Traurig, New York, New York. Brock Silverstein LLC renders legal services to Cruttenden Roth in connection with matters other than this offering. Robert Steven Brown, a member of Brock Silverstein LLC, owns beneficially and of record an aggregate of 5,000 shares of common stock. EXPERTS The consolidated financial statements of Netgateway, Inc. and subsidiaries as of June 30, 1998 and for the period from March 4, 1998 (inception) to June 30, 1998 have been included herein and in the Form S-1 in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Infobahn Technologies LLC dba Digital Genesis as of December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996 have been included herein and in the Form S-1 in reliance upon the report of Wright Ford Young & Co., independent certified public accountants, appearing elsewhere herein upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Spartan Multimedia, Inc. as of August 31, 1998 and for the year ended August 31, 1998 have been included herein and in the Form S-1 in reliance upon the report of Allan Hogenson, Chartered Accountant, appearing elsewhere herein upon the authority of said individual as expert in accounting and auditing. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1, including the exhibits, schedules, and amendments to this registration statement, under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all the information set forth in the registration statement. For further information with respect to us and the shares of our common stock to be sold in this offering, we make reference to the registration statement. Although this prospectus contains all material information regarding us, statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance we make reference to the copy of such contract, agreement, or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. You may read and copy all or any portion of the registration statement or any other information which we file at the Securities and Exchange Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our Securities and Exchange Commission filings, including the registration statement, are also available to you on the Securities and Exchange Commission's Web site (http://www.sec.gov). 59 As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with this Act, will file periodic reports, proxy and information statements, and other information with the Securities and Exchange Commission. Such reports, proxy and information statements, and other information may also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. 60 INDEX TO FINANCIAL STATEMENTS NETGATEWAY, INC. AND SUBSIDIARIES PRO FORMA STATEMENTS Unaudited Pro Forma Consolidated Statement of Operations for the period March 4, 1998 (Inception) through June 30, 1998........................................... F-3 Unaudited Pro Forma Consolidated Statement of Operations for the nine months ended March 31, 1999................................................................... F-4 Notes to Unaudited Pro Forma Consolidated Statement of Operations.................. F-5 NETGATEWAY, INC. AND SUBSIDIARIES Independent Auditor's Report for Netgateway, Inc................................... F-6 Consolidated Balance Sheet as of June 30, 1998..................................... F-7 Consolidated Statement of Operations for the period March 4, 1998 (Inception) through June 30, 1998............................................................ F-8 Consolidated Statement of Changes in Shareholders' Deficit for the period March 4, 1998 (Inception) through June 30, 1998........................................... F-9 Consolidated Statement of Cash Flows for the period March 4, 1998 (Inception) through June 30, 1998............................................................ F-10 Notes to Consolidated Financial Statements......................................... F-11 Unaudited Consolidated Balance Sheet as of March 31, 1999.......................... F-22 Consolidated Statements of Operations for the nine months ended March 31, 1999 and for the cumulative period from March 4, 1998 (Inception) through March 31, 1999 (Unaudited)...................................................................... F-23 Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the period March 4, 1998 (Inception) through June 30, 1998 and the nine months ended March 31, 1999 (Unaudited)............................................................. F-24 Consolidated Statements of Cash Flows for the nine months ended March 31, 1999 and for the cumulative period from March 4, 1998 (Inception) through March 31, 1999 (Unaudited)...................................................................... F-25 Notes to Unaudited Consolidated Financial Statements............................... F-26 INFOBAHN TECHNOLOGIES, LLC DBA DIGITAL GENESIS Independent Auditor's Report for Infobahn Technologies, LLC dba Digital Genesis.... F-32 Balance Sheets as of December 31, 1997 and 1996.................................... F-33 Statements of Operations for the Years Ended December 31, 1997 and 1996............ F-34 Statements of Members' Equity for the Years Ended December 31, 1997 and 1996....... F-35 Statements of Cash Flows for the Years Ended December 31, 1997 and 1996............ F-36 Notes to Financial Statements...................................................... F-37 SPARTAN MULTIMEDIA, INC. Auditor's Report for Spartan Multimedia, Inc....................................... F-38 Balance Sheet as of August 31, 1998................................................ F-39 Statement of Earnings and Retained Earnings for the Year Ended August 31, 1998..... F-40 Statement of Changes in Financial Position for the Year Ended August 31, 1998...... F-41 Notes to Financial Statements...................................................... F-42
F-1 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS The following unaudited pro forma consolidated data present the Unaudited Pro Forma Consolidated Statement of Operations of the Company for the nine months ended March 31, 1999, and period since inception (March 4, 1998) to June 30, 1998 after giving effect to the acquisitions of Spartan Multimedia and Infobahn Technologies (dba Digital Genesis) as if they had been consummated at the beginning of the respective periods presented. The Company's fiscal year ends on June 30. The pro forma data are based on the historical consolidated statements of the Company, Spartan Multimedia and Infobahn Technologies, giving effect to the acquisitions using the purchase method of accounting and the assumptions and adjustments outlined in the accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements. The pro forma adjustments set forth in the following unaudited pro forma consolidated financial data are preliminary estimates and may differ from the actual adjustments when they become known. However, management believes such adjustments, if any, will not be material. The following unaudited pro forma consolidated financial data do not give effect to anticipated expenses related to the acquisition and do not reflect certain cost savings that management of the Company believes may be realized following the acquisition. These savings are expected to be realized primarily through integration of operations. The pro forma data are provided for comparative purposes only. They do not purport to be indicative of the results that actually would have occurred if the acquisitions had been consummated on the dates indicated or that may be obtained in the future. The unaudited pro forma consolidated financial data should be read in conjunction with the Notes thereto, the audited Consolidated Financial Statements of the Company and the Notes thereto and the audited Financial Statements of Infobahn Technologies and Spartan Multimedia, and the Notes thereto, all included in this registration statement. F-2 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
HISTORICAL ------------------------------------- PRO FORMA DIGITAL SPARTAN ------------------------------------- NETGATEWAY GENESIS MULTIMEDIA ADJUSTMENTS REFS. TOTAL ------------- --------- ----------- ----------- ----- ----------- Service revenue......................... $ 2,800 82,319 5,874 90,993 Operating expenses: License fees.......................... 3,822,000 -- -- 3,822,000 Depreciation and amortization......... 12,249 228 -- 53,090 1,2 65,567 Selling, general and administrative... 721,210 62,030 19,360 -- 802,600 -- ------------- --------- ----------- ----------- ----------- Total operating expenses.......... 4,555,459 62,258 19,360 53,090 4,690,167 -- ------------- --------- ----------- ----------- ----------- Income (loss) from operations..... (4,552,659) 20,061 (13,486) 53,090 4,599,174 Interest expense........................ 19,277 -- -- -- 19,277 -- ------------- --------- ----------- ----------- ----------- Net income (loss)................. $ (4,571,936) 20,061 (13,486) 53,090 4,618,451 -- -- ------------- --------- ----------- ----------- ----------- ------------- --------- ----------- ----------- ----------- Basic and diluted loss per share........ $ (0.84) -- -- -- (0.81) -- -- ------------- --------- ----------- ----------- ----------- ------------- --------- ----------- ----------- ----------- Weighted average common shares outstanding -- basic and diluted...... 5,416,242 -- -- 400,000 3 5,721,327 -- -- ------------- --------- ----------- ----------- ----------- ------------- --------- ----------- ----------- -----------
F-3 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999
HISTORICAL -------------------------- PRO FORMA SPARTAN ------------------------------------- NETGATEWAY MULTIMEDIA ADJUSTMENTS REFS TOTAL ------------- ----------- ----------- --- ----------- Service revenue..................................... $ 198,759 3,441 202,200 Operating expenses: Depreciation and amortization..................... 120,577 -- 92,626 1 213,203 Selling, general and administrative............... 6,862,966 75,995 6,938,961 ------------- ----------- ----------- ----------- Total operating expenses.................... 6,983,543 75,995 92,626 7,152,164 ------------- ----------- ----------- ----------- Loss from operations........................ (6,784,784) (72,554) (92,626) (6,949,964) Loss on sale of equity securities................... 54,729 -- -- 54,729 Interest expense.................................... 313,744 -- -- 313,744 ------------- ----------- ----------- ----------- Loss before extraordinary item.............. (7,153,257) (72,554) (92,626) (7,318,437) Extraordinary gain on extinguishment of debt........................................... 1,853,232 -- -- 1,853,232 ------------- ----------- ----------- ----------- Net loss.................................... $ (5,300,025) (72,554) (92,626) (5,465,205) ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- Basic and diluted extraordinary gain per share......................................... .21 -- -- .21 ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- Basic and diluted loss per share.................... $ (0.61) -- -- (0.63) ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- Weighted average common shares outstanding - basic and diluted....................................... 8,659,851 -- -- 8,659,851 ------------- ----------- ----------- ----------- ------------- ----------- ----------- -----------
F-4 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998 AND FOR THE NINE MONTHS ENDED MARCH 31, 1999 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS The unaudited pro forma consolidated statements of operations have been prepared to reflect the acquisition of substantially all of the assets and liabilities of Infobahn Technologies (d/b/a Digital Genesis) and all outstanding capital stock of Spartan Multimedia in exchange for 400,000 shares of the Company's Common Stock and 371,429 shares of common stock of Storesonline.com, a wholly-owned subsidiary of the Company, which was convertible into the Company's common stock on a one-to-one basis, respectively, as if the transactions were effective at the beginning of the respective periods. The transactions are accounted for under the purchase method. To give effect to this assumption, the following adjustments were made: 1. The acquisition of Spartan Multimedia resulted in acquired technology and trade secrets of $926,262. Additional amortization of $46,313 for the period from March 4, 1998 (inception) to June 30, 1998 and $92,626 for the period from July 1, 1998 until the actual acquisition date of January 15, 1999 are shown. 2. The acquisition of Infobahn Technologies resulted in an intangible asset representing the value of acquired technology of $120,000, and goodwill valued at $235,193. Additional amortization of $6,777 for the period since March 4, 1998 (inception) to the acquisition date of June 2, 1998 is shown. The impact on income taxes would be minor due to historical losses of NetGateway. 3. The Company issued 400,000 shares of common stock to acquire Infobahn Technologies. F-5 INDEPENDENT AUDITORS' REPORT The Board of Directors Netgateway, Inc.: We have audited the accompanying consolidated balance sheet of Netgateway, Inc. and subsidiary (a development stage enterprise) as of June 30, 1998 and the related consolidated statements of operations, changes in shareholders' deficit and cash flows for the period March 4, 1998 (inception) through June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Netgateway, Inc. and subsidiary as of June 30, 1998 and the results of its operations and its cash flows for the period March 4, 1998 (inception) through June 30, 1998 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the financial statements, the Company's planned principal operations have not commenced and minimal revenues have been generated while the Company develops its technology. Additionally, the Company has a total shareholders' deficit and has continuing financial needs. These matters raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP October 23, 1998, except note 11 which is as of April 30, 1999 F-6 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEET JUNE 30, 1998 ASSETS Current assets: Cash........................................................................ $ 254,597 Accounts receivable......................................................... 21,305 Notes receivable............................................................ 50,000 Other current assets........................................................ 45,565 ---------- Total current assets.................................................... 371,467 Property and equipment, net (note 3)............................................ 143,384 Intangible assets, net (note 4)................................................. 351,804 Other assets.................................................................... 4,897 ---------- $ 871,552 ---------- ---------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable............................................................ $ 106,242 Accrued liabilities......................................................... 172,842 Current portion of notes payable to related parties (note 5)................ 2,052,159 ---------- Total current liabilities............................................... 2,331,243 Notes payable to related parties, less current portion (note 5)................. 367,892 ---------- Total liabilities....................................................... 2,699,135 ---------- Shareholders' deficit (notes 7 and 8): Common stock, par value $.001 per share. Authorized 25,000,000 shares; issued and outstanding 7,510,000 shares at June 30, 1998.................. 7,510 Additional paid-in capital.................................................. 2,849,163 Deferred compensation....................................................... (112,320) Deficit accumulated during development stage................................ (4,571,936) ---------- Total shareholders' deficit............................................. (1,827,583) Commitments and subsequent events (notes 10 and 11)............................. ---------- Total liabilities and shareholders' deficit............................. $ 871,552 ---------- ----------
See accompanying notes to consolidated financial statements. F-7 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998 Service revenue................................................................. $ 2,800 Operating expenses: License fees (note 6)....................................................... 3,822,000 Depreciation and amortization............................................... 12,249 Selling, general and administrative......................................... 721,210 ---------- Total operating expenses................................................ 4,555,459 ---------- Loss from operations.................................................... (4,552,659) Interest expense................................................................ 19,277 ---------- Net loss................................................................ $(4,571,936) ---------- ---------- Basic and diluted loss per share................................................ $ (0.84) ---------- ---------- Weighted average common shares outstanding--basic and diluted................... 5,416,242 ---------- ----------
See accompanying notes to consolidated financial statements. F-8 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998
DEFICIT ACCUMULATED COMMON STOCK ADDITIONAL DURING PRICE ---------------------- PAID-IN DEFERRED DEVELOPMENT DATE PER SHARE SHARES AMOUNT CAPITAL COMPENSATION STAGE ----------- ---------- --------- ----------- ----------- ------------- ----------- Sale of common stock for cash.......................... 3/98 $.07 - .33 754,545 $ 755 199,245 -- -- Common stock issued for services...................... 3/98 0.22 1,445,455 1,445 316,555 -- -- Common stock issued in exchange for shareholder's payment of Company debt.................. 3/98 0.50 400,000 400 199,600 -- -- Common stock issued to acquire license....................... 3/98 0.22 1,000,000 1,000 219,000 -- -- Common stock issued for services...................... 4/98 0.22 100,000 100 21,900 -- -- Deferred compensation on stock issued for services........... 4/98 -- -- (14,080) (14,080) -- Amortization of deferred compensation.................. 4/98 - 6/98 -- -- 1,760 1,760 -- Common stock issued to acquire license....................... 4/98 0.22 1,900,000 1,900 416,100 -- -- Common stock issued for services...................... 5/98 .22 200,000 200 43,800 -- -- Common stock issued in exchange for shareholder's payment of Company debt.................. 5/98 1.00 200,000 200 199,800 -- -- Sale of common stock for cash.......................... 5/98 - 6/98 1.00 303,000 303 302,697 -- -- Conversion of debt to capital contribution.................. 6/98 -- -- 100,000 -- -- Adjustment resulting from reverse acquisition........... 6/98 450,000 450 (310) -- -- Shares issued in business acquisition................... 6/98 1.00 400,000 400 399,600 -- -- Conversion of debt to common stock, including interest..... 6/98 1.00 184,000 184 185,349 -- -- Stock issued for deferred compensation.................. 6/98 1.00 100,000 100 (100) (100,000) -- Sale of common stock for cash.......................... 6/98 2.00 73,000 73 145,927 -- -- Net loss....................... -- -- -- -- (4,571,936) --------- ----------- ----------- ------------- ----------- Balance at June 30, 1998....... 7,510,000 $ 7,510 2,849,163 (112,320) (4,571,936) --------- ----------- ----------- ------------- ----------- --------- ----------- ----------- ------------- ----------- TOTAL SHAREHOLDERS' DEFICIT ------------ Sale of common stock for cash.......................... 200,000 Common stock issued for services...................... 318,000 Common stock issued in exchange for shareholder's payment of Company debt.................. 200,000 Common stock issued to acquire license....................... 220,000 Common stock issued for services...................... 22,000 Deferred compensation on stock issued for services........... (14,080) Amortization of deferred compensation.................. 1,760 Common stock issued to acquire license....................... 418,000 Common stock issued for services...................... 44,000 Common stock issued in exchange for shareholder's payment of Company debt.................. 200,000 Sale of common stock for cash.......................... 303,000 Conversion of debt to capital contribution.................. 100,000 Adjustment resulting from reverse acquisition........... 140 Shares issued in business acquisition................... 400,000 Conversion of debt to common stock, including interest..... 185,533 Stock issued for deferred compensation.................. -- Sale of common stock for cash.......................... 146,000 Net loss....................... (4,571,936) ------------ Balance at June 30, 1998....... (1,827,583) ------------ ------------
See accompanying notes to consolidated financial statements. F-9 NET GATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998 Cash flows from operating activities: Net loss..................................................................... $(4,571,936) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............................................. 12,249 Common stock issued for services........................................... 371,680 Amortization and write-off of license fees................................. 3,822,000 Interest expense for debt converted to equity.............................. 19,277 Provision for doubtful accounts............................................ 25,000 Changes in assets and liabilities: Accounts receivable...................................................... (2,000) Other assets............................................................. (45,422) Accounts payable and accrued liabilities................................. 116,033 ----------- Net cash used in operating activities.................................. (253,119) ----------- Cash flows from investing activities: Cash assumed in business acquisition......................................... 3,321 Loans to customers........................................................... (75,000) Purchase of property and equipment........................................... (102,034) ----------- Net cash used in investing activities.................................. (173,713) ----------- Cash flows from financing activities: Proceeds from issuance of common stock....................................... 649,000 Proceeds from issuance of notes payable to related parties................... 132,429 Repayment of notes payable to related parties................................ (100,000) ----------- Net cash provided by financing activities.............................. 681,429 ----------- Net increase in cash................................................... 254,597 Cash at beginning of period.................................................... -- ----------- Cash at end of period.......................................................... $ 254,597 ----------- ----------- Supplemental schedule of noncash activities: Issuance of common stock for business acquisition............................ $ 400,000 Accrued asset purchases...................................................... 27,743 Conversion of notes payable to equity........................................ 284,000 Common stock issued in exchange for shareholders' payment of Company debt.... 400,000 ----------- -----------
See accompanying notes to consolidated financial statements. F-10 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS Netgateway, Inc. and subsidiary ("Netgateway" or the "Company"), was formed on March 4, 1998 as a Nevada corporation. Netgateway is an internet commerce and connectivity company which is developing technology to enable businesses and other organizations to conduct commerce over the internet. The Company plans to assist such businesses and organizations with internet connectivity, web site design and development, database support, training and information, commerce server solutions and transaction clearing-house functions. The Company is a development stage enterprise as defined in Statement of Financial Accounting Standards ("SFAS") No. 7. The Company is devoting substantially all of its present efforts to developing technology. Planned principal operations have not commenced, and accordingly, no revenues have been derived therefrom. Only minimal consulting revenues were generated through June 30, 1998. On June 2, 1998, the Company acquired 100% of the outstanding stock of Video Calling Card, Inc. ("VCC"), a Nevada public shell corporation, in exchange for 450,000 shares of common stock. The transaction was recorded as a reverse acquisition under the purchase method of accounting whereby the accounting acquiror is Netgateway. Accordingly, the common stock account of the Company has been adjusted retroactively to reflect the outstanding common stock of VCC as of the date of the acquisition and for all prior periods. Also on June 2, 1998, the Company acquired certain assets and liabilities of Infobahn Technologies, LLC (d/b/a Digital Genesis), a California limited liability company, in exchange for 400,000 shares of common stock of the Company valued at $400,000. The consideration was allocated based on the relative fair values of the tangible and intangible assets and liabilities acquired, including acquired technology of $120,000, with the excess consideration of $235,193 recorded as goodwill. The operations of Digital Genesis are included in the consolidated statement of operations of the Company from June 2, 1998 through June 30, 1998. Unaudited pro forma consolidated results of operations are summarized below to reflect the acquisition of Digital Genesis as if it had occurred on March 4, 1998 (inception): Revenue................................................. $ 85,119 ---------- ---------- Net loss................................................ (4,551,875) ---------- ---------- Loss per share.......................................... (.81) ---------- ----------
(2) LIQUIDITY The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of the date of this report, the Company's planned principal operations have not commenced and minimal revenues have been generated as the Company continues to develop its technology. The Company has relied upon private placements of its stock and issuances of debt to generate funds to meet its operating needs and plans to continue pursuing financing in this manner during the next year. However, there are no assurances that such financing will be available when and as needed to satisfy current obligations. As such, substantial doubt exists as to whether the Company will continue as a going concern. F-11 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. (B) REVENUE RECOGNITION Revenue generated from consulting services is recognized as services are performed. (C) INTANGIBLE ASSETS Intangible assets are amortized on a straight-line basis over their estimated useful lives as follows: Acquired technology....................................... 7 years Goodwill.................................................. 10 years
(D) PROPERTY AND EQUIPMENT Property and equipment, stated at cost, is comprised of computer and office equipment. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 5 years. (E) RESEARCH AND DEVELOPMENT EXPENDITURES Research and development costs are expensed as incurred. (F) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (G) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted operating cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. F-12 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (H) FINANCIAL INSTRUMENTS The carrying values of cash, accounts receivable, notes receivable, accounts payable and accrued liabilities at June 30, 1998 approximated fair value due to the short maturity of those instruments. The fair value of the notes payable to related parties could not be estimated due to the nature of the borrowings. All financial instruments are held for purposes other than trading. (I) ACCOUNTING FOR STOCK OPTIONS The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its fixed plan employee stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Compensation expense related to stock options granted to non-employees is accounted for under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," whereby compensation expense is recognized over the vesting period based on the fair value of the options on the date of grant. (J) COMPREHENSIVE INCOME SFAS 130, "Reporting Comprehensive Income" (SFAS No. 130) establishes standards for reporting and displaying comprehensive income (loss) and its components in a full set of general-purpose financial statements. This statement requires that an enterprise classify items of other comprehensive income (loss) by their nature in a financial statement and display the accumulated balance of other comprehensive income (loss) separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company does not have any components of other comprehensive income (loss), therefore, comprehensive loss is the same as net loss for the period March 4, 1998 (inception) through June 30, 1998. (K) BUSINESS SEGMENTS AND RELATED INFORMATION Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131) establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. Is also establishes standards for related disclosure about products and services, geographic areas and major customers. It replaces the "industry segment" concept of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," with a "management approach" concept as the basis for identifying reportable segments. The Company has only one operating segment and has no foreign operations. Therefore, the adoption of SFAS No. 131 had no impact on the Company. (L) LOSS PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the F-13 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) issuance of common stock that then shared in the earnings of the entity. Diluted earnings (loss) per share is computed similarly to fully diluted earnings (loss) per share pursuant to Accounting Principles Board (APB) Opinion No. 15. There were 200,000 options and 73,000 warrants to purchase shares of common stock that were outstanding during the period March 4, 1998 (inception) through June 30, 1998 which were not included in the computation of diluted loss per share because the impact would have been antidilutive. (M) COSTS OF START-UP ACTIVITIES Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities," the Company expenses all the costs of start-up activities as incurred. (N) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reporting of revenues and expenses during the reporting periods to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) PROPERTY AND EQUIPMENT Property and equipment balances at June 30, 1998 are summarized as follows: Computers and office equipment............................ $ 152,244 Less accumulated depreciation............................. (8,860) --------- $ 143,384 --------- ---------
(4) INTANGIBLE ASSETS Intangible assets balances at June 30, 1998 are summarized as follows: Acquired technology....................................... $ 120,000 Goodwill.................................................. 235,193 --------- 355,193 Less accumulated amortization............................. (3,389) --------- $ 351,804 --------- ---------
(5) LICENSE AGREEMENTS In March 1998, the Company entered into a sublicense agreement related to proprietary courseware with Training Resources International (TRI), which is wholly-owned by Michael Khaled, a stockholder of the Company, in exchange for the assumption of TRI's obligation of $1,600,000 to the original licensor, ProSoft I Net Solutions, Inc. (ProSoft). TRI entered into the original license agreement with ProSoft in January 1998. F-14 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) LICENSE AGREEMENTS (CONTINUED) In April 1998, the Company entered into a sublicense agreement related to proprietary courseware with S.T.E.P.S., Inc. (Steps), whose primary stockholder is Scott Beebe, a stockholder and director of the Company, in exchange for (1) the assumption of Steps remaining obligation of $1,500,000 to the original licensor, ProSoft, (2) the assumption of Step's obligation of $200,000 to Vision Holdings Inc. (Vision), an unrelated entity, which had advanced funds to Steps, and (3) the issuance of 1,000,000 shares of common stock valued at $220,000 to Steps. Additionally, the Company acquired supplies, books and other materials related to the licensed technology from Vision in exchange for $84,000. The Company had previously entered into a separate loan agreement for $100,000 with Vision. The Company's chief executive officer, Keith Freadhoff, was the chief executive officer at ProSoft when the original license agreement with Steps was entered into. Don Danks is a stockholder of the Company and was an officer of ProSoft at the time the original license agreements were entered into. In April 1998, the Company converted the $300,000 obligation to Vision into 1,900,000 shares of common stock, valued at $418,000. As a result, license fees of $418,000 were recorded for the incremental increase of the stock exchanged for the note payable cancellation. In June 1998, the Company changed its business plan and began focusing on developing technology to enable businesses and other organizations to conduct commerce over the internet. Therefore, the Company determined that the license fees would not ultimately be recoverable. Accordingly, the costs of acquiring the sub-license agreements and related supplies is included as license fees expense in the accompanying consolidated statement of operations. (6) NOTES PAYABLE Notes payable at June 30, 1998 consists of the following: Non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under license agreements, maturing through October 15, 1998.......................................................... $1,100,000 Non-interest bearing note payable payable to ProSoft I-Net Solutions, Inc. under license agreements, payable in quarterly principal and interest installments of $200,000 and maturing through December 31, 1999..................................... 1,287,622 Non-interest bearing note payable to an officer and shareholder, due on demand................................................. 32,429 ---------- 2,420,051 Less current portion............................................ (2,052,159) ---------- $ 367,892 ---------- ----------
F-15 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) NOTES PAYABLE (CONTINUED) At June 30, 1998, aggregate maturities of notes payable are as follows:
TOTAL ------------ Year ending June 30: 1999................................................................ $ 2,052,159 2000................................................................ 367,892 ------------ Total maturities.................................................. 2,420,051 ------------ ------------
The non-interest bearing note payable payable to ProSoft I-Net Solutions, Inc. under license agreements due December 31, 1999, is net of imputed interest of $112,378 as of June 30, 1998. During the period from March 4, 1998 (inception) through June 30, 1998, an officer and shareholder loaned the Company $132,429 of which $100,000 was converted into a capital contribution in June 1998. The remaining balance of $32,429 is due on demand. In August 1998, the notes payable agreements to ProSoft I-Net Solutions, Inc. aggregating $2,387,622 were amended whereby the scheduled principal payments of $2,100,000 and $400,000 due in fiscal years 1999 and 2000, were changed to $1,800,000 and $700,000, respectively. (7) STOCKHOLDERS' EQUITY During the period March 4, 1998 (inception) through June 30, 1998, the Company issued 1,645,455 shares of common stock valued at $362,000 to certain officers and employees in exchange for compensation. The shares vested immediately upon grant. In April 1998, the Company granted 100,000 shares of common stock under a consulting agreement in exchange for services valued at $22,000. Compensation expense of $7,920 was recognized for the value of the shares which vested immediately upon grant. Under the agreement, the Company may repurchase up to 64,000 shares of the common stock issued to the consultant. The shares eligible for repurchase vest ratably over a 24 month period upon performance of services under the consulting agreement. Deferred compensation of $14,080 was recorded in the accompanying consolidated statement of changes in shareholders' deficit to reflect the unearned compensation. During the period March 4, 1998 (inception) through June 30, 1998, 8,000 of the shares eligible for repurchase vested. As a result, $1,760 of compensation was recorded in the accompanying consolidated statement of operations. In June 1998, the Company issued 100,000 shares of common stock to an employee in exchange for services valued at $100,000. Half of the shares vested on July 1, 1998 with the remaining shares vesting ratably over a 12 month period. Accordingly, deferred compensation of $100,000 was recorded at June 30, 1998. During the period March 4, 1998 (inception) through June 30, 1998, Mike Khaled, Don Danks, and Lynn Turnbow, shareholders of the Company, paid, on behalf of the Company, $400,000 of the scheduled payments under the $3,000,000 notes payable to ProSoft in exchange for 600,000 shares of common stock valued at $400,000. In March 1998, an officer and shareholder of the Company loaned the Company $100,000. In June 1998, the note was converted into a capital contribution. F-16 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) STOCKHOLDERS' EQUITY (CONTINUED) In June 1998, $184,000 of notes payable to third parties were converted into 184,000 shares of common stock valued at $185,333, including $1,533 of accrued interest. During the period March 4, 1998 (inception) through June 30, 1998, the Company sold 1,057,545 shares of common stock for $503,000 in cash. Additionally, in June 1998, the Company sold 73,000 units in exchange for $146,000. Each unit consisted of one share of common stock and one warrant to purchase an equivalent number of shares of common stock at an exercise price of $4.00. The warrants were exercisable at any time prior to September 1, 1998. The fair value of the warrants on the date of the grant was estimated to be $.02 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5.16%; volatility of 100%; and an expected life of two months. The warrants were subsequently repriced to $2.00 per share and the exercise date was extended to October 1, 1998. The fair value of the warrants on the date of repricing remained consistent with the fair value on date of grant. (8) STOCK OPTIONS In June 1998, the Board of Directors approved, for future grants, 500,000 options to acquire an equivalent number of shares of common stock at an exercise price of $1 per share to certain senior management. No options were granted as of June 30, 1998. In June 1998, the Board of Directors granted 100,000 options to acquire an equivalent number of shares of common stock at an exercise price of $6 per share as a legal fee retainer. The options vest ratably as services are provided and expire on April 30, 2005. The fair value of the options on the date of the grant was estimated to be $.66 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5.66%; volatility of 100%; and an expected life of seven years. As of June 30, 1998, only a minimal amount of legal services had been provided under the agreement. In June 1998, the Company granted a consultant 100,000 options to purchase an equivalent number of shares of common stock at an exercise price of $3.50 per share as compensation for services. The options vest upon the consultant achieving certain sales goals related to the sale of training courses under the ProSoft license agreement by June 1999. The options expire on June 1, 2003. As of June 30, 1998, no options had been earned under the agreement. The fair value of the options on the date of the grant was estimated to be $.59 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5.50%; volatility of 100%; and an expected life of 5 years. Subsequent to June 30, 1998, these options were canceled. The following is a summary of stock option activity:
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE ----------- --------------- Balance at March 4, 1998........................................... -- $ -- Granted............................................................ 200,000 4.75 ----------- Balance at June 30, 1998........................................... 200,000 4.75 ----------- ----- ----------- -----
F-17 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) STOCK OPTIONS (CONTINUED) The following table summarizes information about shares under option at June 30, 1998:
WEIGHTED- AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - -------------- ----------- ----------- ----------- ------------- ----------- $3.50 to 6.00 200,000 5.88 years $ 4.75 -- $ -- ----------- ----------- ----------- --- ----------- ----------- ----------- ----------- --- -----------
In July 1998, the Board of Directors adopted the 1998 Stock Compensation Program ("Program") which consists of an Incentive Stock Option Plan, Non-Qualified Stock Option Plan, Restricted Share Plan, Employee Stock Purchase Plan, Non-Employee Director Stock Option Plan, Stock Appreciation Rights Plan and Other Stock Rights Plan. An aggregate of 1,000,000 shares were reserved for issuance under the Program. In December, 1998, the Board of Directors adopted, subject to approval by our stockholders, the 1998 Stock Option Plan for Senior Executives. This plan provides for the grant of options to purchase up to 5,000,000 shares of common stock to senior executives of Netgateway. Options may be either "incentive stock options" or non-qualified stock options under Federal tax laws. (9) INCOME TAXES Income tax expense for the period March 4, 1998 (inception) through June 30, 1998 represents the California state minimum franchise tax of $800 and is included in selling, general and administrative expenses in the accompanying consolidated statement of operations. Income tax expense attributable to loss from operations during the period March 4, 1998 (inception) through June 30, 1998, differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to loss from operations as a result of the following: Computed "expected" tax benefit................................. $(1,564,458) Decrease (increase) reduction in income taxes resulting from: State and local income tax benefit, net of federal effect....... (278,196) Change in the valuation allowance for deferred tax assets allocated to income taxes..................................... 1,859,974 Other......................................................... (27,320) ---------- Income tax expense............................................ $ 800 ---------- ----------
F-18 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 1998 are presented below: Deferred tax assets: Net operating loss carryforwards.............................. $ 199,036 License fees.................................................. 1,470,280 Stock compensation expense.................................... 179,872 Intangible assets, principally due to differences in amortization................................................ 10,290 Property and equipment, principally due to differences in depreciation................................................ 496 ---------- Total gross deferred tax assets............................. 1,859,974 Less valuation allowance.................................... (1,859,974) ---------- Net deferred tax assets..................................... $ -- ---------- ----------
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the schedule reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $4,650,000 prior to the expiration of the carryforward period in 2013. Based on the projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences. Such potential future benefits have been fully reserved, and accordingly, there are no net deferred tax assets. As of June 30, 1998, the Company had approximately $498,000 of net operating loss carryforwards available for Federal and state income tax purposes, respectively, which expire 2013. The ultimate realization of the net operating loss carryforwards will be limited by Section 382 of the Internal Revenue Code as a result of a change of control. (10) LEASE COMMITMENTS The Company has noncancelable operating leases for office space which expire at various dates through July 2001. Minimum annual commitments under noncancelable operates leases are $71,102 in 1999, $66,571 in 2000 and $69,552 in 2001. All other operating leases are month-to-month arrangements. Rent expense amounted to $18,367 during the period March 4, 1998 (inception) through June 30, 1998. (11) SUBSEQUENT EVENTS During July 1998 through September 1998, the Company sold 949,800 units in exchange for $1,899,600, of which 5,000 shares valued at $10,000 have yet to be issued. Each unit consisted of one F-19 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) SUBSEQUENT EVENTS (CONTINUED) share of common stock and one warrant to purchase an equivalent number of shares of common stock at an exercise price of $4.00. The warrants were subsequently repriced to $2.00 per share. During July 1998 through October 1998, warrants to purchase 132,100 shares of common stock were exercised generating proceeds of $264,200. Subsequent to June 30, 1998, the Company paid $700,000 of scheduled principal payments under the notes payable to ProSoft I-Net Solutions, Inc. In connection with a settlement agreement and termination of the license agreements with ProSoft I-Net Solutions, Inc., the unpaid principal balance of $1,800,000 was forgiven in December 1998. During the period of July 1998 through March 1999, the Company granted 908,337 options to employees at exercise prices ranging from $2.17 to $5.34 per share. In December 1998, the Board of Directors adopted the 1998 Stock Option Plan for Senior Executives. An aggregate of 5,000,000 shares were reserved for issuance under the plan, 2,408,888 which had been granted as of March 31, 1999. In January 1999, the Company acquired 100% of the outstanding stock of Spartan Multimedia, Inc., a Canadian corporation, in exchange for 185,715 shares of common stock of StoresOnline.com, LTD, a wholly-owned Canadian subsidiary, valued at $464,286. The shares are convertible on a one-to-one basis into common stock of the Company. The issuance of an additional 185,714 shares was contingent upon the attainment of certain performance standards in future periods. In April 1999, the Board of Directors approved the issuance of the contingent shares and waived the performance standards. Accordingly, the consideration increased to $928,572. The acquisition of Spartan Multimedia, Inc. was recorded for using the purchase method of accounting. The consideration was allocated based on the relative fair values of the tangible and intangible assets and liabilities acquired, with the excess consideration of $926,267 recorded as acquired technology and trade secrets. During July 1998 and August 1998, the Company advanced an aggregate of $800,000 to Admor Memory Corp. (Admor) with which the Company was in merger discussions. Certain Company officers and directors were minor shareholders of Admor. The merger was not consummated and the advances were deemed uncollectible in December 1998 and written-off. From January 1999 to February 1999, the Company issued $1,000,000 of convertible debentures bearing interest at the 90-day treasury bill rate plus 4%. The debentures are convertible into the Company's common stock at $2.50 per share at the Company's option. The debentures are due in December 1999. During March 1999 and April 1999, the Company sold 312,600 shares of common stock in exchange for $937,000. F-20 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) VALUATION AND QUALIFYING ACCOUNTS AND RESERVES The Company's schedule of valuation and qualifying accounts and reserves for the period of March 4, 1998 (inception) through June 30, 1998 as follows:
BALANCE AT BALANCE AT BEGINNING CHARGED TO COSTS END OF OF PERIOD AND EXPENSES DEDUCTIONS PERIOD ----------- ----------------- ----------- ------------ Allowance for doubtful accounts.............. $ -- $ 25,000 $ -- $ 25,000
F-21 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED BALANCE SHEET MARCH 31, 1999
MARCH 31, 1999 ------------- ASSETS Current assets: Cash............................................................................................. $ 137,233 Accounts receivable.............................................................................. 37,000 Notes receivable................................................................................. -- Debt issue costs................................................................................. 141,595 Other current assets............................................................................. 10,100 ------------- Total current assets......................................................................... 325,928 Property and equipment, net........................................................................ 196,119 Intangible assets, net............................................................................. 1,201,256 Other assets....................................................................................... 8,194 ------------- $ 1,731,497 ------------- ------------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable................................................................................. $ 447,432 Accrued liabilities.............................................................................. 353,512 Convertible debentures (note 4).................................................................. 237,500 Current portion of note payable to related parties............................................... 100,000 Current portion of notes payable................................................................. 160,000 ------------- Total current liabilities.................................................................... 1,298,444 Shareholders' equity (note 6): Common stock, par value $.001 per share. Authorized 25,000,000 shares; issued and outstanding 9,357,900 shares at March 31, 1999............................................................. 9,358 Additional paid-in captial....................................................................... 10,308,156 Deferred compensation............................................................................ (12,500) Deficit accumulated during development stage..................................................... (9,871,961) ------------- Total shareholders' equity................................................................... 433,053 Subsequent events (note 7) ------------- Total liabilities and shareholders' equity................................................... $ 1,731,497 ------------- -------------
See accompanying notes to consolidated financial statements. F-22 NETGATEWAY, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND FOR THE CUMULATIVE PERIOD FROM MARCH 4, 1998 (INCEPTION) THROUGH MARCH 31, 1999
CUMULATIVE PERIOD FROM MARCH 4, 1998 NINE MONTHS (INCEPTION) ENDED THROUGH MARCH 31, 1999 MARCH 31, 1999 -------------- ------------------------ Service revenue........................................................ $ 198,759 201,559 Operating expenses: License fees (note 5)................................................ -- 3,822,000 Depreciation and amortization........................................ 120,577 132,826 Selling, general and administrative.................................. 6,862,966 7,584,176 -------------- ----------- Total operating expenses........................................... 6,983,543 11,539,002 -------------- ----------- Loss from operations............................................... (6,784,784) (11,337,443) Loss on sale of equity securities...................................... 54,729 54,729 Interest expense....................................................... 313,744 333,021 -------------- ----------- Loss before extraordinary item..................................... (7,153,257) (11,725,193) Extraordinary gain on extinguishment of debt........................... 1,853,232 1,853,232 -------------- ----------- Net loss........................................................... $ (5,300,025) (9,871,961) -------------- ----------- -------------- ----------- Basic and diluted extraordinary gain per share......................... $ .21 $ .24 -------------- ----------- -------------- ----------- Basic and diluted loss per share....................................... $ (0.61) (1.29) -------------- ----------- -------------- ----------- Weighted average common shares outstanding--basic and diluted.......... 8,659,851 7,628,895 -------------- ----------- -------------- -----------
See accompanying notes to consolidated financial statements. F-23 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998 AND THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
COMMON STOCK ADDITIONAL PRICE PER ---------------------- PAID-IN DEFERRED DATE SHARE SHARES AMOUNT CAPITAL COMPENSATION ----------- ----------- --------- ----------- ------------- ------------- Sale of common stock for cash........... 3/98 $.07 - .33 754,545 $ 755 199,245 -- Common stock issued for services........ 3/98 0.22 1,445,455 1,445 316,555 -- Common stock issued in exchange for shareholders' payment of Company debt.................................. 3/98 0.50 400,000 400 199,600 -- Common stock issued to acquire license............................... 3/98 0.22 1,000,000 1,000 219,000 -- Common stock issued for services........ 4/98 0.22 100,000 100 21,900 -- Deferred compensation on stock issued for services.......................... 4/98 -- -- -- (14,080) Amortization of deferred compensation... 4/98 - 6/98 -- -- -- 1,760 Common stock issued to acquire license............................... 4/98 0.22 1,900,000 1,900 416,100 -- Common stock issued for services........ 5/98 0.22 200,000 200 43,800 -- Common stock issued in exchange for shareholders' payment of Company debt.................................. 5/98 1.00 200,000 200 199,800 -- Sale of common stock for cash........... 5/98 - 6/98 1.00 303,000 303 302,697 -- Conversion of debt by officer........... 6/98 -- -- 100,000 -- Shares issued and adjustment resulting from reverse acquisition.............. 6/98 450,000 450 (310) -- Shares issued in business acquisition... 6/98 1.00 400,000 400 399,600 -- Conversion of debt to common stock, including interest.................... 6/98 1.00 184,000 184 185,349 -- Stock issued for deferred compensation.......................... 6/98 1.00 100,000 100 99,900 (100,000) Sale of common stock for cash........... 6/98 2.00 73,000 73 145,927 -- Net loss................................ -- -- -- -- --------- ----------- ------------- ------------- Balance at June 30, 1998................ 7,510,000 7,510 2,849,163 (112,330) Unaudited............................... Sale of common stock for cash........... 7/98 - 9/98 2.00 949,800 950 1,898,650 -- Exercise of warrants.................... 7/98 - 9/98 2.00 132,100 132 264,068 -- 10/98 - Warrants granted for services........... 3/99 2.00 - 2.50 -- -- 1,410,400 -- Stock compensation paid by stockholders.......................... -- -- 400,000 -- Amortization of deferred compensation... 7/98 - 3/99 -- -- -- 89,260 Forfeited stock......................... (48,000) (48) (10,512) 10,560 Subsidiary convertible common issued in business acquisition.................. 1/99 2.50 -- -- 928,572 -- Options issued for legal services....... 7/98 - 3/99 -- -- 194,160 -- Warrants granted for debt issue costs... 2/99 2.50 -- -- 369,969 -- Shares issued for debenture conversion............................ 3/99 2.50 305,000 305 762,195 -- 10/98 - Shares issued for services.............. 3/99 2.00 - 3.00 390,600 390 901,409 -- Shares issued for debt issue costs...... 3/99 2.50 30,000 30 74,970 -- Sale of common stock for cash........... 3/99 3.00 88,400 89 265,111 -- Net loss................................ -- -- -- -- --------- ----------- ------------- ------------- Balance at March 31, 1999............... 9,357,900 $ 9,358 10,308,156 (12,500) --------- ----------- ------------- ------------- --------- ----------- ------------- ------------- DEFICIT ACCUMULATED TOTAL DURING SHAREHOLDERS' DEVELOPMENT EQUITY STAGE (DEFICIT) ----------- ------------ Sale of common stock for cash........... -- 200,000 Common stock issued for services........ -- 318,000 Common stock issued in exchange for shareholders' payment of Company debt.................................. -- 200,000 Common stock issued to acquire license............................... -- 220,000 Common stock issued for services........ -- 22,000 Deferred compensation on stock issued for services.......................... -- (14,080) Amortization of deferred compensation... -- 1,760 Common stock issued to acquire license............................... -- 418,000 Common stock issued for services........ -- 44,000 Common stock issued in exchange for shareholders' payment of Company debt.................................. -- 200,000 Sale of common stock for cash........... -- 303,000 Conversion of debt by officer........... -- 100,000 Shares issued and adjustment resulting from reverse acquisition.............. -- 140 Shares issued in business acquisition... -- 400,000 Conversion of debt to common stock, including interest.................... -- 185,533 Stock issued for deferred compensation.......................... -- Sale of common stock for cash........... 146,000 Net loss................................ (4,571,936) (4,571,936) ----------- ------------ Balance at June 30, 1998................ (4,571,936) (1,827,583) Unaudited............................... Sale of common stock for cash........... -- 1,899,600 Exercise of warrants.................... -- 264,200 Warrants granted for services........... -- 1,410,400 Stock compensation paid by stockholders.......................... -- 400,000 Amortization of deferred compensation... -- 89,260 Forfeited stock......................... -- -- Subsidiary convertible common issued in business acquisition.................. -- 928,572 Options issued for legal services....... -- 194,160 Warrants granted for debt issue costs... -- 369,969 Shares issued for debenture conversion............................ -- 762,500 Shares issued for services.............. -- 901,800 Shares issued for debt issue costs...... -- 75,000 Sale of common stock for cash........... -- 265,200 Net loss................................ (5,300,025) (5,300,025) ----------- ------------ Balance at March 31, 1999............... (9,871,961) 433,053 ----------- ------------ ----------- ------------
F-24 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND FOR THE CUMULATIVE PERIOD FROM MARCH 4, 1998 (INCEPTION) THROUGH MARCH 31, 1999
CUMULATIVE PERIOD FROM MARCH 4, 1998 NINE MONTHS (INCEPTION) ENDED MARCH THROUGH 31, 1999 MARCH 31, 1999 -------------- ------------------ Cash flows from operating activities: Net loss.................................................................... $ (5,300,025) (9,871,961) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................................. 120,577 132,826 Common stock issued for services.......................................... 901,800 1,273,480 Amortization and write-off of license fees................................ -- 3,822,000 Loss on sale of equity securities......................................... 54,729 54,729 Amortization of deferred compensation..................................... 89,260 89,260 Gain on extinguishment of debt............................................ (1,853,232) (1,853,232) Compensation expense for contributed capital.............................. 400,000 400,000 Interest expense for debt converted to equity............................. 35,488 54,765 Interest expense on warrants issued as debt issue......................... 303,374 303,374 Options and warrants issued for services.................................. 1,604,560 1,604,560 Provision for doubtful accounts........................................... 48,026 73,026 Changes in assets and liabilities: Accounts receivable..................................................... (63,721) (65,721) Other assets............................................................ 32,474 (12,948) Accounts payable and accrued liabilities................................ 644,007 760,040 -------------- ---------- Net cash used in operating activities................................. (2,982,683) (3,235,802) -------------- ---------- Cash flows from investing activities: Cash assumed in business acquisition........................................ 4,781 8,102 Purchase of equity securities............................................... (100,733) (100,733) Proceeds from sale of equity securities..................................... 46,004 46,004 Notes receivable............................................................ 50,000 (25,000) Purchase of property and equipment.......................................... (91,303) (193,337) -------------- ---------- Net cash used in investing activities................................. (91,251) (264,964) -------------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock...................................... 2,164,800 2,813,800 Proceeds from exercise of warrants.......................................... 264,200 264,200 Proceeds from issuance of notes payable and convertible debentures.......... 1,160,000 1,392,429 Proceeds from issuance of notes payable to related parties.................. 100,000 -- Repayment of notes payable to related parties............................... (732,429) (832,429) -------------- ---------- Net cash provided by financing activities............................. 2,956,571 3,638,000 -------------- ---------- Net increase (decrease) in cash....................................... (117,363) 137,234 Cash at beginning of period................................................... 254,597 -- -------------- ---------- Cash at end of period......................................................... $ 137,234 137,234 -------------- ---------- -------------- ---------- Supplemental schedule of noncash activities: Issuance of common stock for business acquisition........................... $ -- 400,000 Issuance of convertible stock in business acquisition....................... 464,286 464,286 Accrued asset purchases..................................................... -- 27,743 Conversion of notes payable to equity....................................... -- 284,000 Conversion of debt to common stock.......................................... 762,500 762,500 Common stock issued in exchange for shareholders' payment of Company debt... -- 400,000 Warrants issued for debt issue costs........................................ 369,969 369,969 Stock issued for debt issue costs........................................... 75,000 75,000 -------------- ---------- -------------- ----------
See accompanying notes to consolidated financial statements. F-25 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (1) DESCRIPTION OF BUSINESS Netgateway is an internet commerce and connectivity company which provides turn-key solutions designed to enable companies of any size to extend their business to the internet for a wide variety of purposes, including the advertising and sale of products or services by retailers and the conduct of commercial transactions between business enterprises. The Company is a development stage enterprise as defined in Statement of Financial Accounting Standards ("SFAS") No. 7. The Company is devoting substantially all of its present efforts to developing technology. Planned principal operations have commenced, but have not produced significant revenue. Only minimal service and consulting revenues were generated through March 31, 1999. On June 2, 1998, the Company acquired 100% of the outstanding stock (450,000 shares) of Video Calling Card, Inc. ("VCC"), a Nevada public shell corporation, in exchange for all of the issued and outstanding common stock of Netgateway. Each Netgateway share was exchanged for 10 shares of VCC. The transaction was recorded as a reverse acquisition under the purchase method of accounting whereby the accounting acquiror is Netgateway. Accordingly, the common stock account of the Company has been adjusted retroactively to reflect the outstanding common stock of VCC as of the date of the acquisition and for all prior periods. Also on June 2, 1998, the Company acquired certain assets and liabilities of Infobahn Technologies, LLC (d/b/a Digital Genesis), a California limited liability company, in exchange for 400,000 shares of common stock of the Company valued at $400,000. The consideration was allocated based on the relative fair values of the tangible and intangible assets and liabilities acquired, including acquired technology of $120,000, with the excess consideration of $235,193 recorded as goodwill. The operations of Digital Genesis are included in the consolidated statement of operations of the Company from June 2, 1998 through June 30, 1998. In January 1999, the Company acquired 100% of the outstanding stock of Spartan Multimedia, Inc., a Canadian corporation, in exchange for 185,715 shares of common stock of StoresOnline.com, LTD, a wholly-owned Canadian subsidiary, valued at $464,286. The shares are convertible on a one-to-one basis into common stock of the Company. The issuance of an additional 185,714 shares was contingent upon the attainment of certain performance standards in future periods. In April 1999, the Board of Directors approved the issuance of the contingent shares and waived the performance standards. Accordingly, the consideration increased to $928,572. The acquisition of Spartan Multimedia, Inc. was recorded for using the purchase method of accounting. The consideration was allocated based on the relative fair values of the tangible and intangible assets and liabilities acquired, with the excess consideration of $926,267 recorded as acquired technology and trade secrets. The operations of Spartan Multimedia, Inc. are included in the consolidated statement of operations of the Company from January 15, 1999 through March 31, 1999. Unaudited pro forma consolidated results of operations for the nine months ended March 31, 1999 are summarized below to reflect the acquisition of Spartan Multimedia, Inc. as if it had occurred on July 1, 1998: Revenue $ 201,982 ---------- ---------- Net loss (5,379,256) ---------- ---------- Loss per share (.62) ---------- ----------
F-26 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 (2) LIQUIDITY The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of the date of this report, the Company's planned principal operations have not commenced and minimal revenues have been generated as the Company continues to develop its technology. The Company has relied upon private placements of its stock and issuances of debt to generate funds to meet its operating needs and plans to continue pursuing financing in this manner during the next year. However, there are no assurances that such financing will be available when and as needed to satisfy current obligations. As such, substantial doubt exists as to whether the Company will continue as a going concern. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. (B) REVENUE Revenue from services is recognized as the services are performed. Services revenue earned but not invoiced is recorded as revenue and unbilled accounts receivable until invoiced. Services billed in advance are recorded to deferred revenue as advance billings and collections relating to future services are recognized as revenue when earned. (C) RESEARCH AND DEVELOPMENT EXPENDITURES Research and development costs are expensed as incurred. (D) COMPREHENSIVE INCOME On March 4, 1998 (inception), the Company adopted SFAS 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes standards for reporting and displaying comprehensive income (loss) and its components in a full set of general-purpose financial statements. This statement requires that an enterprise classify items of other comprehensive income (loss) by their nature in a financial statement and display the accumulated balance of other comprehensive income (loss) separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company does not have any components of other comprehensive income (loss), therefore, comprehensive loss is the same as net loss for the period March 4, 1998 (inception) through June 30, 1998 and the nine months ended March 31, 1999. (E) LOSS PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if F-27 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings (loss) per share is computed similarly to fully diluted earnings (loss) per share pursuant to Accounting Principles Board (APB) Opinion No. 15. There were 5,706,825 options and 1,308,300 warrants to purchase shares of common stock that were outstanding during the period July 1, 1998 through March 31, 1999. There were $237,500 of debentures outstanding which were convertible into 95,000 shares of common stock and 185,715 shares of common stock granted in the Company's Canadian subsidiary, StoresOnline.com, Ltd. that are convertible into 185,715 shares common stock outstanding as of March 31, 1999. None of these items were included in the computation of diluted loss per share because the impact would have been antidilutive. (E) COSTS OF START-UP ACTIVITIES Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities," the Company expenses all the costs of start-up activities as incurred. (F) DEBT ISSUE COSTS Debt issue costs are recognized as interest expense ratably over the term of the related debt. (4) CONVERTIBLE DEBENTURES AND NOTES PAYABLE During January 1999 and February 1999, the Company issued $1,000,000 of convertible debentures bearing interest at the 90-day Treasury Bill rate plus 4%. The debentures are convertible into the Company's common stock at $2.50 per share at the Company's option. The debentures are due in December 1999. As of March 31, 1999, $762,500 in convertible debentures had been converted into 305,000 shares of common stock. In March, 1999, the CEO of the Company loaned the Company $100,000 which is due within 10 days of the close of bridge financing. (5) LICENSE AGREEMENTS In March 1998, the Company entered into a sublicense agreement related to proprietary courseware with Training Resources International (TRI), which is wholly-owned by Michael Khaled, a stockholder of the Company, in exchange for the assumption of TRI's obligation of $1,600,000 to the original licensor, ProSoft I Net Solutions, Inc. (ProSoft). TRI entered into the original license agreement with ProSoft in January 1998. In April 1998, the Company entered into a sublicense agreement related to proprietary courseware with S.T.E.P.S., Inc. (Steps), whose primary stockholder is Scott Beebe, a stockholder and director of the Company, in exchange for (1) the assumption of Steps remaining obligation of $1,500,000 to the original licensor, ProSoft, (2) the assumption of Step's obligation of $200,000 to Vision Holdings Inc. (Vision), an unrelated entity, which had advanced funds to Steps, and (3) the issuance of 1,000,000 shares of common stock valued at $220,000 to Steps. Additionally, the Company acquired supplies, F-28 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 (5) LICENSE AGREEMENTS (CONTINUED) books and other materials related to the licensed technology from Vision in exchange for $84,000. The Company had previously entered into a separate loan agreement for $100,000 with Vision. The Company's chief executive officer, Keith Freadhoff, was the chief executive officer at ProSoft when the original license agreement with Steps was entered into. Don Danks is a stockholder of the Company and was an officer of ProSoft at the time the original license agreements were entered into. In April 1998, the Company converted the $300,000 obligation to Vision into 1,900,000 shares of common stock, valued at $418,000. As a result, license fees of $418,000 were recorded for the incremental increase of the stock exchanged for the note payable cancellation. In June 1998, the Company changed its business plan and began focusing on developing technology to enable businesses and other organizations to conduct commerce over the internet. Therefore, the Company determined that the license fees would not ultimately be recoverable. Accordingly, the costs of acquiring the sub-license agreements and related supplies is included as license fees expense in the accompanying consolidated statement of operations. (6) STOCKHOLDERS' EQUITY During the period March 4, 1998 (inception) through June 30, 1998, the Company issued 1,645,455 shares of common stock valued at $362,000 to certain officers and employees in exchange for compensation. The shares vested immediately upon grant. In April 1998, the Company granted 100,000 shares of common stock under a consulting agreement in exchange for services valued at $22,000. Compensation expense of $7,920 was recognized for the value of the shares which vested immediately upon grant. Under the agreement, the Company may repurchase up to 64,000 shares of the common stock issued to the consultant. The shares eligible for repurchase vest ratably over a 24 month period upon performance of services under the consulting agreement. Deferred compensation of $14,080 was recorded in the accompanying consolidated statement of changes in shareholders' equity (deficit) to reflect the unearned compensation. During the period March 4, 1998 (inception) through June 30, 1998, 8,000 shares eligible for repurchase vested. As a result, $1,760 of compensation was recorded in the accompanying consolidated statement of operations. During the nine months ended March 31, 1999, an additional 8,000 shares eligible for repurchase vested and the consulting agreement was subsequently canceled. As a result, $1,760 of compensation was recorded in the accompanying consolidated statement of operations. In June 1998, the Company issued 100,000 shares of common stock to an employee in exchange for services valued at $100,000. Half of the shares vested on July 1, 1998 with the remaining shares vesting ratably over a 12 month period. Accordingly, deferred compensation of $100,000 was recorded at June 30, 1998. During the nine months ended March 31, 1999, the Company recorded $87,500 of compensation expense related to these shares. During the period March 4, 1998 (inception) through June 30, 1998, Mike Khaled, Don Danks and Lynn Turnbow, shareholders of the Company, paid, on behalf of the Company, $400,000 of the scheduled payments under the $3,000,000 notes payable to ProSoft in exchange for 600,000 shares of common stock valued at $400,000. F-29 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 (6) STOCKHOLDERS' EQUITY (CONTINUED) In March 1998, an officer and shareholder of the Company, Keith Freadhoff, loaned the Company $100,000. In June 1998, the note was contributed to capital. In June 1998, $184,000 of notes payable to third parties were converted into 184,000 shares of common stock valued at $185,333, including $1,533 of accrued interest. During the period March 4, 1998 (inception) through June 30, 1998, the Company sold 1,057,545 shares of common stock for $503,000 in cash. Additionally, in June 1998, the Company sold 73,000 units in exchange for $146,000. Each unit consisted of one share of common stock and one warrant to purchase an equivalent number of shares of common stock at an exercise price of $4.00. The warrants were exercisable at any time prior to September 1, 1998. The estimated fair value of the warrants on the date of the grant was estimated to be $.02 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5.16%; volatility of 100%; and an expected life of two months. The warrants were subsequently repriced to $2.00 per share and the exercise date was extended to October 1, 1998. The fair value of the warrants on the date of repricing remained consistent with the fair value on date of grant. In October 1998, 132,100 warrants were exercised to purchase 132,100 shares of common stock and proceeds of $264,200. In June 1998, the Board of Directors granted 100,000 options to acquire an equivalent number of shares of common stock at an exercise price of $6 per share as a legal retainer. The options vest ratably as services are provided and expire on April 30, 2005. As of June 30, 1998, only a minimal amount of legal services had been provided under the agreement. During the nine months ended March 31, 1999, under the anti-dilution clause of the agreement, the number of options increased to 240,000 and the exercise price was decreased to $2.50 per share. The fair value of the options was estimated to be $194,160 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected life of 7 years. All services under the agreement were provided through March 31, 1999, therefore, legal expense of $194,160 was recognized in the accompanying consolidated financial statements. During the nine months ended March 31, 1999, the Company issued warrants as consideration for various consulting fees and debt issue costs associated with the convertible debentures. The warrants were exercisable within two years from the dates of issuance. The fair value of the warrants on the dates of issuance was estimated to be $1,360,368 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected life of 2 years. Accordingly, compensation expense of $990,400, debt issuance costs of $66,595 and interest expense of $303,374 were recorded in the accompanying consolidated financial statements. During July 1998 through September 1998, warrants were exercised to purchase 132,100 shares of common stock for $264,068. During the nine months ended March 31, 1999, the Company issued 390,600 shares of common stock valued at $901,800 as payment of consulting services. During March 1999, the Company issued 30,000 shares of common stock valued at $75,000 as payment of debt issuance costs associated with the issuance of $160,000 of notes payable. F-30 NETGATEWAY, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1999 (6) STOCKHOLDERS' EQUITY (CONTINUED) In November 1998, the Company entered into a settlement agreement with Michael Khaled, a shareholder of the Company, whereby four shareholders of the Company contributed 200,000 shares of common stock valued at $400,000 to Mr. Khaled. Additionally, the Company granted warrants to purchase 100,000 shares of common stock to Mr. Khaled and warrants to purchase 200,000 shares of common stock to the four shareholders who contributed their stock. The fair value of the warrants on the issuance date was estimated to be $420,000 using the Black Scholes option-pricing with the following assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility of 100% and an expected life of 2 years. Accordingly, compensation expense of $820,000 was recognized in the accompanying consolidated financial statements. In December 1998, the Board of Directors adopted the 1998 Stock Option Plan for Senior Executives. An aggregate of 5,000,000 shares were reserved for issuance under the plan. As of March 31, 1999, 2,408,488 options had been granted under the Plan. During March 1999, the Company sold 88,400 shares of common stock in exchange for cash of $265,200. During April and May 1999, the Company sold 237,934 shares of common stock in exchange for cash of $713,800. In April 1999, the Company issued 2,570 shares of common stock in connection with the cashless exercise of warrants. During the nine months ended March 31, 1999, the Company granted 908,337 options to employees at exercise prices ranging from $2.17 to $5.34 per share. During the period of April and May 1999, $25,000 of convertible debentures were converted to 10,000 shares of common stock. In May 1999, the Company agreed to purchase and lease back technology from UnitNetImaging (Shopping Planet) in exchange for 35,000 shares of common stock. F-31 INDEPENDENT AUDITORS' REPORT April 20, 1999 To the Members of Infobahn Technologies, LLC. dba Digital Genesis: We have audited the accompanying balance sheets of Infobahn Technologies, LLC. dba Digital Genesis (a California Limited Liability Corporation) as of December 31, 1997 and 1996, and the related statements of operations, members' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Infobahn Technologies, LLC dba Digital Genesis as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ WRIGHT FORD YOUNG & CO. -------------------------------------- WRIGHT FORD YOUNG & CO. F-32 INFOBAHN TECHNOLOGIES, LLC. DBA DIGITAL GENESIS BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ---------- --------- ASSETS Current assets: Cash..................................................................................... $ 6,783 $ 3,649 Accounts receivable...................................................................... 75,174 21,296 ---------- --------- Total current assets................................................................. 81,957 24,945 ---------- --------- Equipment.................................................................................. 20,193 2,067 Less--accumulated depreciation............................................................. (1,432) (69) ---------- --------- Net equipment........................................................................ 18,761 1,998 ---------- --------- Total assets......................................................................... $ 100,718 $ 26,943 ---------- --------- ---------- --------- LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accounts payable......................................................................... $ 14,177 $ 10,319 Accrued expenses......................................................................... 2,874 1,585 ---------- --------- Total current liabilities............................................................ 17,051 11,904 Members' equity............................................................................ 83,667 15,039 ---------- --------- Total liabilities and members' equity................................................ $ 100,718 $ 26,943 ---------- --------- ---------- ---------
The accompanying notes are an integral part of these balance sheets. F-33 INFOBAHN TECHNOLOGIES, LLC. DBA DIGITAL GENESIS STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ---------- ---------- Revenues.................................................................................. $ 507,891 $ 167,572 Selling, general and administrative expenses.............................................. 446,416 181,940 ---------- ---------- Net income (loss)....................................................................... $ 61,475 $ (14,368) ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these statements. F-34 INFOBAHN TECHNOLOGIES, LLC. DBA DIGITAL GENESIS STATEMENTS OF MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Balance at December 31, 1995...................................................... $ -- Members' contributions.......................................................... 29,407 Net loss........................................................................ (14,368) --------- Balance at December 31, 1996...................................................... 15,039 Members' contributions.......................................................... 7,153 Net income...................................................................... 61,475 --------- Balance at December 31, 1997...................................................... $ 83,667 --------- ---------
The accompanying notes are an integral part of these statements. F-35 INFOBAHN TECHNOLOGIES, LLC DBA DIGITAL GENESIS STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ---------- ---------- Cash flows from operating activities: Net income (loss)....................................................................... $ 61,475 $ (14,368) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation........................................................................ 1,363 69 Increase in accounts receivable..................................................... (53,878) (21,296) Increase in accounts payable........................................................ 3,858 10,319 Increase in accrued expenses........................................................ 1,289 1,585 ---------- ---------- Net cash provided by (used in) operating activities............................. 14,107 (23,691) ---------- ---------- Cash flows from investing activities: Purchase of equipment............................................................... (18,126) (2,067) ---------- ---------- Cash flows from financing activities: Members' contributions.............................................................. 7,153 29,407 ---------- ---------- Net increase in cash and equivalents...................................................... 3,134 3,649 Cash at beginning of year................................................................. 3,649 -- ---------- ---------- Cash at end of year....................................................................... $ 6,738 $ 3,649 ---------- ---------- ---------- ---------- Supplemental disclosures of cash flow information: Interest paid....................................................................... $ -- $ -- Income taxes paid................................................................... $ -- $ --
The accompanying notes are an integral part of these statements. F-36 INFOBAHN TECHNOLOGIES, LLC DBA DIGITAL GENESIS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 1. ORGANIZATION AND SUBSEQUENT EVENT Infobahn Technologies, LLC. dba Digital Genesis (the Company) is a California corporation engaged primarily as an internet consulting company. The Company essentially ceased operation in June 1998, when the Company sold all of its net assets to Netgateway, a publicly traded company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION The Company recognizes revenue as the consulting services are provided to the customer. EQUIPMENT Equipment is stated at cost. Depreciation on equipment is provided on the straight-line method over the estimated useful lives of the assets, which is five years. INCOME TAXES The Company is treated as a partnership for federal and state income tax purposes. Consequently, income taxes are not payable by, or provided for, the Company. Members are taxed individually on their respective shares of the Company's earnings USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the report amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments which subject the Company to concentrations of credit risk consist primarily of trade receivables. The Company's customer base consists primarily of technology based businesses. Significant customers as a percentage of revenues is as follows:
1997 1996 ----- ----- Customer A...................................................................... 61% -- Customer B...................................................................... 13% 17% Customer C...................................................................... 9% 13%
F-37 AUDITOR'S REPORT To the Shareholders of Spartan Multimedia Inc. I have audited the balance sheet of Spartan Multimedia Inc. as at August 31, 1998 and the statement of earnings and retained earnings and changes in financial position for the year then ended. These financial statements are the responsibility of the company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In my opinion, these financial statements present fairly, in all material respects, the financial position of the company as at August 31, 1998 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles. /s/ ALLAN HOGENSON -------------------------------------- ALLAN HOGENSON Chartered Accountant Calgary, Alberta April 19, 1999 F-38 SPARTAN MULTIMEDIA INC. BALANCE SHEET AUGUST 31, 1998 (IN CANADIAN DOLLARS) ASSETS CURRENT Cash............................................................................ $ 53,075 Accounts receivable (Note 2).................................................... 39,042 --------- 92,117 CAPITAL (Note 3).................................................................. 10,714 --------- $ 102,831 --------- --------- LIABILITIES CURRENT Accounts payable and accrued liabilities (Note 2)............................... $ 30,042 Due to shareholders (Note 2).................................................... 24,030 --------- 54,072 --------- SHAREHOLDERS' EQUITY SHARE CAPITAL (Note 4)............................................................ 147,510 RETAINED EARNINGS (DEFICIT)....................................................... (98,751) --------- 48,759 --------- $ 102,831 --------- ---------
APPROVED ON BEHALF OF THE BOARD: __/s/ David Rosenthal__, Director David Rosenthal __/s/ Jordi MacDonald__, Director Jordi MacDonald F-39 SPARTAN MULTIMEDIA INC. STATEMENT OF EARNINGS AND RETAINED EARNINGS FOR THE YEAR ENDED AUGUST 31, 1998 (IN CANADIAN DOLLARS) REVENUE........................................................................... $ 13,188 --------- EXPENSES Advertising and promotion....................................................... 39,547 Depreciation.................................................................... 1,335 Management fees................................................................. 53,674 Office.......................................................................... 4,299 Postage and delivery............................................................ 195 Professional fees............................................................... 2,651 Telephone....................................................................... 4,921 Travel.......................................................................... 5,317 --------- 111,939 --------- NET EARNINGS (LOSS) and RETAINED EARNINGS (DEFICIT), end of year............................................................ $ (98,751) --------- ---------
F-40 SPARTAN MULTIMEDIA INC. STATEMENT OF CHANGES IN FINANCIAL POSITION FOR THE YEAR ENDED AUGUST 31, 1998 (IN CANADIAN DOLLARS) OPERATING ACTIVITIES Net earnings.................................................................... $ (98,751) Item not affecting cash Depreciation.................................................................. 1,335 --------- (97,416) Net change in non-cash working capital balances................................. 15,030 --------- (82,386) --------- FINANCING ACTIVITIES Issuance of share capital....................................................... 147,510 --------- INVESTMENT ACTIVITIES Purchase of capital assets...................................................... (12,049) --------- INCREASE IN CASH.................................................................. 53,075 CASH, beginning of year........................................................... -- --------- CASH, end of year................................................................. $ 53,075 --------- ---------
F-41 SPARTAN MULTIMEDIA INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1998 1. SIGNIFICANT ACCOUNTING POLICIES CAPITAL ASSETS Capital assets are recorded at cost and are depreciated using the following annual rates and methods: Computer equipment 30% Declining balance 2. RELATED PARTY TRANSACTIONS During the year, the company had business transactions with its shareholders. The particulars of these transactions and balances owing from or to these shareholders for the year ended August 31 were as follows: Transactions during the year: Management fees.................................................. $ 51,357 Computer equipment............................................... 9,000 Balances at end of year: Accounts receivable (share subscriptions)........................ $ 37,500 Accounts payable (management fees)............................... 14,000
Amounts due to shareholders are non-interest bearing and are not subject to specified terms of repayment. 3. CAPITAL ASSETS
1998 ------------------------------------- ACCUMULATED NET BOOK COST AMORTIZATION VALUE --------- ------------- ----------- Computer equipment........................................ $ 12,049 $ 1,335 $ 10,714
4. SHARE CAPITAL AUTHORIZED Unlimited number of common shares ISSUED 1,666,668 common shares........................................... $ 147,510 --------- ---------
5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, F-42 SPARTAN MULTIMEDIA INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) AUGUST 31, 1998 5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE (CONTINUED) resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other parties, will be fully resolved. 6. SUBSEQUENT EVENTS Effective November 1, 1998, an agreement was entered into between the shareholders of the company, Netgateway, Inc. and its wholly owned subsidiary, Storesonline.com Ltd. (Storesonline). All of the shares of the company were transferred to Storesonline on the effective date. The company will be amalgamated with Storesonline upon closing. F-43 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NETGATEWAY [LOGO] UNTIL , 1999 ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemization of all expenses (subject to future contingencies) incurred or expected to be incurred by Netgateway in connection with the issuance and distribution of the securities being offered hereby, excluding the underwriters' discounts and commissions (items marked with an asterisk (*) represent estimated expenses): SEC Registration Fee.............................................. $ 12,909 Legal Fees and Expenses........................................... 225,000* Blue Sky Fees (including counsel fees)............................ 40,000* NASD Filing Fees.................................................. 30,000* NASDR Fees........................................................ 5,144 Accounting Fees and Expenses...................................... 100,000 Transfer Agent and Registrar Fees................................. 10,000* Printing and Engraving Expenses................................... 75,000* Miscellaneous..................................................... 31,947* --------- Total....................................................... $ 530,000* --------- ---------
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS Delaware General Corporation Law, Section 102(b)(7), enables a corporation in its original certificate of incorporation, or an amendment thereto validly approved by stockholders, to eliminate or limit personal liability of members of its Board of Directors for violations of a director's fiduciary duty of care. However, the elimination or limitation shall not apply where there has been a breach of the duty of loyalty, failure to act in good faith, intentional misconduct or a knowing violation of a law, the payment of a dividend or approval of a stock repurchase which is deemed illegal or an improper personal benefit is obtained. Our Certificate of Incorporation includes the following language: "The personal liability of the Directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of Subsection (b) of Section 102 of the General Corporation Law of the State of Delaware as the same may be amended and supplemented." Delaware General Corporation Law, Section 145, permits a corporation organized under Delaware law to indemnify directors and officers with respect to any matter in which the director or officer acted in good faith and in a manner he reasonably believed to be not opposed to the best interests of Netgateway, and, with respect to any criminal action, had reasonable cause to believe his conduct was lawful. Article VII, Section 7 of the by-laws of Netgateway provides as follows: "The corporation shall indemnify its officers, directors, employees, and agents to the extent permitted by the General Corporation Law of Delaware." Article EIGHTH of the certificate of incorporation of Netgateway, as amended, permits indemnification of, and advancement of expenses to, among others, officers and directors of Netgateway. Such Article provides as follows: "(a) Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, officer, employee, or agent of the Corporation or any of its direct or indirect subsidiaries or is or 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 Maylene Burchmont in payment of consulting services. The certificates evidencing the warrants and any securities underlying the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On October 21, 1998, Netgateway issued warrants exercisable for an aggregate of 300,000 shares of common stock to Howard Effron in payment of consulting services. The certificates evidencing the warrants and any securities underlying the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. In connection with a Consulting and Advisory Agreement with Richard Berns, on October 21, 1998 Netgateway issued 25,000 shares of common stock in payment of advisory services. The certificates evidencing the securities underlying the units were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. In payment for merger and acquisition advisory services related to the acquisition of Spartan Multimedia, in November 1998, Netgateway issued 10,000 shares of common stock to the Chaffetz Family Trust. The certificates evidencing the securities underlying the units were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On November 20, 1998, Netgateway issued warrants exercisable for an aggregate of (i) 50,000 shares to each of Keith D. Freadhoff, Scott Beebe, Donald D. Danks, and Michael Vanderhoff and 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. These shares were subsequently returned to the authorized, but unissued, common stock of Netgateway. In connection with Netgateway's then pending private offering of convertible debentures, on February 1, 1999, Netgateway issued warrants exercisable for an aggregate of (i) 129,000 shares to Dean Dumont,(ii) 12,750 shares to Todd Torneo, (iii) 3,000 shares to Tradeway Securities Group, (iv) 4,250 to John Borcich, (v) 66,800 shares to Y2K Capital, (vi) 35,000 to Roxanne Melotte, and (vii) 32,500 shares to Michael Vanderhoff. The certificates evidencing the warrants and any securities underlying the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the units (and the securities constituting the units) was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. 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 one year following the closing of this offering. The certificates evidencing debentures, as well as any shares of common stock issued upon the conversion thereof, were appropriately legended. In the opinion of Netgateway, the offer and the sale of the debentures was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. All of the investors in the offering were "accredited investors" as defined in Rule 501 under the Securities Act. On March 5, 1999, Netgateway issued an aggregate of 30,000 shares of common stock in order to induce Joseph Py and Robert Ciri to make loans to Netgateway. The certificates evidencing debentures, as well as any shares of common stock issued upon the conversion thereof, were appropriately legended. In the opinion of Netgateway, the offer and the sale of the debentures was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On March 17, 1999, Netgateway issued warrants exercisable for an aggregate of 25,000 shares of common stock to XOOM.com, Inc. These warrants were exercisable at $12.00 per share and were exercisable on a cashless basis. The warrants were exercised in full on a cashless basis on April 14, 1999 for an aggregate of 2,570 shares of common stock. The certificates evidencing the warrants, as well as any shares of common stock issued upon the exercise thereof, were appropriately legended. In the opinion of Netgateway, the offer and the sale of the debentures was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On March 31, 1999, Netgateway issued 600 shares of common stock to Steve Jorgenson, a professional golfer, in connection with Mr. Jorgenson acting as a spokesman for Netgateway. In April 1999, Netgateway closed a private offering of 329,000 shares of its common stock. The shares were sold at the price of $3.00 per share, resulting in gross proceeds of $987,000. Each of the investors agreed to acquire the shares for investment purposes only and not with a view to distribution. The certificates evidencing the shares of common stock were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. All of the investors in the offering were "accredited investors" as defined in Rule 501 under the Securities Act. On April 1, 1999, Netgateway issued warrants exercisable for an aggregate of 5,000 shares of common stock to Andrew Glashow in order to induce such individual to make a loan to Netgateway. The certificates evidencing the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. On April 1, 1999, Netgateway issued warrants exercisable for an aggregate of 26,050 shares of common stock to Richard Berns in connection with Netgateway's convertible debenture private offering. The certificates evidencing the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. In May 1999, Netgateway closed a private offering of 40 units, each unit consisting of $50,000 principal amount of Series A 12% Senior Notes due 2000 and 5,000 shares of common stock. The II-7 notes mature on the earlier of April 30, 2000 and the date of the closing of this offering. The units were sold at the price of $50,000 per unit, resulting in gross proceeds of $2,000,000. Each of the investors agreed to acquire the shares for investment purposes only and not with a view to distribution. The certificates evidencing the securities underlying the units were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. All of the investors in the offering were "accredited investors" as defined in Rule 501 under the Securities Act. On May 3, 1999, Netgateway issued warrants exercisable for an aggregate of 5,000 shares of common stock to GMR for consulting services. The certificates evidencing the warrants were appropriately legended. In the opinion of Netgateway, the offer and the sale of the shares was exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated thereunder. Each of such transactions was exempt from registration under the Securities Act by virtue of the provisions of Section 4(2) and/or Section 3(b) of the Securities Act. Each purchaser of the securities described below has represented that he/she/it understands that the securities acquired may not be sold or otherwise transferred absent registration under the Securities Act or the availability of an exemption from the registration requirements of the Securities Act, and each certificate evidencing the securities owned by each purchaser bears or will bear upon issuance a legend to that effect. ITEM 16. EXHIBITS (a) The following exhibits are filed herewith:
EXHIBIT NO. - ----------- 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation 3.2* Bylaws 4.1 Form of Representatives' Warrant 4.2* Form of Common Stock Certificate 5.1* Opinion of Brock Silverstein LLC 10.1 Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and Keith D. Freadhoff 10.2 Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and Donald M. Corliss, Jr. 10.3 Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and David Bassett-Parkins 10.4 Form of Employment Agreement, dated as of January 1, 1999, between Netgateway, Inc. and Hanh Ngo 10.5 Form of Employment Agreement, dated as of April 5, 1999, between Netgateway, Inc. and Craig Gatarz 10.6 1998 Stock Compensation Program 10.7 1998 Stock Option Plan for Senior Executives 10.8 Office Lease, dated as of June 26, 1998, between Netgateway, Inc. and Pacific Tower Associates 10.9 Form of Internet Data Center Services Agreement, between Netgateway, Inc. and Exodus Communications, Inc.
II-8
EXHIBIT NO. - ----------- 10.10 Form of Secured Convertible Debenture due December 31, 1999 10.11 Agreement and Plan of Reorganization, dated as of June 2, 1998, among Netgateway, Infobahn Technologies, LLC, Video Calling Card, Inc., the Netgateway Shareholders and the Video Majority Shareholder 10.12 Software Assignment and Grant Back Limited License Agreement, dated as of November 16, 1999, between Netgateway and Shopping Planet 10.13 Stock Purchase Agreement, dated as of November 1, 1998, among StoresOnline.com, Ltd., Netgateway, Inc. and the Selling Stockholders 10.14 Amendment to Stock Purchase Agreement, among StoresOnline.com, Ltd., Netgateway, Inc. and the Selling Stockholders 10.15 Form of Financial Consulting Agreement. 10.16* Form of Series A 12% Senior Note due 2000 23.1 Consent of KPMG LLP 23.2 Consent of Wright Ford Young & Company 23.3 Consent of Allan Hogenson, Chartered Accountant 23.4* Consent of Brock Silverstein LLC (contained in the Opinion filed as Exhibit 5.1). 24.1 Power of Attorney (set forth on the signature page attached hereto).
- ------------------------ * To be filed by amendment. ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The Registrant hereby undertakes that it will: (1) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (2) For the purpose of determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement relating to the securities offered therein, and the offering of such securities at that time as the initial bona fide offering thereof. II-9 (c) The Registrant hereby undertakes that it will provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (d) The Registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the underwriters during the subscription period, the amount of unsubscribed securities to be purchased by the underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of this prospectus, a post-effective amendment will be filed to set forth the terms of such offering. (e) The Registrant hereby undertakes that it will: (1) File, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement; (i) Include any Prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) Reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 200 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) Include any material information which with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) For the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-10 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Long Beach, California on May 27, 1999. NETGATEWAY, INC. By: /s/ KEITH D. FREADHOFF ----------------------------------------- Name: Keith D. Freadhoff Title: Chairman of the Board of Directors and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Keith D. Freadhoff, Donald M. Corliss, Jr., and David Bassett-Parkins, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and his name, place and stead, and in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorneys-in-fact and agents, and each of them, full power and authority to do and perform such and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Chairman of the Board of /s/ KEITH D. FREADHOFF Directors and Chief - ------------------------------ Executive Officer May 27, 1999 Keith D. Freadhoff (Principal Executive Officer) Chief Financial Officer, /s/ DAVID BASSETT-PARKINS Chief Operating Officer, - ------------------------------ and Director (Principal May 27, 1999 David Bassett-Parkins Financial and Accounting Officer) /s/ DONALD M. CORLISS, JR. - ------------------------------ President and Director May 27, 1999 Donald M. Corliss, Jr. /s/ SCOTT BEEBE - ------------------------------ Director May 27, 1999 Scott Beebe /s/ RONALD SPIRES - ------------------------------ Director May 27, 1999 Ronald Spires
II-11 EX-1.1 2 EX-1.1 Exhibit 1.1 2,500,000 SHARES(1) NETGATEWAY, INC. COMMON STOCK FORM OF UNDERWRITING AGREEMENT ____________, 1999 CRUTTENDEN ROTH INCORPORATED 24 Corporate Plaza Newport Beach, California 92660 Ladies and Gentlemen: NETGATEWAY, INC., a Delaware corporation (the "Company"), addresses you as the Representative of each of the persons, firms and corporations listed in Schedule A hereto (herein collectively called the "Underwriters") and hereby confirms its agreement with the several Underwriters as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 2,500,000 shares of its authorized and unissued Common Stock, $.001 par value per share (the "Firm Shares"), to the several Underwriters. The Company also proposes to grant to the Underwriters an option to purchase up to 375,000 additional shares of the Company's Common Stock, $.001 par value per share (the "Option Shares"), as provided in Section 7 hereof. In addition, the Company proposes to sell to you, individually and not in your capacity as Representative, four-year warrants (the "Representative's Warrants") to purchase up to 250,000 shares of Common Stock, $.001 par value per share, of the Company (the "Representative's Warrant Stock"), which sale will be consummated in accordance with the terms and conditions of the Representative's Warrant Agreement (the "Representative's Warrant Agreement"), the form of which is filed as an exhibit to the Registration Statement described below. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. The Representative's Warrants shall be exercisable at a price per Share equal to one hundred twenty percent (120%) of the initial public offering price. All shares of Common Stock, $.001 par value per share, of the Company to be outstanding after giving effect to the sales contemplated hereby, including the sale of the Shares, are hereinafter referred to as "Common Stock." Unless the context otherwise requires, references herein to the "Company" include Netgateway, Inc. together with its subsidiaries described in the Prospectus (defined in Section 2(a) below.). 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company represents and warrants to and agrees with each Underwriter that: (a) A registration statement on Form S-1 (File No. 333-____) with respect to the Shares, the Representative's Warrants and the Representative's Warrant Stock, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and (1) Plus an option to purchase up to 375,000 additional shares from the company to cover over-allotments, if any. 2 regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement and such amended prospectuses subject to completion as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement and such amended prospectuses subject to completion as may hereafter be required. Copies of such registration statement and amendments and of each related prospectus subject to completion (the "Preliminary Prospectuses") have been delivered to you. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information previously omitted from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations) and, in the event of any amendment thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations), except that if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus on file with the Commission at the time the Registration Statement became or becomes, as the case may be, effective (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus, at the time of filing thereof, has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and 3 at all times subsequent thereto up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) neither the Registration Statement nor the Prospectus, or any amendments or supplements thereto, will include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that none of the representations and warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter specifically for use in the preparation thereof. (c) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company taken as a whole; no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; the Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities that are material to the conduct of its business, all of which are valid and in full force and effect; the Company is not in material violation of its charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which it or its properties or assets may be bound; and the Company is not in material violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties or assets. The Prospectus accurately describes any corporation, association or other entity owned or controlled, directly or indirectly, by the Company. (d) The Company has full legal right, power and authority to enter into this Agreement and the Representative's Warrant Agreement and to perform the transactions contemplated hereby and thereby. Each of this Agreement and the Representative's Warrant Agreement has been duly authorized, executed and delivered by the Company and is a valid and 4 binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification under this Agreement or the Representative's Warrant Agreement may be limited by applicable law and except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the Representative's Warrant Agreement and the consummation of the transactions herein or therein contemplated will not result in a material breach or violation of any of the terms and provisions of, or constitute a default under, (i) any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which its properties or assets may be bound, (ii) the charter or bylaws of the Company, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties or assets. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties or assets is required for the execution and delivery of this Agreement or the Representative's Warrant Agreement and the consummation by the Company of the transactions herein and therein contemplated, except such as may be required under the Act or under state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (e) There is not any pending or, to the best of the Company's knowledge, threatened, action, suit, claim or proceeding against the Company, or any of its officers or any of its properties, assets or rights, before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its officers or properties or otherwise that (i) is reasonably likely to result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company or might materially and adversely affect its properties, assets or rights, (ii) might prevent consummation of the transactions contemplated hereby, or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations or by the Securities Exchange Act of 1934 (the "Exchange Act") or the rules and regulations of the Commission thereunder that have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (f) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Firm Shares and 5 the Option Shares have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Firm Shares or Option Shares or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act, the Rules and Regulations or under state or other securities or Blue Sky laws. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights under the Act and the Rules and Regulations. (g) KPMG Peat Marwick, LLP, which has examined the financial statements of the Company, together with the related schedules and notes, for the period from March 2, 1998 (inception) through June 30, 1998 and for the nine month period ended March 31, 1999, respectively, filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited financial statements of the Company, together with the related schedules and notes, and the unaudited financial information, forming part of the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply; and all audited financial statements of the Company, together with the related schedules and notes, and the unaudited financial information, filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, (ii) any transaction that is material to the Company, (iii) any obligation, direct or contingent, that is material to the Company, incurred by the Company, except obligations 6 incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company that is material to the Company, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (vi) any loss or damage (whether or not insured) to the property of the Company which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (i) Except as set forth in the Registration Statement and Prospectus, (i) the Company has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, (ii) the agreements to which the Company is a party described in the Registration Statement are valid agreements, enforceable by the Company in accordance with their terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) the Company has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted and as described in the Registration Statement and the Prospectus. (j) The Company has timely filed all federal, state, local and foreign tax returns required to be filed by it and has paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, is reasonably likely to be asserted against the Company, which might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, and all tax liabilities are adequately provided for on the books of the Company. (k) The Company maintains insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for its business including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; the Company has not been refused any insurance coverage sought or applied for; and the Company does have any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (l) No labor disturbance by the employees of the Company exists or, to the 7 best of the Company's knowledge, is imminent. The Company is not aware of any existing or imminent labor disturbance by the employees of any principal suppliers or customers that might be expected to result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. No collective bargaining agreement exists with any of the Company's employees and, to the best of the Company's knowledge, no such agreement is imminent. (m) The Company owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights described or referred to in the Prospectus as owned by or used by it or that are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights described or referred to in the Prospectus as owned by or used by it; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights described or referred to in the Prospectus as owned by or used by it or which, singly or in the aggregate, in the event of an unfavorable decision, ruling or finding, would have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (n) The Common Stock is registered pursuant to Section 12(g) of the Exchange Act and is approved for quotation on the OTC Bulletin Board, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the OTC Bulletin Board, nor has the Company received any notification that the Commission or the National Association of Securities Dealers, Inc. ("NASD") is contemplating terminating such registration or listing. (o) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it is not and will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (p) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (q) The Company has not at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental 8 officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (r) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization in violation of law or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (s) Each officer, director and director-nominee of the Company and each beneficial owner of five (5) percent or more of the Company's Common Stock has agreed in writing that such person will not, for a period of 365 days from the date that the Registration Statement is declared effective by the Commission (the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, and (ii) with the prior written consent of Cruttenden Roth Incorporated. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction that is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will also agree and consent to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors, director-nominees and stockholders have agreed to such restrictions (the "Lock-up Agreements"). The Company hereby represents and warrants that it will not release any of its officers, directors or director-nominees or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Cruttenden Roth Incorporated. (t) Except as set forth in the Registration Statement and Prospectus, (i) the Company is in material compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") that are applicable to its business, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) to its best knowledge, the Company is not likely to be required to make future material 9 capital expenditures to comply with Environmental Laws (iv) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss. 9601, ET SEQ.), or otherwise designated as a contaminated site under applicable state or local law, and (v) the Company is not in violation of any federal or state law or regulation relating to occupational safety or health. (u) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, including without limitation cash receipts, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers, directors or director-nominees of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. (w) The Company has not incurred any liability, direct or indirect, for finders' or similar fees on behalf of or payable by the Company or the Underwriters in connection with this or any other transaction involving the Company and the Underwriters. (x) The Representative's Warrants have been duly and validly authorized by the Company and upon delivery to you in accordance with the Representative's Warrant Agreement will be duly issued and legal, valid and binding obligations of the Company. (y) The Representative's Warrant Stock has been duly authorized and reserved for issuance upon the exercise of the Representative's Warrants and when issued upon payment of the exercise price therefor will be validly issued, fully paid and nonassessable shares of Common Stock of the Company. 3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $______ per share, the respective number of Firm Shares as hereinafter set forth. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10). Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price 10 therefor by the several Underwriters by certified or official bank check or checks drawn in next-day funds, payable to the order of the Company (and the Company agrees not to deposit any such check in the bank on which it is drawn until the day following the date of its delivery to the Company) at the offices of the Representative or such other place as may be agreed upon among the Representative and the Company, at ____ A.M., Los Angeles time, on the third (3rd) full business day following the first day that Shares are traded (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date." The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the Closing Date. If the Representative so elects, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representative. It is understood that you, individually, and not as the Representative of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. After the Registration Statement becomes effective, the several Underwriters intend to make an initial public offering (as such term is described in Section 11 hereof) of the Firm Shares at an initial public offering price of $______ per share. After the initial public offering, the several Underwriters may, in their discretion, vary the public offering price. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), in the first paragraph on page 2, concerning stabilization and over-allotment by the Underwriters, in the third paragraph under the caption "Underwriting," concerning the manner of offering the Firm Shares and the Option Shares, and in the seventh paragraph under the caption "Underwriting," concerning the discretionary accounts controlled by the Underwriters, in each case, in any Preliminary Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b) constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement 11 and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; it will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement or any subsequent amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of Greenberg Traurig, counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the rules and regulations of the Commission thereunder and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to qualify the Shares for offering 12 and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be reasonably required by the laws of such jurisdiction. (d) The Company will furnish to you, as soon as available, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act (three of which will include all exhibits) all in such quantities as you may from time to time reasonably request. (e) The Company will make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of five (5) years after the date hereof and for so long as the Company is subject to Section 13 or 15 of the Exchange Act, the Company will furnish to its stockholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its stockholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's stockholders, (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the NASD, (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to stockholders or prepared by the Company, and (vi) any additional information of a public nature concerning the Company or its business which you may reasonably request. During such five (5) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary that is not so consolidated. 13 (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) The Company will file Form SR in conformity with the requirements of the Act and the Rules and Regulations. (j) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the Company will pay the several Underwriters for all out-of-pocket expenses (including fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in investigating or preparing to market or marketing the Shares. (k) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, if reasonably requested by you, forthwith prepare, and, if permitted by law, disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (l) During the Lock-up Period, the Company will not, without the prior written consent of Cruttenden Roth Incorporated, effect the Disposition of, directly or indirectly, any Securities other than (i) the sale of the Firm Shares and the Option Shares hereunder, and (ii) the Company's issuance of options or Common Stock under the Company's presently authorized stock option plans or restricted stock plans (collectively, the "Option Plans"). (m) During the period commencing on the date of this Agreement and ending on the date which is nine (9) months after the effective date of the Registration Statement, or such earlier date as of which the Company or the Underwriters are no longer required to deliver a Prospectus in connection with the sale of the Shares, the Company will not issue, release or disseminate any press release or other material news item or article in respect of the Company or its affairs without the prior written consent of Cruttenden Roth Incorporated, which consent shall not be unreasonably withheld. 5. EXPENSES. (a) The Company agrees with each Underwriter that: 14 (i) The Company will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; the printing of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any, the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel and accountants for the Company; all fees and other charges of the Company's independent certified public accountants; all fees, disbursements and other charges of the Underwriters' Counsel, the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or supplements to any of the foregoing; NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and fees and disbursements of counsel for the Underwriters related to such qualification); the Company's road show costs and expenses, the cost of preparing bound volumes of the documents relating to the public offering of Common Stock contemplated hereby; and all other expenses directly incurred by the Company in connection with the performance of its obligations hereunder. All fees, disbursements and other charges of the Underwriters' Counsel shall be paid on the Closing Date. (ii) In addition to its other obligations under Section 5(a)(i) hereof, the Company will pay to you a nonaccountable expense allowance equal to 3.0% of the gross sales price of the Shares to the public. This nonaccountable expense allowance with respect to the Firm Shares shall be paid to you on the Closing Date and the nonaccountable expenses with respect to the Option Shares shall be paid to you on the closing of the sale to you of such Option Shares. The Company has previously paid to you a fee of $50,000 which shall be credited towards the nonaccountable expense allowance at Closing. (iii) In addition to its other obligations under Section 8(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in THE WALL STREET JOURNAL which represents the base rate on corporate loans posted by a substantial majority of the nation's five (5) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. 15 (b) In addition to their other obligations under Section 8(b) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof, they will reimburse the Company on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(a)(iii) and 5(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted pursuant to the Code of Arbitration Procedure of the NASD in Orange County, California (or as close geographically to Orange County, California as is reasonably practical). Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a)(iii) and 5(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a) and 8(b) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(d) hereof. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 2:00 P.M., Los Angeles time, on the date following the date of this Agreement, or such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' 16 Counsel. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issuance, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such documents and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date there shall not have been any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) You shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, the following opinion of Brock Silverstein LLC, counsel for the Company, dated the Closing Date or such later date on which Option Shares are purchased, addressed to the Underwriters (and stating that it may be relied upon by Greenberg Traurig, Underwriters' Counsel, in rendering its opinion pursuant to Section 6(e) of this Agreement) and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) The Company has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company taken as a whole. The Prospectus accurately describes any corporation, association or other entity owned or controlled, directly or indirectly, by the Company; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable, and, have not been issued in violation of or subject to any 17 preemptive right under the Delaware General Corporation Law ("DGCL"), or to such counsel's knowledge, any co-sale right, registration right, right of first refusal or other similar right; (v) The Firm Shares and the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement each have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and, will not have been issued in violation of or subject to any preemptive right under the DGCL, or to such counsel's knowledge, any co-sale right, registration right, right of first refusal or other similar right of stockholders; (vi) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (vii) The Company has the corporate power and authority to enter into the Representative's Warrant Agreement and to issue, sell and deliver to the Representative the Representative's Warrants to be issued and sold by it thereunder; (viii) Each of this Agreement and the Representative's Warrant Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by applicable law and to which counsel need not express any opinion and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors rights generally or by general equitable principles; (ix) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (x) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial and statistical data included in the Registration Statement as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; (xi) The information in the Prospectus under the caption (a) 18 "Description of Capital Stock" and "Shares Eligible For Future Sale," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and complies with all applicable disclosure requirements of Regulation S-K and is true and correct in all material respects; (xii) The forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Delaware law; (xiii) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations; (xiv) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement that are not described or referred to therein or filed as required; (xv) The performance of this Agreement and the Representative's Warrant Agreement and the consummation of the transactions herein and therein contemplated will not (a) result in any violation of the Company's charter or bylaws or (b) result in a material breach or violation of any of the terms and provisions of, or constitute a material default under, any material bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations; (xvi) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters; (xvii) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations or by the Exchange Act or the applicable rules and regulations of the Commission thereunder, other than those described therein; 19 (xviii) The Company is in possession of all material permits from all governmental agencies or other authorities having jurisdiction over the Company or over any of its properties or operations, and to such counsel's knowledge, the Company is not presently (a) in material violation of its respective charter or bylaws, (b) in material breach of any applicable permit, statute, rule or regulation known by us to be applicable to the Company, or (c) to such counsel's knowledge, any order, writ or decree of any California or federal court or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations. (xix) The Representative's Warrants have been duly and validly authorized by the Company and upon delivery to you in accordance with the Representative's Warrant Agreement will be duly issued and legal, valid and binding obligations of the Company; (xx) The Representative's Warrant Stock to be issued by the Company pursuant to the terms of the Representative's Warrant has been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms of the Representative's Warrant Agreement, will be duly and validly issued and fully paid and nonassessable, and to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right under the DGCL, or to such counsel's knowledge, any co-sale right, registration right, right of first refusal or other similar right of stockholders; (xxi) To such counsel's knowledge, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company; and (xxii) The offer and sale of all securities of the Company made within the last three years as set forth in Item 15 of the Registration Statement were exempt from the registration requirements of the Securities Act, pursuant to the provisions set forth in such Item, and from the registration or qualification requirements of all relevant state securities laws. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which the contents of the Registration Statement and Prospectus and related matters were discussed, and although (except as specifically set forth in paragraphs (xi) and (xiii) above) they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel that leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement, when such documents became effective or were filed with the Commission (other than the financial statements 20 including supporting schedules and other financial and statistical data included in the Registration Statement as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, and of government officials, in which case its opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Greenberg Traurig, in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (f) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from KPMG Peat Marwick, LLP, addressed to the Company and the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations or business of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from KPMG Peat Marwick, LLP shall be addressed to or for the use of the Underwriters in form 21 and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth its opinion with respect to its examination of the balance sheet of the Company as of ______________, 1999 and related statements of operations, stockholders' equity, and cash flows for the period from March 2, 1998 (inception) through June 1998 and the nine month period ended March 31, 1999, respectively, and (iii) address other matters agreed upon by KPMG Peat Marwick, LLP and you. In addition, you shall have received from KMPM Peat Marwick, LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that its review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of its examination of the Company's financial statements as of _________________, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the President and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied, in all material aspects, with all the agreements and satisfied all the conditions on its part to be performed or satisfied, at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all information required to be included therein by the Act and the Rules and Regulations or the Exchange Act and the applicable rules and regulations of the Commission thereunder, as the case may be, and in all respects conformed to the requirements of the Act and the Rules and Regulations or the Exchange Act and the applicable rules and regulations of the Commission thereunder, as the case may be, the Registration Statement, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements 22 therein, in the light of the circumstances under which they were made, not misleading; and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus that has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, (b) any transaction that is material to the Company, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company, incurred by the Company, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company that is material to the Company, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company (other than dividends paid in respect of the Company's preferred stock outstanding on the date of the Prospectus in amounts not in excess of those described in the Prospectus), or (f) any loss or damage (whether or not insured) to the property of the Company which has a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company. (h) The Company shall have obtained and delivered to you an agreement from each officer, director and director-nominee of the Company, and each beneficial owner of five percent or more of the Common Stock immediately after the offering contemplated hereby, in writing prior to the date hereof that such person will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, or (ii) with the prior written consent of Cruttenden Roth Incorporated. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. (i) The Company shall have furnished to you such further certificates and documents as you shall reasonably request, including certificates of officers of the Company as to the accuracy of the representations and warranties of the Company, as to the performance by the Company of its obligations hereunder and as to the other conditions concurrent and precedent 23 to the obligations of the Underwriters hereunder. (j) The Representative's Warrant Agreement shall have been entered into by the Company and you, and the Representative's Warrants shall have been issued and sold to you pursuant thereto. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 7. OPTION SHARES. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to an aggregate of 375,000 Option Shares at the purchase price per share for the Firm Shares set forth in Section 3 hereof. Such option may be exercised by the Representative on behalf of the several Underwriters on one (1) or more occasions in whole or in part during the period of forty-five (45) days after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representative in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in next-day funds, payable to the order of the Company (and the Company agrees not to deposit any such check in the bank on which it is drawn until the day following the date of its delivery to the Company). Such delivery and payment shall take place at the offices of the Representative, or at such other place as may be agreed upon by the Representative and the Company (i) on the Closing Date, if written notice of the exercise of such option is received by the Company at least three (3) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the fifth (5th) full business day following the date the Company receives written notice of the exercise of such option, if such notice is received by the Company less than three (3) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location as you may reasonably request for inspection at least two (2) full business days prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least three (3) full business days prior to such date of payment and delivery. If the Representative so elects, delivery of the 24 Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representative of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a) hereof, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be reasonably satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may reasonably request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company or the compliance with any of the conditions herein contained. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, 25 damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof and, PROVIDED FURTHER, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company against any losses, claims, damages or liabilities, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) related to negligence on the part of the Company, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof, and agrees to reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act. This indemnity agreement 26 shall be in addition to any liabilities which each Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party which pose a conflict of interest for such counsel, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a) or 8(b) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii)the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; PROVIDED that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such indemnification. (d) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for 27 indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Underwriters severally and not jointly are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company is responsible for the remaining portion, PROVIDED, HOWEVER, that (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(d) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls the Underwriters or the Company within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. (e) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. The parties are advised that federal or state public policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain of the provisions of this Section 8, and the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under this Section 8 and further agree not to attempt to assert any such defense. 9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, covenants and agreements of the Company and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person within the meaning of the Act or the Exchange Act, or by or on behalf of the Company or any of its officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. 28 If any Underwriter or Underwriters so default and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty-four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, the Company shall not be liable to any Underwriter (except as provided in Sections 4(j), 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company and the other Underwriters for damages, if any, resulting from such default) be liable to the Company (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., Los 29 Angeles time, on the first full business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representative of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(j), 5 and 8 hereof. (b) You, as Representative of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time at or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company shall have failed, refused or been unable to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 4(j), 5 and 8 hereof. In the event of termination pursuant to subparagraph (i) above, the Company shall also remain obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy or telegram, in each case, confirmed by letter. 30 12. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o Cruttenden Roth Incorporated, 24 Corporate Plaza, Newport Beach, California 92660, telecopier number (949) 720-7223, Attention: Shelly Singhal, if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to 300 Oceangate, Suite 500, Long Beach, California 90802, (562) 308-0021, Attention: Keith Freadhoff. 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto and their respective executors, administrators, successors and assigns, and their controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or corporation. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. The Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof. In all dealings with the Company under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you on behalf of each of the several Underwriters. 14. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 15. COUNTERPARTS. This Agreement may be signed in several counterparts, each of which will constitute an original. If the foregoing correctly sets forth the understanding among the Company and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and the several Underwriters. Very truly yours, NETGATEWAY, INC. 31 By: Name: Title: Accepted as of the date first above written: CRUTTENDEN ROTH INCORPORATED On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By: CRUTTENDEN ROTH INCORPORATED By: Name: Title: 32 SCHEDULE A Underwriters Number of Firm Shares To be Purchased Cruttenden Roth Incorporated TOTAL 33 EX-3.1 3 EXHIBIT 3.1 Exhibit 3.1 STATE OF DELAWARE PAGE 1 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 INCORPORATION OF "NETGATEWAY, INC.", FILED IN THIS OFFICE ON THE TWELFTH DAY OF MAY, A.D. 1999, AT 3 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. /s/ Edward J. Freel [SEAL] ------------------------------------ EDWARD J. FREEL, SECRETARY OF STATE 3042135 8100 AUTHENTICATION: 9742954 991190779 DATE: 05-13-99 CERTIFICATE OF INCORPORATION OF NETGATEWAY, INC. FIRST. The name of the corporation is Netgateway, Inc. (the "Corporation"). SECOND. The address, including street, number, city, and county of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, county of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. A. The aggregate number of shares which the Corporation shall have authority to issue is 45,000,000, par value $.001 per share, of which 40,000,000 shares shall be designated Common Shares and 5,000,000 shares shall be designated Preferred Shares. B. Authority is hereby expressly granted to the Board of Directors of the Corporation (or a Committee thereof designated by the Board of Directors pursuant to the by-laws of the Corporation, as from time to time amended (the "By-Laws")) to issue the Preferred Shares from time to time as Preferred Shares of any series and to declare and pay dividends thereon in accordance with the terms thereof and, in connection with the creation of each such series, to fix by the resolution or resolutions providing for the issue of shares thereof, the number of such shares, the designations, powers, preferences, and rights (including voting rights), and the qualifications, limitations, and restrictions, of such series, to the full extent now or hereafter permitted by the laws of the State of Delaware. FIFTH. The name and mailing address of the incorporator is Kim Lefkowitz, c/o Brock Silverstein LLC, One Citicorp Center, 153 East 53rd Street, 56th Floor, New York, New York 10022. SIXTH. Election of directors need not be by written ballot. SEVENTH. The Board of Directors is authorized to adopt, amend, or repeal By-Laws of the Corporation. EIGHTH. 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 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, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended, 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 heir, 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 expense"); 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 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 the Corporation's 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 director 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 to protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. NINTH. No director of the Corporation shall be liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision does not eliminate the liability of the director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from which the director derived an improper personal benefit. For purposes of the prior sentence, the term "damages" shall, to the extent permitted by law, include without limitation, any judgment, fine, amount paid in settlement, penalty, punitive damages, excise or other tax assessed with respect to an employee benefit plan, or expense of any nature (including, without limitation, counsel fees and disbursements). Each person who serves as a director of the Corporation while this Article NINTH is in effect shall be deemed to be doing so in reliance on the provisions of this Article NINTH, and neither the amendment or repeal of this Article NINTH, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article NINTH, shall apply to or have any effect on the liability or alleged liability of any director or the Corporation for, arising out of, based upon, or in connection with any acts or omissions of such director occurring prior to such amendment, repeal, or adoption of an inconsistent provision. The provisions of this Article NINTH are cumulative and shall be in addition to and independent of any and all other limitations on or eliminations of the liabilities of directors of the Corporation, as such, whether such limitations or eliminations arise under or are created by any law, rule, regulation, by-law, agreement, vote of shareholders or disinterested directors, or otherwise. TENTH. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. IN WITNESS WHEREOF, I have made, signed, and sealed this Certificate of Incorporation this 12th day of May 1999. /s/ Kim Lefkowitz ----------------------- Kim Lefkowitz INCORPORATOR EX-4.1 4 EX-4.1 EXHIBIT 4.1 [Form of Warrant Certificate] EXERCISABLE ON OR BEFORE _______________, 2004 No. 250,000 Warrants Warrant Certificate NETGATEWAY, INC. This Warrant Certificate certifies that Cruttenden Roth Incorporated, or registered assigns, is the registered holder of Warrants expiring ____________, 2004 (the "Warrants") to purchase Common Stock, $0.001 par value per share (the "Common Stock"), of Netgateway, Inc., a Delaware corporation (the "Company"). Each Warrant entitles the holder upon exercise to receive from the Company from 10:00 a.m., Pacific time, on _____________, 2000 through and until 6:00 p.m., Pacific time, on ____________, 2004, one fully paid and nonassessable share of Common Stock (a "Warrant Share") at the initial exercise price (the "Warrant Price") of [$_____] payable in lawful money of the United States of America upon surrender of this Warrant Certificate and payment of the Warrant Price at the conditions set forth herein and in the Warrant Agreement referred to on the reverse hereof. The Warrant Price and number of Warrant Shares issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement. No Warrant may be exercised after 6:00 p.m., Pacific time, on ___________, 2004 (the "Expiration Date"). Notwithstanding the foregoing, if at 6:00 p.m., Pacific time on the Expiration Date, any Holder or Holders of the Warrants have not exercised their Warrants and the Closing Price (as defined in the Warrant Agreement) for the Common Stock on the Expiration Date is greater than the Warrant Price, then each such unexercised Warrant shall be automatically converted into a number of shares of Common Stock of the Company equal to: (A) the number of shares of Common Stock then issuable upon exercise of a Warrant multiplied by (B) a fraction (1) the numerator of which is the difference between the Closing Price for the Common Stock on the Expiration Date and the Warrant Price and (2) the denominator of which is the Closing Price for the Warrant Stock on the Expiration Date. Reference is hereby made to the further provisions of this Warrant Certificate set forth on the reverse hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this price. This Warrant Certificate shall not be valid unless countersigned by the Company. 1 IN WITNESS WHEREOF, Netgateway, Inc. has caused this Warrant Certificate to be signed by its President and by its Secretary and has caused its corporate seal to be affixed hereunto or imprinted hereon. Dated: ________________ 1999 NETGATEWAY, INC. By: Name: Title: By: Name: Title: 2 [Form of Warrant Certificate] [Reverse] The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring _____________, 2004 entitling the holder on exercise to receive shares of Common Stock, $0.001 par value per share, of the Company (the "Common Stock"), and are issued or to be issued pursuant to a Warrant Agreement, dated as of ___________, 1999 (the "Warrant Agreement"), duly executed and delivered by the Company, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. A copy of the Warrant Agreement may be obtained by the holder hereof upon written request to the Company. The Warrants may be exercised at any time on or before ____________, 2004. The holder of Warrants evidenced by this Warrant Certificate may exercise them by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the Warrant Price in cash at the office of the Company designated for such purpose. In the event that upon any exercise of Warrants evidenced hereby the number of Warrants exercised shall be less than the total number of Warrants evidenced hereby, there shall be issued to the holder hereof or his assignee a new Warrant Certificate evidencing the number of Warrants not exercised. No adjustment shall be made for any dividends on any Common Stock issuable upon exercise of this Warrant. The Warrant Agreement provides that upon the occurrence of certain events the number of shares of Common Stock issuable upon the exercise of each Warrant shall be adjusted. If the number of shares of Common Stock issuable upon such exercise is adjusted, the Warrant Agreement provides that the Warrant Price set forth on the face hereof may, subject to certain conditions, be adjusted. No fractions of a share of Common Stock will be issued upon the exercise of any Warrants but the Company will pay the cash value thereof determined as provided in the Warrant Agreement. The Warrant Agreement also provides that, while the Warrants are exercisable, the holders of the Warrants shall have an optional conversion right to convert, without payment of any exercise price or any cash or other consideration by such holders, the Warrants or any portion thereof into a number of shares of Common Stock as specified in the Warrant Agreement. The holders of the Warrants are entitled to certain registration rights with respect to the Common Stock purchasable upon exercise thereof. Said registration rights are set forth in full in the Warrant Agreement. Warrant Certificates, when surrendered at the office of the Company by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but 3 without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. Upon due presentation for registration of transfer of this Warrant Certificate at the office of the Company, a new Warrant certificate or Warrant certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to other transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company may deem and treat the registered holder(s) thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the holder(s) hereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. Neither the Warrants nor this Warrant Certificate entitles any holder hereof to any rights of a stockholder of the Company. 4 (Form of Election to Purchase) (To be Executed upon Exercise of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant certificate, to receive ____________ shares of Common Stock and herewith tenders payment for such shares to the order of Netgateway, Inc., in the amount of $___________ in accordance with the terms hereof. The undersigned requests that a certificate for such shares be registered in the name of _____________________________, whose address is ______________________________________ and that such shares be delivered to _______________________ whose address is______________________________________ _______________________________________. If said number of shares is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant certificate representing the remaining balance of such shares be registered in the name of ________________________, whose address is _______________________, and that such Warrant certificate be delivered to _______________, whose address is _______________________________. Signature: Date: Signature Guaranteed: 5 EX-10.1 5 EMPLOYMENT AGREE BTW CO. & K. FREADHOFF Exhibit 10.1 EMPLOYMENT AGREEMENT, dated as of January 1, 1999 (the "Agreement"), between Netgateway, Inc., a corporation organized under the laws of the State of Nevada (the "Company"), Netgateway, a corporation organized under the laws of the State of Nevada and a wholly owned subsidiary of the Company (the "Employer") and Keith D. Freadhoff. (the "Executive"). - -------------------------------------------------------------------------------- The Company and the Employer desires to retain the Executive to supply services to the Company and the Employer, and the Executive desires to provide the services to the Company and the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Executive's agreement to supply the services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Company, the Employer and the Executive agree as follows: 1. SERVICES; TERM. (a) The Employer hereby employs the Executive, and the Executive hereby agrees to be employed by the Employer, as Chief Executive Officer of the Employer, and the Executive will use his best efforts to perform services for the Employer in accordance with directions given to Executive from time to time by the Board of Directors of the Company (the "Board"). (b) The Executive shall participate in the operation of the business of the Employer (the "Business"), and assume and perform all duties and responsibilities consistent with his title and position (the "Services") as from time to time requested by the Employer. (c) The Executive shall be employed for the period commencing on the date of this Agreement (the "Effective Date") and ending on December 31, 2001, unless sooner terminated pursuant to the provisions of this Agreement (such period being referred to as the "Employment Period"); provided, however, that on the second anniversary of the Effective Date (and on each succeeding anniversary of the Effective Date during the Employment Period), the Employment Period shall automatically be extended by an additional year (unless the Company, the Employer or Executive shall give the other at least 120 days' notice to the contrary). 2. PERFORMANCE BY EXECUTIVE. During the Employment Period, the Executive shall devote all of his business time, attention, knowledge and skills to, and use his best efforts to perform, the Services and shall promote the interests of the Employer in carrying out the Services. Other than the restrictions contained in Sections 5 and 6 of this Agreement, nothing herein shall be deemed to preclude the Executive from continuing to serve on the board of directors of any business corporation or any charitable organization on which he now serves or, subject to the prior approval of the Board, from accepting appointment to additional boards of directors, provided that such activities do not materially interfere with the performance of Executive's duties hereunder. 3. COMPENSATION AND BENEFITS. During the Employment Period: (a) BASE COMPENSATION. As compensation for the Services, the Company shall pay Executive an annual base salary at the rate of $201,250 per year or such higher amount as the Company's Compensation Committee (the "Committee") may from time to time determine (the "Base Salary"), payable in accordance with the Employer's payroll practices, provided that for the period commencing on the Effective Date and ending on June 30, 1999, the Base Salary shall be $185,000. The Base Salary shall be increased (but not decreased) for cost of living adjustments, and subject to discretionary increase, as determined by an annual review by the Committee on or prior to each anniversary of the Effective Date. (b) PERFORMANCE BONUS On or about July 31, 1999, Executive shall be entitled to receive from the Company a performance bonus in the amount of $57,500. In addition, Executive shall be entitled to receive a performance bonus in the amount of $28,750 in respect of the fiscal quarter of the Company starting July 1, 1999 and ending September 30, 1999 if the Company meets or exceeds the financial projections set forth as Exhibit A to this Agreement (the "Projections") for such fiscal quarter. Executive shall also be entitled to receive a performance bonus in the amount of $28,750 in respect of the fiscal quarter of the Company starting October 1, 1999 and ending December 31, 1999 if the Company meets or exceeds the Projections for such fiscal quarter. For each succeeding calendar years during the Employment Period commencing on January 1,2000, Executive shall be entitled to participate in any annual bonus plan of the Company or the Employer and to receive an annual performance bonus from the Company or the Employer in accordance with the terms thereof. (c) STOCK OPTIONS. The Executive will be granted a number of options pursuant to the Employer's 1998 Stock Option Plan (the "Options") to purchase 676,000 shares of the common stock, par value $.01 per share, of the Company, on terms and conditions to be embodied in separate agreements between the Employer and the Executive. (d) BENEFIT PLANS. The Executive shall be entitled to receive benefits from the Employer consistent with those in effect for the Employer's senior executives, as those benefits are revised from time to time by the Board of Directors of the Employer. Except as specifically provided in this Section 3, nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. (e) VACATIONS AND HOLIDAYS. The Executive shall be entitled to vacation and paid holidays in accordance with the Employer's policy. (f) LIFE INSURANCE. With respect to each policy year or partial policy year that this Agreement is in effect, the Company or the Employer shall pay to or on behalf of Executive an amount sufficient to cover the cost of premium payments on a split-dollar life insurance policy or policies (the "Policy") providing a death benefit in the aggregate amount of $1,000,000 to be acquired and owned by Executive, and such amounts shall be used to pay such premiums. The Policy shall be in a form and shall provide for premium payments in an amount reasonably acceptable to the Company and to Employer. The Executive shall provide for the collateral assignment to the Company or to the Employer of a portion of any cash surrender value or death benefits, as the case may be, payable under the Policy in an amount sufficient to reimburse the Company or the Employer, as the case may be, without interest, for the aggregate value of such premium payments. In addition, Executive shall have the right to purchase up to the maximum amount of group term life insurance available through any plan or program adopted from time to time by the Company or the Employer for the benefit of its executive employees. 4. TERMINATION. (a) DEATH OR DISABILITY. If the Executive dies during the Employment Period, the Employment Period shall terminate as of the date of the Executive's death. If the Executive becomes unable to perform the Services for 180 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Executive, or, in case the Employer and the Executive cannot agree upon a physician within 15 days, then by a physician selected by physicians designated by each of the Employer and the Executive. The Executive's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Executive's inability to perform his duties hereunder. (b) CAUSE. The Company or the Employer, at its option, may terminate the Employment Period and all of the obligations of the Company and the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Executive's employment hereunder in the event of (i) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to a felony, (ii) the Executive's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Executive's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Executive's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (c) WITHOUT CAUSE. The Company or the Employer, at its option, may terminate the Employment Period without Cause at any time upon 30 days advance written notice. (d) TERMINATION BY EXECUTIVE FOR GOOD REASON. The Executive may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a substantial diminution in benefits provided under this Agreement, (ii) a substantial diminution in status, position and responsibilities of the Executive, (iii), the Employer requiring the Executive to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Executive is currently assigned or (iv) the Employer's other material breach of his obligations under this Agreement. (e) WITHOUT GOOD REASON. The Executive, at his option, may terminate the Employment Period without Good Reason at any time upon 30 days advance written notice. (f) PAYMENTS IN THE EVENT OF TERMINATION. Upon the termination of the Employment Period for death, disability, by the Executive without Good Reason, or by the Employer for Cause, the Employer shall pay to the Executive, or his estate, as the case may be, the Base Salary and Performance Bonus earned to the date of death or termination for disability or Cause, as the case may be. In addition, all vested and unexercised Options shall remain exercisable by the Executive for a period of 365 days. Upon the termination of the Employment Period by the Employer without Cause or by the Executive for Good Reason, the Employer shall pay to the Executive (A) the Base Salary and Performance Bonus earned to the date of such termination, and (B) an additional amount in a lump sum in cash equal to the Base Salary at the time of termination for a period beginning on the date of such termination, and ending on the date that the Employment Period would have ended pursuant to this Agreement had there been no termination of Executive's employment, provided that in no event shall such period be less than twelve months. In addition, all vested and unexercised Options shall become and remain exercisable by the Executive until the expiration date of the Options pursuant to the Option Agreement. (g) TERMINATION FOLLOWING A CHANGE IN CONTROL. If, within the two year period following a Change in Control (as defined below), (X) Executive's employment is terminated by the Company or by the Employer for any reason other than Executive's death or disability or for Cause, or (Y) Executive terminates his employment for Good Reason, (i) the Company or the Employer shall pay Executive as severance a lump sum amount equal to (A) three times the sum of (1) Executive's then Base Salary plus (2) Executive's highest annual Performance Bonus in the three year period immediately preceding such Change in Control and (B) the present value of all other benefits otherwise payable through the then remaining Employment Period under Sections 3(d) and 3(f) of this Agreement, and (ii) all outstanding equity incentive awards shall immediately vest, and Executive shall be entitled to receive a lump sum amount equal to the "spread" on any then outstanding stock options or similar awards held by Executive in exchange for the surrender and cancellation of such awards. A Change in Control shall be deemed to have occurred if any of the following conditions shall have been satisfied: (i) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company; any trustee or other fiduciary holding securities under an employee benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership at such time of stock of the Company), is or becomes after the Effective Date the "beneficial owner" (as defined in Rules 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not included in the securities beneficially owned by such person any securities acquired directly from the Company) representing 35% or more of the combined voting power of the Company's then outstanding securities, (ii) during any period of two consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described within this definition of Change in Control) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the Board of Directors then still in office who either were members of the Board of Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other entity and, in connection with such merger or consolidation, individuals who constitute the Board of Directors immediately prior to the time any agreement to effect such merger or consolidation is entered into fail for any reason to constitute at least a majority of the board of directors of the surviving corporation following the consummation of such merger or consolidation, or (iv) the stockholders of the Company approve (a) a plan of complete liquidation of the Company or (b) an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (h) EXCISE TAX GROSS UP. In the event any of the payments hereunder shall become subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar or successor provision of federal, state or local law, the Company or the Employer shall pay to Executive such additional amounts as may be necessary to offset fully the tax effects of such excise tax or taxes, in accordance with the procedures set forth in Exhibit B hereto. (i) TERMINATION OF OBLIGATIONS. In the event of termination of the Employment Period in accordance with this Section 4, all obligations of the Employer and the Executive under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Sections 4(f) 4(g) and 4(h) of this Agreement; PROVIDED, however, that notwithstanding anything to the contrary in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms, and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 4, the Executive agrees to cooperate with the Employer in order to ensure an orderly transfer of the Executive's duties and responsibilities. 5. CONFIDENTIALITY; NON-DISCLOSURE. (a) Except as provided in this Section 5(a), the Executive shall not disclose any confidential or proprietary information of the Company and the Employer or of their affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Company, the Employer, their subsidiaries, officers or executives, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Company or the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor shall the Executive make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Company and the Employer. As used in this Section 5(a), the term "confidential or proprietary information" means all information which is or becomes known to the Executive and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchases, potential business combinations, services procedures, pricing information and private processes as they may exist from time to time; PROVIDED that the term "confidential or proprietary information" shall not include information that is or become generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Executive or by a person who received such information from the Executive in violation of this Agreement). (b) If the Executive is requested or (in the opinion of his counsel) required by law or judicial order to disclose any confidential or proprietary information, the Executive shall provide the Company or the Employer with prompt notice of any such request or requirement so that the Company or the Employer may seek an appropriate protective order or waiver of the Executive's compliance with the provisions of this Section 5(a). The Executive will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the confidential or proprietary information. If, failing the entry of a protective order or the receipt of a waiver hereunder, he is, in the opinion of his counsel, compelled by law to disclose a portion of the confidential or proprietary information, the Executive may disclose to the relevant tribunal without liability hereunder only that portion of the confidential or proprietary information which counsel advises the Executive he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such confidential or proprietary information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Company and the Employer will provide for the defense of matters arising under this provision. 6. NON-SOLICITATION. The Executive agrees that he shall not, during and for the period commencing on the Effective Date and ending on the date that is one year after the termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal of another business firm, induce any executive of the Company, the Employer or any of their affiliates or subsidiaries to terminate such person's employment with the Company, the Employer or such affiliate or subsidiary or hire any executive of the Company, the Employer or any of their affiliates to work with any business affiliated with the Executive, provided, that the provisions of this Section 6 shall not apply in the event that the Company or the Employer materially breaches its obligations under this Agreement. 7. GENERAL PROVISIONS (a) ENFORCEABILITY. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Executive, the Company and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary right, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Company, the Employer and the Executive consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Executive, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) REMEDIES. The parties acknowledge that the Company's and the Employer's damages at law would be an inadequate remedy for the breach by the Executive of any provision of Section 5 or Section 6, and agree in the event of such breach that the Company or the Employer may obtain temporary and permanent injunctive relief restraining the Executive from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Company or the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 of this Agreement. (c) WITHHOLDING. The Employer shall withhold such amounts from any compensation or other benefits referred to herein as payable to the Executive on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) ASSIGNMENT; BENEFIT. This Agreement is personal in its nature and the parties hereto shall not, without the written consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; PROVIDED that the provisions hereof shall inure to the benefit of, and be binding upon, each successor of the Company and the Employer, whether by merger, consolidation, transfer of all or substantially all of its assets, or otherwise. (e) INDEMNITY. The Company and the Employer hereby agrees to indemnify and hold the Executive harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorney's fees and costs), claims, judgements, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Executive's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Company or the Employer), if with respect to the actions at issue in the proceeding the Executive acted in good faith and in a manner Executive reasonably believed to be in, or not opposed to, the best interests of the Company and the Employer, and (with respect to any criminal action) Executive had no reason to believe Executive's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Executive which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Executive is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (f) NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: NetGateway 300 Oceangate Long Beach, CA 90802 Attention: Secretary Facsimile: 562-308-0021 With a copy to NetGateway, Inc. 300 Oceangate Long Beach, CA 90802 Attention: General Counsel Facsimile: 562-308-0021 If to the Executive: Keith D. Freadhoff 401 Prospect Circle South Pasadena, California 91030 Facsimile: 562-308-0021 With a copy to Brock Silverstein LLC One Citicorp Center, 56th Floor New York, New York 10022 Attention: Cynthia D. Mann, Esq. Facsimile: 212-371-5500 or at such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If such notice or communication is mailed, such communication shall be deemed to have been given on the fifth business day following the date on which such communication is posted. (g) DISPUTE RESOLUTION; ATTORNEY'S FEES. The Company, the Employer and the Executive agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before a private judge to be determined by mutually agreeable means. In such event, each of the Company, the Employer and the Executive shall have the right to full discovery. The Executive shall have the right, in addition to any other relief granted by such arbitrator, to attorneys' fees in the event that a claim brought by the Executive is decided in the Executive's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Executive). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) ACKNOWLEDGEMENT. Executive acknowledges that he has been advised by Employer to seek the advice of independent counsel prior to reaching agreement with Employer or any of the terms of this Agreement. (i) AMENDMENTS AND WAIVERS. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (j) DESCRIPTIVE HEADINGS; CERTAIN INTERPRETATIONS. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (k) COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the Option Agreement contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Option Agreement and supersede all prior agreements or understandings among the parties with respect to the Executive's employment by the Employer. (l) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA. (M) CONSENT TO JURISDICTION. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT LOCATED IN LOS ANGELES COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EXECUTIVE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURT. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. NETGATEWAY, INC. By: ---------------------------------------- Name: Title: ------------------------------------------- Keith D. Freadhoff EXHIBIT B GROSS-UP PAYMENT In the event that any payment received by Executive or paid by the Company or the Employer on behalf of Executive under this Agreement or under any other plan, arrangement or agreement with the Company, the Employer or any person whose actions result in a Change in Control (provided that the Company and the Employer approve of the arrangement pursuant to which the payment by such person is made to Executive) or any person affiliated with the Company or the Employer or such person (collectively, the "Total Payments") will be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company or the Employer shall pay to Executive an additional amount (the "Gross-Up Payment") such that the net amount retained or to be retained by Executive, after deduction of any Excise Tax on the Total Payments and on any Federal, state and local income, excise and/or other taxes upon the Gross-Up Payment provided for hereunder, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive, the Total Payments (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay Federal income and other taxes at the highest applicable marginal rate of taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and other taxes at the highest applicable marginal rate of taxation in the state and locality of Executive's residence on the date the Gross-Up Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes and any other taxes. In the event that the Excise Tax is subsequently determined to be less than the amount originally taken into account hereunder, Executive shall repay to the Company or to the Employer, as the case may be, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and Federal, state and local income and other taxes imposed on the Gross-Up Payment being repaid by Executive to the extent that such repayment results in an actual reduction in Excise Tax and/or a Federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code (provided, however, that if all or any portion of the amount of any repayment made to Executive by any governmental entity shall be made at a higher rate of interest than that provided under Section 1274(b)(2)(B) of the Code (the "Higher Interest Rate Amount"), Executive shall also repay to the Company or to the Employer, as the case may be, interest on the Higher Interest Rate Amount at a rate equal to the excess of such higher rate of interest over the rate provided under Section 1274(b)(2)(B) of the Code). In the event that the Excise Tax is determined to exceed the amount originally taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company or the Employer, as the case may be, shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions to tax payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. The parties agree that such excess will be considered to have been finally determined at the conclusion of Internal Revenue Service administrative appellate proceedings, unless the parties mutually agree to pay or settle such amount earlier, or agree to pursue an appeal further. Each of Executive, the Company and the Employer shall reasonably cooperate with each other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. In the event of an audit or other administrative or judicial proceeding relating to or arising from the issue of potential liability for the Excise Tax, the Company shall pay all attorneys' and accountants' fees and other costs reasonably incurred by the Executive in connection with the audit or other proceeding to the extent such fees and costs relate to such liability, provided, that in the case of judicial or administrative proceedings, the Company consents to the pursuit of such proceedings. The Gross-Up Payment payable pursuant hereto shall be payable (or, as applicable, withheld), in whole or in part as applicable, on the earlier of (i) the date the Company or the Employer is required to withhold the Excise Tax pursuant to Section 4999 of the Code, or (ii) the date the Executive is required to pay the Excise Tax. Executive shall notify the Company and the Employer of any audit or review by the Internal Revenue Service of Executive's Federal income tax return for the year in which a payment under this Agreement is made within ten days of Executive's receipt of such audit or review. In addition, Executive shall also notify the Company and the Employer of the final resolution of such audit or review within then days of such resolution. EX-10.2 6 EMPLOYEEMENT AGREE BTW CO. & D. CORLISS J Exhibit 10.2 EMPLOYMENT AGREEMENT, dated as of January 1, 1999 (the "Agreement"), between Netgateway, Inc., a corporation organized under the laws of the State of Nevada (the "Company"), Netgateway, a corporation organized under the laws of the State of Nevada and a wholly owned subsidiary of the Company (the "Employer") and Donald M. Corliss, Jr. (the "Executive"). - ------------------------------------------------------------------------------- The Company and the Employer desires to retain the Executive to supply services to the Company and the Employer, and the Executive desires to provide the services to the Company and the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Executive's agreement to supply the services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Company, the Employer and the Executive agree as follows: 1. SERVICES; TERM. (a) The Employer hereby employs the Executive, and the Executive hereby agrees to be employed by the Employer, as President of the Employer, and the Executive will use his best efforts to perform services for the Employer in accordance with directions given to Executive from time to time by the Board of Directors of the Company (the "Board"). (b) The Executive shall participate in the operation of the business of the Employer (the "Business"), and assume and perform all duties and responsibilities consistent with his title and position (the "Services") as from time to time requested by the Employer. (c) The Executive shall be employed for the period commencing on the date of this Agreement (the "Effective Date") and ending on December 31, 2001, unless sooner terminated pursuant to the provisions of this Agreement (such period being referred to as the "Employment Period"); provided, however, that on the second anniversary of the Effective Date (and on each succeeding anniversary of the Effective Date during the Employment Period), the Employment Period shall automatically be extended by an additional year (unless the Company, the Employer or Executive shall give the other at least 120 days' notice to the contrary). 2. PERFORMANCE BY EXECUTIVE. During the Employment Period, the Executive shall devote all of his business time, attention, knowledge and skills to, and use his best efforts to perform, the Services and shall promote the interests of the Employer in carrying out the Services. Other than the restrictions contained in Sections 5 and 6 of this Agreement, nothing herein shall be deemed to preclude the Executive from continuing to serve on the board of directors of any business corporation or any charitable organization on which he now serves or, subject to the prior approval of the Board, from accepting appointment to additional boards of directors, provided that such activities do not materially interfere with the performance of Executive's duties hereunder. 3. COMPENSATION AND BENEFITS. During the Employment Period: (a) BASE COMPENSATION. As compensation for the Services, the Company shall pay Executive an annual base salary at the rate of $192,500 per year or such higher amount as the Company's Compensation Committee (the "Committee") may from time to time determine (the "Base Salary"), payable in accordance with the Employer's payroll practices, provided that for the period commencing on the Effective Date and ending on June 30, 1999, the Base Salary shall be $185,000. The Base Salary shall be increased (but not decreased) for cost of living adjustments, and subject to discretionary increase, as determined by an annual review by the Committee on or prior to each anniversary of the Effective Date. (b) PERFORMANCE BONUS On or about July 31, 1999, Executive shall be entitled to receive from the Company a performance bonus in the amount of $55,000. In addition, Executive shall be entitled to receive a performance bonus in the amount of $27,500 in respect of the fiscal quarter of the Company starting July 1, 1999 and ending September 30, 1999 if the Company meets or exceeds the financial projections set forth as Exhibit A to this Agreement (the "Projections") for such fiscal quarter. Executive shall also be entitled to receive a performance bonus in the amount of $27,500 in respect of the fiscal quarter of the Company starting October 1, 1999 and ending December 31, 1999 if the Company meets or exceeds the Projections for such fiscal quarter. For each succeeding calendar years during the Employment Period commencing on January 1,2000, Executive shall be entitled to participate in any annual bonus plan of the Company or the Employer and to receive an annual performance bonus from the Company or the Employer in accordance with the terms thereof. (c) STOCK OPTIONS. The Executive will be granted a number of options pursuant to the Employer's 1998 Stock Option Plan (the "Options") to purchase 664,000 shares of the common stock, par value $.01 per share, of the Company, on terms and conditions to be embodied in separate agreements between the Employer and the Executive. (d) BENEFIT PLANS. The Executive shall be entitled to receive benefits from the Employer consistent with those in effect for the Employer's senior executives, as those benefits are revised from time to time by the Board of Directors of the Employer. Except as specifically provided in this Section 3, nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. (e) VACATIONS AND HOLIDAYS. The Executive shall be entitled to vacation and paid holidays in accordance with the Employer's policy. (f) LIFE INSURANCE. With respect to each policy year or partial policy year that this Agreement is in effect, the Company or the Employer shall pay to or on behalf of Executive an amount sufficient to cover the cost of premium payments on a split-dollar life insurance policy or policies (the "Policy") providing a death benefit in the aggregate amount of $1,000,000 to be acquired and owned by Executive, and such amounts shall be used to pay such premiums. The Policy shall be in a form and shall provide for premium payments in an amount reasonably acceptable to the Company and to Employer. The Executive shall provide for the collateral assignment to the Company or to the Employer of a portion of any cash surrender value or death benefits, as the case may be, payable under the Policy in an amount sufficient to reimburse the Company or the Employer, as the case may be, without interest, for the aggregate value of such premium payments. In addition, Executive shall have the right to purchase up to the maximum amount of group term life insurance available through any plan or program adopted from time to time by the Company or the Employer for the benefit of its executive employees. 4. TERMINATION. (a) DEATH OR DISABILITY. If the Executive dies during the Employment Period, the Employment Period shall terminate as of the date of the Executive's death. If the Executive becomes unable to perform the Services for 180 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Executive, or, in case the Employer and the Executive cannot agree upon a physician within 15 days, then by a physician selected by physicians designated by each of the Employer and the Executive. The Executive's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Executive's inability to perform his duties hereunder. (b) CAUSE. The Company or the Employer, at its option, may terminate the Employment Period and all of the obligations of the Company and the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Executive's employment hereunder in the event of (i) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to a felony, (ii) the Executive's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Executive's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Executive's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (c) WITHOUT CAUSE. The Company or the Employer, at its option, may terminate the Employment Period without Cause at any time upon 30 days advance written notice. (d) TERMINATION BY EXECUTIVE FOR GOOD REASON. The Executive may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a substantial diminution in benefits provided under this Agreement, (ii) a substantial diminution in status, position and responsibilities of the Executive, (iii) the Employer requiring the Executive to be hired at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Executive is currently assigned, or (iv) the Employer's other material breach of his obligations under this Agreement. (e) WITHOUT GOOD REASON. The Executive, at his option, may terminate the Employment Period without Good Reason at any time upon 30 days advance written notice. (f) PAYMENTS IN THE EVENT OF TERMINATION. Upon the termination of the Employment Period for death, disability, by the Executive without Good Reason, or by the Employer for Cause, the Employer shall pay to the Executive, or his estate, as the case may be, the Base Salary and Performance Bonus earned to the date of death or termination for disability or Cause, as the case may be. In addition, all vested and unexercised Options shall remain exercisable by the Executive for a period of 365 days. Upon the termination of the Employment Period by the Employer without Cause or by the Executive for Good Reason, the Employer shall pay to the Executive (A) the Base Salary and Performance Bonus earned to the date of such termination, and (B) an additional amount in a lump sum in cash equal to the Base Salary at the time of termination for a period beginning on the date of such termination, and ending on the date that the Employment Period would have ended pursuant to this Agreement had there been no termination of Executive's employment, provided that in no event shall such period be less than twelve months. In addition, all vested and unexercised Options shall become and remain exercisable by the Executive until the expiration date of the Options pursuant to the Option Agreement. (g) TERMINATION FOLLOWING A CHANGE IN CONTROL. If, within the two year period following a Change in Control (as defined below), (X) Executive's employment is terminated by the Company or by the Employer for any reason other than Executive's death or disability or for Cause, or (Y) Executive terminates his employment for Good Reason, (i) the Company or the Employer shall pay Executive as severance a lump sum amount equal to (A) three times the sum of (1) Executive's then Base Salary plus (2) Executive's highest annual Performance Bonus in the three year period immediately preceding such Change in Control and (B) the present value of all other benefits otherwise payable through the then remaining Employment Period under Sections 3(d) and 3(f) of this Agreement, and (ii) all outstanding equity incentive awards shall immediately vest, and Executive shall be entitled to receive a lump sum amount equal to the "spread" on any then outstanding stock options or similar awards held by Executive in exchange for the surrender and cancellation of such awards. A Change in Control shall be deemed to have occurred if any of the following conditions shall have been satisfied: (i) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company; any trustee or other fiduciary holding securities under an employee benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership at such time of stock of the Company), is or becomes after the Effective Date the "beneficial owner" (as defined in Rules 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not included in the securities beneficially owned by such person any securities acquired directly from the Company) representing 35% or more of the combined voting power of the Company's then outstanding securities, (ii) during any period of two consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described within this definition of Change in Control) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the Board of Directors then still in office who either were members of the Board of Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other entity and, in connection with such merger or consolidation, individuals who constitute the Board of Directors immediately prior to the time any agreement to effect such merger or consolidation is entered into fail for any reason to constitute at least a majority of the board of directors of the surviving corporation following the consummation of such merger or consolidation, or (iv) the stockholders of the Company approve (a) a plan of complete liquidation of the Company or (b) an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (h) EXCISE TAX GROSS UP. In the event any of the payments hereunder shall become subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar or successor provision of federal, state or local law, the Company or the Employer shall pay to Executive such additional amounts as may be necessary to offset fully the tax effects of such excise tax or taxes, in accordance with the procedures set forth in Exhibit B hereto. (i) TERMINATION OF OBLIGATIONS. In the event of termination of the Employment Period in accordance with this Section 4, all obligations of the Employer and the Executive under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Sections 4(f) 4(g) and 4(h) of this Agreement; PROVIDED, however, that notwithstanding anything to the contrary in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms, and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 4, the Executive agrees to cooperate with the Employer in order to ensure an orderly transfer of the Executive's duties and responsibilities. 5. CONFIDENTIALITY; NON-DISCLOSURE. (a) Except as provided in this Section 5(a), the Executive shall not disclose any confidential or proprietary information of the Company and the Employer or of their affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Company, the Employer, their subsidiaries, officers or executives, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Company or the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor shall the Executive make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Company and the Employer. As used in this Section 5(a), the term "confidential or proprietary information" means all information which is or becomes known to the Executive and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchases, potential business combinations, services procedures, pricing information and private processes as they may exist from time to time; PROVIDED that the term "confidential or proprietary information" shall not include information that is or become generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Executive or by a person who received such information from the Executive in violation of this Agreement). (b) If the Executive is requested or (in the opinion of his counsel) required by law or judicial order to disclose any confidential or proprietary information, the Executive shall provide the Company or the Employer with prompt notice of any such request or requirement so that the Company or the Employer may seek an appropriate protective order or waiver of the Executive's compliance with the provisions of this Section 5(a). The Executive will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the confidential or proprietary information. If, failing the entry of a protective order or the receipt of a waiver hereunder, he is, in the opinion of his counsel, compelled by law to disclose a portion of the confidential or proprietary information, the Executive may disclose to the relevant tribunal without liability hereunder only that portion of the confidential or proprietary information which counsel advises the Executive he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such confidential or proprietary information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Company and the Employer will provide for the defense of matters arising under this provision. 6. NON-SOLICITATION. The Executive agrees that he shall not, during and for the period commencing on the Effective Date and ending on the date that is one year after the termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal of another business firm, induce any executive of the Company, the Employer or any of their affiliates or subsidiaries to terminate such person's employment with the Company, the Employer or such affiliate or subsidiary or hire any executive of the Company, the Employer or any of their affiliates to work with any business affiliated with the Executive, provided, that the provisions of this Section 6 shall not apply in the event that the Company or the Employer materially breaches its obligations under this Agreement. 7. GENERAL PROVISIONS (a) ENFORCEABILITY. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Executive, the Company and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary right, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Company, the Employer and the Executive consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Executive, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) REMEDIES. The parties acknowledge that the Company's and the Employer's damages at law would be an inadequate remedy for the breach by the Executive of any provision of Section 5 or Section 6, and agree in the event of such breach that the Company or the Employer may obtain temporary and permanent injunctive relief restraining the Executive from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Company or the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 of this Agreement. (c) WITHHOLDING. The Employer shall withhold such amounts from any compensation or other benefits referred to herein as payable to the Executive on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) ASSIGNMENT; BENEFIT. This Agreement is personal in its nature and the parties hereto shall not, without the written consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; PROVIDED that the provisions hereof shall inure to the benefit of, and be binding upon, each successor of the Company and the Employer, whether by merger, consolidation, transfer of all or substantially all of its assets, or otherwise. (e) INDEMNITY. The Company and the Employer hereby agrees to indemnify and hold the Executive harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorney's fees and costs), claims, judgements, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Executive's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Company or the Employer), if with respect to the actions at issue in the proceeding the Executive acted in good faith and in a manner Executive reasonably believed to be in, or not opposed to, the best interests of the Company and the Employer, and (with respect to any criminal action) Executive had no reason to believe Executive's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Executive which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Executive is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (f) NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: NetGateway 300 Oceangate Long Beach, CA 90802 Attention: Secretary Facsimile: 562-308-0021 With a copy to NetGateway, Inc. 300 Oceangate Long Beach, CA 90802 Attention: General Counsel Facsimile: 562-308-0021 If to the Executive: Donald M. Corliss, Jr. 1361 Justin Avenue Glendale, California 91201 Facsimile: 562-308-0021 With a copy to Brock Silverstein LLC One Citicorp Center, 56th Floor New York, New York 10022 Attention: Cynthia D. Mann, Esq. Facsimile: 212-371-5500 or at such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If such notice or communication is mailed, such communication shall be deemed to have been given on the fifth business day following the date on which such communication is posted. (g) DISPUTE RESOLUTION; ATTORNEY'S FEES. The Company, the Employer and the Executive agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before a private judge to be determined by mutually agreeable means. In such event, each of the Company, the Employer and the Executive shall have the right to full discovery. The Executive shall have the right, in addition to any other relief granted by such arbitrator, to attorneys' fees in the event that a claim brought by the Executive is decided in the Executive's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Executive). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) ACKNOWLEDGEMENT. Executive acknowledges that he has been advised by Employer to seek the advice of independent counsel prior to reaching agreement with Employer or any of the terms of this Agreement. (i) AMENDMENTS AND WAIVERS. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (j) DESCRIPTIVE HEADINGS; CERTAIN INTERPRETATIONS. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (k) COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the Option Agreement contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Option Agreement and supersede all prior agreements or understandings among the parties with respect to the Executive's employment by the Employer. (l) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA. (M) CONSENT TO JURISDICTION. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT LOCATED IN LOS ANGELES COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EXECUTIVE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURT. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. NETGATEWAY, INC. By: ---------------------------------- Name: Title: ------------------------------------- Donald M. Corliss, Jr. EXHIBIT B GROSS-UP PAYMENT In the event that any payment received by Executive or paid by the Company or the Employer on behalf of Executive under this Agreement or under any other plan, arrangement or agreement with the Company, the Employer or any person whose actions result in a Change in Control (provided that the Company and the Employer approve of the arrangement pursuant to which the payment by such person is made to Executive) or any person affiliated with the Company or the Employer or such person (collectively, the "Total Payments") will be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company or the Employer shall pay to Executive an additional amount (the "Gross-Up Payment") such that the net amount retained or to be retained by Executive, after deduction of any Excise Tax on the Total Payments and on any Federal, state and local income, excise and/or other taxes upon the Gross-Up Payment provided for hereunder, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive, the Total Payments (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay Federal income and other taxes at the highest applicable marginal rate of taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and other taxes at the highest applicable marginal rate of taxation in the state and locality of Executive's residence on the date the Gross-Up Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes and any other taxes. In the event that the Excise Tax is subsequently determined to be less than the amount originally taken into account hereunder, Executive shall repay to the Company or to the Employer, as the case may be, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and Federal, state and local income and other taxes imposed on the Gross-Up Payment being repaid by Executive to the extent that such repayment results in an actual reduction in Excise Tax and/or a Federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code (provided, however, that if all or any portion of the amount of any repayment made to Executive by any governmental entity shall be made at a higher rate of interest than that provided under Section 1274(b)(2)(B) of the Code (the "Higher Interest Rate Amount"), Executive shall also repay to the Company or to the Employer, as the case may be, interest on the Higher Interest Rate Amount at a rate equal to the excess of such higher rate of interest over the rate provided under Section 1274(b)(2)(B) of the Code). In the event that the Excise Tax is determined to exceed the amount originally taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company or the Employer, as the case may be, shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions to tax payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. The parties agree that such excess will be considered to have been finally determined at the conclusion of Internal Revenue Service administrative appellate proceedings, unless the parties mutually agree to pay or settle such amount earlier, or agree to pursue an appeal further. Each of Executive, the Company and the Employer shall reasonably cooperate with each other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. In the event of an audit or other administrative or judicial proceeding relating to or arising from the issue of potential liability for the Excise Tax, the Company shall pay all attorneys' and accountants' fees and other costs reasonably incurred by the Executive in connection with the audit or other proceeding to the extent such fees and costs relate to such liability, provided, that in the case of judicial or administrative proceedings, the Company consents to the pursuit of such proceedings. The Gross-Up Payment payable pursuant hereto shall be payable (or, as applicable, withheld), in whole or in part as applicable, on the earlier of (i) the date the Company or the Employer is required to withhold the Excise Tax pursuant to Section 4999 of the Code, or (ii) the date the Executive is required to pay the Excise Tax. Executive shall notify the Company and the Employer of any audit or review by the Internal Revenue Service of Executive's Federal income tax return for the year in which a payment under this Agreement is made within ten days of Executive's receipt of such audit or review. In addition, Executive shall also notify the Company and the Employer of the final resolution of such audit or review within then days of such resolution. EX-10.3 7 EMPLOYMENT AGREE BTW CO. & D. BASSETT - PARKINS Exhibit 10.3 EMPLOYMENT AGREEMENT, dated as of January 1, 1999 (the "Agreement"), between Netgateway, Inc., a corporation organized under the laws of the State of Nevada (the "Company"), Netgateway, a corporation organized under the laws of the State of Nevada and a wholly owned subsidiary of the Company (the "Employer") and David Bassett-Parkins (the "Executive"). - -------------------------------------------------------------------------------- The Company and the Employer desires to retain the Executive to supply services to the Company and the Employer, and the Executive desires to provide the services to the Company and the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Executive's agreement to supply the services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Company, the Employer and the Executive agree as follows: 1. SERVICES; TERM. (a) The Employer hereby employs the Executive, and the Executive hereby agrees to be employed by the Employer, as Chief Operating Officer of the Employer, and the Executive will use his best efforts to perform services for the Employer in accordance with directions given to Executive from time to time by the Board of Directors of the Company (the "Board"). (b) The Executive shall participate in the operation of the business of the Employer (the "Business"), and assume and perform all duties and responsibilities consistent with his title and position (the "Services") as from time to time requested by the Employer. (c) The Executive shall be employed for the period commencing on the date of this Agreement (the "Effective Date") and ending on December 31, 2001, unless sooner terminated pursuant to the provisions of this Agreement (such period being referred to as the "Employment Period"); provided, however, that on the second anniversary of the Effective Date (and on each succeeding anniversary of the Effective Date during the Employment Period), the Employment Period shall automatically be extended by an additional year (unless the Company, the Employer or Executive shall give the other at least 120 days' notice to the contrary). 2. PERFORMANCE BY EXECUTIVE. During the Employment Period, the Executive shall devote all of his business time, attention, knowledge and skills to, and use his best efforts to perform, the Services and shall promote the interests of the Employer in carrying out the Services. Other than the restrictions contained in Sections 5 and 6 of this Agreement, nothing herein shall be deemed to preclude the Executive from continuing to serve on the board of directors of any business corporation or any charitable organization on which he now serves or, subject to the prior approval of the Board, from accepting appointment to additional boards of directors, provided that such activities do not materially interfere with the performance of Executive's duties hereunder. 3. COMPENSATION AND BENEFITS. During the Employment Period: (a) BASE COMPENSATION. As compensation for the Services, the Company shall pay Executive an annual base salary at the rate of $175,000 per year or such higher amount as the Company's Compensation Committee (the "Committee") may from time to time determine (the "Base Salary"), payable in accordance with the Employer's payroll practices. The Base Salary shall be increased (but not decreased) for cost of living adjustments, and subject to discretionary increase, as determined by an annual review by the Committee on or prior to each anniversary of the Effective Date. (b) PERFORMANCE BONUS On or about July 31, 1999, Executive shall be entitled to receive from the Company a performance bonus in the amount of $50,000. In addition, Executive shall be entitled to receive a performance bonus in the amount of $25,000 in respect of the fiscal quarter of the Company starting July 1, 1999 and ending September 30, 1999 if the Company meets or exceeds the financial projections set forth as Exhibit A to this Agreement (the "Projections") for such fiscal quarter. Executive shall also be entitled to receive a performance bonus in the amount of $25,000 in respect of the fiscal quarter of the Company starting October 1, 1999 and ending December 31, 1999 if the Company meets or exceeds the Projections for such fiscal quarter. For each succeeding calendar years during the Employment Period commencing on January 1,2000, Executive shall be entitled to participate in any annual bonus plan of the Company or the Employer and to receive an annual performance bonus from the Company or the Employer in accordance with the terms thereof. (c) STOCK OPTIONS. The Executive will be granted a number of options pursuant to the Employer's 1998 Stock Option Plan (the "Options") to purchase 640,000 shares of the common stock, par value $.01 per share, of the Company, on terms and conditions to be embodied in separate agreements between the Employer and the Executive. (d) BENEFIT PLANS. The Executive shall be entitled to receive benefits from the Employer consistent with those in effect for the Employer's senior executives, as those benefits are revised from time to time by the Board of Directors of the Employer. Except as specifically provided in this Section 3, nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. (e) VACATIONS AND HOLIDAYS. The Executive shall be entitled to vacation and paid holidays in accordance with the Employer's policy. (f) LIFE INSURANCE. With respect to each policy year or partial policy year that this Agreement is in effect, the Company or the Employer shall pay to or on behalf of Executive an amount sufficient to cover the cost of premium payments on a split-dollar life insurance policy or policies (the "Policy") providing a death benefit in the aggregate amount of $1,000,000 to be acquired and owned by Executive, and such amounts shall be used to pay such premiums. The Policy shall be in a form and shall provide for premium payments in an amount reasonably acceptable to the Company and to Employer. The Executive shall provide for the collateral assignment to the Company or to the Employer of a portion of any cash surrender value or death benefits, as the case may be, payable under the Policy in an amount sufficient to reimburse the Company or the Employer, as the case may be, without interest, for the aggregate value of such premium payments. In addition, Executive shall have the right to purchase up to the maximum amount of group term life insurance available through any plan or program adopted from time to time by the Company or the Employer for the benefit of its executive employees. 4. TERMINATION. (a) DEATH OR DISABILITY. If the Executive dies during the Employment Period, the Employment Period shall terminate as of the date of the Executive's death. If the Executive becomes unable to perform the Services for 180 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Executive, or, in case the Employer and the Executive cannot agree upon a physician within 15 days, then by a physician selected by physicians designated by each of the Employer and the Executive. The Executive's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Executive's inability to perform his duties hereunder. (b) CAUSE. The Company or the Employer, at its option, may terminate the Employment Period and all of the obligations of the Company and the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Executive's employment hereunder in the event of (i) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to a felony, (ii) the Executive's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Executive's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Executive's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (c) WITHOUT CAUSE. The Company or the Employer, at its option, may terminate the Employment Period without Cause at any time upon 30 days advance written notice. (d) TERMINATION BY EXECUTIVE FOR GOOD REASON. The Executive may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a substantial diminution in benefits provided under this Agreement, (ii) a substantial diminution in status, position and responsibilities of the Executive, (iii) the Employer requiring the Executive to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Executive is currently assigned or (iv) the Employer's other material breach of his obligations under this Agreement. (e) WITHOUT GOOD REASON. The Executive, at his option, may terminate the Employment Period without Good Reason at any time upon 30 days advance written notice. (f) PAYMENTS IN THE EVENT OF TERMINATION. Upon the termination of the Employment Period for death, disability, by the Executive without Good Reason, or by the Employer for Cause, the Employer shall pay to the Executive, or his estate, as the case may be, the Base Salary and Performance Bonus earned to the date of death or termination for disability or Cause, as the case may be. In addition, all vested and unexercised Options shall remain exercisable by the Executive for a period of 365 days. Upon the termination of the Employment Period by the Employer without Cause or by the Executive for Good Reason, the Employer shall pay to the Executive (A) the Base Salary and Performance Bonus earned to the date of such termination, and (B) an additional amount in a lump sum in cash equal to the Base Salary at the time of termination for a period beginning on the date of such termination, and ending on the date that the Employment Period would have ended pursuant to this Agreement had there been no termination of Executive's employment, provided that in no event shall such period be less than twelve months. In addition, all vested and unexercised Options shall become and remain exercisable by the Executive until the expiration date of the Options pursuant to the Option Agreement. (g) TERMINATION FOLLOWING A CHANGE IN CONTROL. If, within the two year period following a Change in Control (as defined below), (X) Executive's employment is terminated by the Company or by the Employer for any reason other than Executive's death or disability or for Cause, or (Y) Executive terminates his employment for Good Reason, (i) the Company or the Employer shall pay Executive as severance a lump sum amount equal to (A) three times the sum of (1) Executive's then Base Salary plus (2) Executive's highest annual Performance Bonus in the three year period immediately preceding such Change in Control and (B) the present value of all other benefits otherwise payable through the then remaining Employment Period under Sections 3(d) and 3(f) of this Agreement, and (ii) all outstanding equity incentive awards shall immediately vest, and Executive shall be entitled to receive a lump sum amount equal to the "spread" on any then outstanding stock options or similar awards held by Executive in exchange for the surrender and cancellation of such awards. A Change in Control shall be deemed to have occurred if any of the following conditions shall have been satisfied: (i) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company; any trustee or other fiduciary holding securities under an employee benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership at such time of stock of the Company), is or becomes after the Effective Date the "beneficial owner" (as defined in Rules 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not included in the securities beneficially owned by such person any securities acquired directly from the Company) representing 35% or more of the combined voting power of the Company's then outstanding securities, (ii) during any period of two consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described within this definition of Change in Control) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the Board of Directors then still in office who either were members of the Board of Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other entity and, in connection with such merger or consolidation, individuals who constitute the Board of Directors immediately prior to the time any agreement to effect such merger or consolidation is entered into fail for any reason to constitute at least a majority of the board of directors of the surviving corporation following the consummation of such merger or consolidation, or (iv) the stockholders of the Company approve (a) a plan of complete liquidation of the Company or (b) an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (h) EXCISE TAX GROSS UP. In the event any of the payments hereunder shall become subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar or successor provision of federal, state or local law, the Company or the Employer shall pay to Executive such additional amounts as may be necessary to offset fully the tax effects of such excise tax or taxes, in accordance with the procedures set forth in Exhibit B hereto. (i) TERMINATION OF OBLIGATIONS. In the event of termination of the Employment Period in accordance with this Section 4, all obligations of the Employer and the Executive under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Sections 4(f) 4(g) and 4(h) of this Agreement; PROVIDED, however, that notwithstanding anything to the contrary in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms, and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 4, the Executive agrees to cooperate with the Employer in order to ensure an orderly transfer of the Executive's duties and responsibilities. 5. CONFIDENTIALITY; NON-DISCLOSURE. (a) Except as provided in this Section 5(a), the Executive shall not disclose any confidential or proprietary information of the Company and the Employer or of their affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Company, the Employer, their subsidiaries, officers or executives, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Company or the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor shall the Executive make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Company and the Employer. As used in this Section 5(a), the term "confidential or proprietary information" means all information which is or becomes known to the Executive and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchases, potential business combinations, services procedures, pricing information and private processes as they may exist from time to time; PROVIDED that the term "confidential or proprietary information" shall not include information that is or become generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Executive or by a person who received such information from the Executive in violation of this Agreement). (b) If the Executive is requested or (in the opinion of his counsel) required by law or judicial order to disclose any confidential or proprietary information, the Executive shall provide the Company or the Employer with prompt notice of any such request or requirement so that the Company or the Employer may seek an appropriate protective order or waiver of the Executive's compliance with the provisions of this Section 5(a). The Executive will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the confidential or proprietary information. If, failing the entry of a protective order or the receipt of a waiver hereunder, he is, in the opinion of his counsel, compelled by law to disclose a portion of the confidential or proprietary information, the Executive may disclose to the relevant tribunal without liability hereunder only that portion of the confidential or proprietary information which counsel advises the Executive he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such confidential or proprietary information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Company and the Employer will provide for the defense of matters arising under this provision. 6. NON-SOLICITATION. The Executive agrees that he shall not, during and for the period commencing on the Effective Date and ending on the date that is one year after the termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal of another business firm, induce any executive of the Company, the Employer or any of their affiliates or subsidiaries to terminate such person's employment with the Company, the Employer or such affiliate or subsidiary or hire any executive of the Company, the Employer or any of their affiliates to work with any business affiliated with the Executive, provided, that the provisions of this Section 6 shall not apply in the event that the Company or the Employer materially breaches its obligations under this Agreement. 7. GENERAL PROVISIONS (a) ENFORCEABILITY. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Executive, the Company and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary right, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Company, the Employer and the Executive consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Executive, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) REMEDIES. The parties acknowledge that the Company's and the Employer's damages at law would be an inadequate remedy for the breach by the Executive of any provision of Section 5 or Section 6, and agree in the event of such breach that the Company or the Employer may obtain temporary and permanent injunctive relief restraining the Executive from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Company or the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 of this Agreement. (c) WITHHOLDING. The Employer shall withhold such amounts from any compensation or other benefits referred to herein as payable to the Executive on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) ASSIGNMENT; BENEFIT. This Agreement is personal in its nature and the parties hereto shall not, without the written consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; PROVIDED that the provisions hereof shall inure to the benefit of, and be binding upon, each successor of the Company and the Employer, whether by merger, consolidation, transfer of all or substantially all of its assets, or otherwise. (e) INDEMNITY. The Company and the Employer hereby agrees to indemnify and hold the Executive harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorney's fees and costs), claims, judgements, fines, and amounts paid in settlement actually and reasonably incurred in connection with any proceeding arising out of the Executive's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Company or the Employer), if with respect to the actions at issue in the proceeding the Executive acted in good faith and in a manner Executive reasonably believed to be in, or not opposed to, the best interests of the Company and the Employer, and (with respect to any criminal action) Executive had no reason to believe Executive's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Executive which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Executive is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (f) NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: NetGateway 300 Oceangate Long Beach, CA 90802 Attention: Secretary Facsimile: 562-308-0021 With a copy to NetGateway, Inc. 300 Oceangate Long Beach, CA 90802 Attention: General Counsel Facsimile: 562-308-0021 If to the Executive: David Bassett-Parkins 11494 Orchila Street Glendale, California 91201 Facsimile: 562-308-0021 With a copy to Brock Silverstein LLC One Citicorp Center, 56th Floor New York, New York 10022 Attention: Cynthia D. Mann, Esq. Facsimile: 212-371-5500 or at such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If such notice or communication is mailed, such communication shall be deemed to have been given on the fifth business day following the date on which such communication is posted. (g) DISPUTE RESOLUTION; ATTORNEY'S FEES. The Company, the Employer and the Executive agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before a private judge to be determined by mutually agreeable means. In such event, each of the Company, the Employer and the Executive shall have the right to full discovery. The Executive shall have the right, in addition to any other relief granted by such arbitrator, to attorneys' fees in the event that a claim brought by the Executive is decided in the Executive's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Executive). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) ACKNOWLEDGEMENT. Executive acknowledges that he has been advised by Employer to seek the advice of independent counsel prior to reaching agreement with Employer or any of the terms of this Agreement. (i) AMENDMENTS AND WAIVERS. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (j) DESCRIPTIVE HEADINGS; CERTAIN INTERPRETATIONS. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (k) COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the Option Agreement contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Option Agreement and supersede all prior agreements or understandings among the parties with respect to the Executive's employment by the Employer. (l) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA. (m) CONSENT TO JURISDICTION. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT LOCATED IN LOS ANGELES COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EXECUTIVE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURT. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. NETGATEWAY, INC. By: ------------------------------- Name: Title: ---------------------------------- David Bassett-Parkins EXHIBIT B GROSS-UP PAYMENT In the event that any payment received by Executive or paid by the Company or the Employer on behalf of Executive under this Agreement or under any other plan, arrangement or agreement with the Company, the Employer or any person whose actions result in a Change in Control (provided that the Company and the Employer approve of the arrangement pursuant to which the payment by such person is made to Executive) or any person affiliated with the Company or the Employer or such person (collectively, the "Total Payments") will be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company or the Employer shall pay to Executive an additional amount (the "Gross-Up Payment") such that the net amount retained or to be retained by Executive, after deduction of any Excise Tax on the Total Payments and on any Federal, state and local income, excise and/or other taxes upon the Gross-Up Payment provided for hereunder, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive, the Total Payments (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay Federal income and other taxes at the highest applicable marginal rate of taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and other taxes at the highest applicable marginal rate of taxation in the state and locality of Executive's residence on the date the Gross-Up Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes and any other taxes. In the event that the Excise Tax is subsequently determined to be less than the amount originally taken into account hereunder, Executive shall repay to the Company or to the Employer, as the case may be, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and Federal, state and local income and other taxes imposed on the Gross-Up Payment being repaid by Executive to the extent that such repayment results in an actual reduction in Excise Tax and/or a Federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code (provided, however, that if all or any portion of the amount of any repayment made to Executive by any governmental entity shall be made at a higher rate of interest than that provided under Section 1274(b)(2)(B) of the Code (the "Higher Interest Rate Amount"), Executive shall also repay to the Company or to the Employer, as the case may be, interest on the Higher Interest Rate Amount at a rate equal to the excess of such higher rate of interest over the rate provided under Section 1274(b)(2)(B) of the Code). In the event that the Excise Tax is determined to exceed the amount originally taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company or the Employer, as the case may be, shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions to tax payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. The parties agree that such excess will be considered to have been finally determined at the conclusion of Internal Revenue Service administrative appellate proceedings, unless the parties mutually agree to pay or settle such amount earlier, or agree to pursue an appeal further. Each of Executive, the Company and the Employer shall reasonably cooperate with each other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. In the event of an audit or other administrative or judicial proceeding relating to or arising from the issue of potential liability for the Excise Tax, the Company shall pay all attorneys' and accountants' fees and other costs reasonably incurred by the Executive in connection with the audit or other proceeding to the extent such fees and costs relate to such liability, provided, that in the case of judicial or administrative proceedings, the Company consents to the pursuit of such proceedings. The Gross-Up Payment payable pursuant hereto shall be payable (or, as applicable, withheld), in whole or in part as applicable, on the earlier of (i) the date the Company or the Employer is required to withhold the Excise Tax pursuant to Section 4999 of the Code, or (ii) the date the Executive is required to pay the Excise Tax. Executive shall notify the Company and the Employer of any audit or review by the Internal Revenue Service of Executive's Federal income tax return for the year in which a payment under this Agreement is made within ten days of Executive's receipt of such audit or review. In addition, Executive shall also notify the Company and the Employer of the final resolution of such audit or review within then days of such resolution. EX-10.4 8 EMPLOYMENT AGREE BTW CO. & HANH NGO EMPLOYMENT AGREEMENT, dated as of January 1, 1999 (the "Agreement"), between Netgateway, Inc., a corporation organized under the laws of the State of Nevada (the "Company"), Netgateway, a corporation organized under the laws of the State of Nevada and a wholly owned subsidiary of the Company (the "Employer") and Hanh Ngo (the "Executive"). - ------------------------------------------------------------------------------ The Company and the Employer desires to retain the Executive to supply services to the Company and the Employer, and the Executive desires to provide the services to the Company and the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Executive's agreement to supply the services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Company, the Employer and the Executive agree as follows: 1. SERVICES; TERM. (a) The Employer hereby employs the Executive, and the Executive hereby agrees to be employed by the Employer, as Executive Vice President -- Operations of the Employer, and the Executive will use his best efforts to perform services for the Employer in accordance with directions given to Executive from time to time by the Board of Directors of the Company (the "Board"). (b) The Executive shall participate in the operation of the business of the Employer (the "Business"), and assume and perform all duties and responsibilities consistent with his title and position (the "Services") as from time to time requested by the Employer. (c) The Executive shall be employed for the period commencing on the date of this Agreement (the "Effective Date") and ending on December 31, 2001, unless sooner terminated pursuant to the provisions of this Agreement (such period being referred to as the "Employment Period"); provided, however, that on the second anniversary of the Effective Date (and on each succeeding anniversary of the Effective Date during the Employment Period), the Employment Period shall automatically be extended by an additional year (unless the Company, the Employer or Executive shall give the other at least 120 days' notice to the contrary). 2. PERFORMANCE BY EXECUTIVE. During the Employment Period, the Executive shall devote all of his business time, attention, knowledge and skills to, and use his best efforts to perform, the Services and shall promote the interests of the Employer in carrying out the Services. Other than the restrictions contained in Sections 5 and 6 of this Agreement, nothing herein shall be deemed to preclude the Executive from continuing to serve on the board of directors of any business corporation or any charitable organization on which he now serves or, subject to the prior approval of the Board, from accepting appointment to additional boards of directors, provided that such activities do not materially interfere with the performance of Executive's duties hereunder. 3. COMPENSATION AND BENEFITS. During the Employment Period: (a) BASE COMPENSATION. As compensation for the Services, the Company shall pay Executive an annual base salary at the rate of $135,000 per year or such higher amount as the Company's Compensation Committee (the "Committee") may from time to time determine (the "Base Salary"), payable in accordance with the Employer's payroll practices.. The Base Salary shall be increased (but not decreased) for cost of living adjustments, and subject to discretionary increase, as determined by an annual review by the Committee on or prior to each anniversary of the Effective Date. (b) PERFORMANCE BONUS On or about July 31, 1999, Executive shall be entitled to receive from the Company a performance bonus in the amount of $25,000. In addition, Executive shall be entitled to receive a performance bonus in the amount of $12,500 in respect of the fiscal quarter of the Company starting July 1, 1999 and ending September 30, 1999 if the Company meets or exceeds the financial projections set forth as Exhibit A to this Agreement (the "Projections") for such fiscal quarter. Executive shall also be entitled to receive a performance bonus in the amount of $12,500 in respect of the fiscal quarter of the Company starting October 1, 1999 and ending December 31, 1999 if the Company meets or exceeds the Projections for such fiscal quarter. For each succeeding calendar years during the Employment Period commencing on January 1,2000, Executive shall be entitled to participate in any annual bonus plan of the Company or the Employer and to receive an annual performance bonus from the Company or the Employer in accordance with the terms thereof. (c) STOCK OPTIONS. The Executive will be granted a number of options pursuant to the Employer's 1998 Stock Option Plan (the "Options") to purchase 664,000 shares of the common stock, par value $.01 per share, of the Company, on terms and conditions to be embodied in separate agreements between the Employer and the Executive. (d) BENEFIT PLANS. The Executive shall be entitled to receive benefits from the Employer consistent with those in effect for the Employer's senior executives, as those benefits are revised from time to time by the Board of Directors of the Employer. Except as specifically provided in this Section 3, nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. 2 (e) VACATIONS AND HOLIDAYS. The Executive shall be entitled to vacation and paid holidays in accordance with the Employer's policy. 4. TERMINATION. (a) DEATH OR DISABILITY. If the Executive dies during the Employment Period, the Employment Period shall terminate as of the date of the Executive's death. If the Executive becomes unable to perform the Services for 180 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Executive, or, in case the Employer and the Executive cannot agree upon a physician within 15 days, then by a physician selected by physicians designated by each of the Employer and the Executive. The Executive's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Executive's inability to perform his duties hereunder. (b) CAUSE. The Company or the Employer, at its option, may terminate the Employment Period and all of the obligations of the Company and the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Executive's employment hereunder in the event of (i) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to a felony, (ii) the Executive's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Executive's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Executive's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (c) WITHOUT CAUSE. The Company or the Employer, at its option, may terminate the Employment Period without Cause at any time upon 30 days advance written notice. (d) TERMINATION BY EXECUTIVE FOR GOOD REASON. The Executive may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a substantial diminution in benefits provided under this Agreement, (ii) a substantial diminution in status, position and responsibilities of the Executive, or (iii) the Employer's other material breach of his obligations under this Agreement. 3 (e) WITHOUT GOOD REASON. The Executive, at his option, may terminate the Employment Period without Good Reason at any time upon 30 days advance written notice. (f) PAYMENTS IN THE EVENT OF TERMINATION. Upon the termination of the Employment Period for death, disability, by the Executive without Good Reason, or by the Employer for Cause, the Employer shall pay to the Executive, or his estate, as the case may be, the Base Salary and Performance Bonus earned to the date of death or termination for disability or Cause, as the case may be. In addition, all vested and unexercised Options shall remain exercisable by the Executive for a period of 365 days. Upon the termination of the Employment Period by the Employer without Cause or by the Executive for Good Reason, the Employer shall pay to the Executive (A) the Base Salary and Performance Bonus earned to the date of such termination, and (B) an additional amount in a lump sum in cash equal to the Base Salary at the time of termination for a period beginning on the date of such termination, and ending on the date that the Employment Period would have ended pursuant to this Agreement had there been no termination of Executive's employment, provided that in no event shall such period be less than twelve months. In addition, all vested and unexercised Options shall become and remain exercisable by the Executive until the expiration date of the Options pursuant to the Option Agreement. (g) TERMINATION FOLLOWING A CHANGE IN CONTROL. If, within the two year period following a Change in Control (as defined below), (X) Executive's employment is terminated by the Company or by the Employer for any reason other than Executive's death or disability or for Cause, or (Y) Executive terminates his employment for Good Reason, (i) the Company or the Employer shall pay Executive as severance a lump sum amount equal to (A) two times the sum of (1) Executive's then Base Salary plus (2) Executive's highest annual Performance Bonus in the three year period immediately preceding such Change in Control and (B) the present value of all other benefits otherwise payable through the then remaining Employment Period under Sections 3(d) and 3(f) of this Agreement, and (ii) all outstanding equity incentive awards shall immediately vest, and Executive shall be entitled to receive a lump sum amount equal to the "spread" on any then outstanding stock options or similar awards held by Executive in exchange for the surrender and cancellation of such awards. A Change in Control shall be deemed to have occurred if any of the following conditions shall have been satisfied: (i) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company; any trustee or other fiduciary holding securities under an employee benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership at such time of stock of the Company), is or becomes after the Effective Date the "beneficial owner" (as defined in Rules 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not included in the securities beneficially owned by such person any securities acquired directly from the Company) representing 35% or more of the combined voting power of the Company's then outstanding securities, (ii) during any period of two 4 consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described within this definition of Change in Control) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the Board of Directors then still in office who either were members of the Board of Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other entity and, in connection with such merger or consolidation, individuals who constitute the Board of Directors immediately prior to the time any agreement to effect such merger or consolidation is entered into fail for any reason to constitute at least a majority of the board of directors of the surviving corporation following the consummation of such merger or consolidation, or (iv) the stockholders of the Company approve (a) a plan of complete liquidation of the Company or (b) an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (h) EXCISE TAX GROSS UP. In the event any of the payments hereunder shall become subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar or successor provision of federal, state or local law, the Company or the Employer shall pay to Executive such additional amounts as may be necessary to offset fully the tax effects of such excise tax or taxes, in accordance with the procedures set forth in Exhibit B hereto. (i) TERMINATION OF OBLIGATIONS. In the event of termination of the Employment Period in accordance with this Section 4, all obligations of the Employer and the Executive under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Sections 4(f) 4(g) and 4(h) of this Agreement; PROVIDED, however, that notwithstanding anything to the contrary in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms, and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 4, the Executive agrees to cooperate with the Employer in order to ensure an orderly transfer of the Executive's duties and responsibilities. 5. CONFIDENTIALITY; NON-DISCLOSURE. (a) Except as provided in this Section 5(a), the Executive shall not disclose any confidential or proprietary information of the Company and the Employer or of their affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Company, the Employer, their subsidiaries, officers or executives, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Company or the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor 5 shall the Executive make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Company and the Employer. As used in this Section 5(a), the term "confidential or proprietary information" means all information which is or becomes known to the Executive and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchases, potential business combinations, services procedures, pricing information and private processes as they may exist from time to time; PROVIDED that the term "confidential or proprietary information" shall not include information that is or become generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Executive or by a person who received such information from the Executive in violation of this Agreement). (b) If the Executive is requested or (in the opinion of his counsel) required by law or judicial order to disclose any confidential or proprietary information, the Executive shall provide the Company or the Employer with prompt notice of any such request or requirement so that the Company or the Employer may seek an appropriate protective order or waiver of the Executive's compliance with the provisions of this Section 5(a). The Executive will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the confidential or proprietary information. If, failing the entry of a protective order or the receipt of a waiver hereunder, he is, in the opinion of his counsel, compelled by law to disclose a portion of the confidential or proprietary information, the Executive may disclose to the relevant tribunal without liability hereunder only that portion of the confidential or proprietary information which counsel advises the Executive he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such confidential or proprietary information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Company and the Employer will provide for the defense of matters arising under this provision. 6. NON-SOLICITATION. The Executive agrees that he shall not, during and for the period commencing on the Effective Date and ending on the date that is one year after the termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal of another business firm, induce any executive of the Company, the Employer or any of their affiliates or subsidiaries to terminate such person's employment with the Company, the Employer or such affiliate or subsidiary or hire any executive of the Company, the Employer or any of their affiliates to work with any business affiliated with the Executive, provided, that the provisions of this Section 6 shall not apply in the event that the Company or the Employer materially breaches its obligations under this Agreement. 7. GENERAL PROVISIONS 6 (a) ENFORCEABILITY. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Executive, the Company and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary right, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Company, the Employer and the Executive consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Executive, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) REMEDIES. The parties acknowledge that the Company's and the Employer's damages at law would be an inadequate remedy for the breach by the Executive of any provision of Section 5 or Section 6, and agree in the event of such breach that the Company or the Employer may obtain temporary and permanent injunctive relief restraining the Executive from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Company or the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 of this Agreement. (c) WITHHOLDING. The Employer shall withhold such amounts from any compensation or other benefits referred to herein as payable to the Executive on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) ASSIGNMENT; BENEFIT. This Agreement is personal in its nature and the parties hereto shall not, without the written consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; PROVIDED that the provisions hereof shall inure to the benefit of, and be binding upon, each successor of the Company and the Employer, whether by merger, consolidation, transfer of all or substantially all of its assets, or otherwise. (e) INDEMNITY. The Company and the Employer hereby agrees to indemnify and hold the Executive harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorney's fees and costs), claims, judgements, fines, and amounts paid in settlement actually and reasonably incurred in 7 connection with any proceeding arising out of the Executive's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Company or the Employer), if with respect to the actions at issue in the proceeding the Executive acted in good faith and in a manner Executive reasonably believed to be in, or not opposed to, the best interests of the Company and the Employer, and (with respect to any criminal action) Executive had no reason to believe Executive's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Executive which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Executive is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (f) NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: NetGateway 300 Oceangate Long Beach, CA 90802 Attention: Secretary Facsimile: 562-308-0021 With a copy to NetGateway, Inc. 300 Oceangate Long Beach, CA 90802 Attention: General Counsel Facsimile: 562-308-0021 If to the Executive: Hanh Ngo 1230 Western Avenue Glendale, California 91201 Facsimile: 562-308-0021 With a copy to Brock Silverstein LLC One Citicorp Center, 56th Floor 8 New York, New York 10022 Attention: Cynthia D. Mann, Esq. Facsimile: 212-371-5500 or at such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If such notice or communication is mailed, such communication shall be deemed to have been given on the fifth business day following the date on which such communication is posted. (g) DISPUTE RESOLUTION; ATTORNEY'S FEES. The Company, the Employer and the Executive agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before a private judge to be determined by mutually agreeable means. In such event, each of the Company, the Employer and the Executive shall have the right to full discovery. The Executive shall have the right, in addition to any other relief granted by such arbitrator, to attorneys' fees in the event that a claim brought by the Executive is decided in the Executive's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Executive). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) ACKNOWLEDGEMENT. Executive acknowledges that he has been advised by Employer to seek the advice of independent counsel prior to reaching agreement with Employer or any of the terms of this Agreement. (i) AMENDMENTS AND WAIVERS. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (j) DESCRIPTIVE HEADINGS; CERTAIN INTERPRETATIONS. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (k) COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the Option Agreement contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Option Agreement and supersede all prior agreements or understandings among the parties with respect to the Executive's employment by the Employer. (l) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA. 9 (m) CONSENT TO JURISDICTION. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT LOCATED IN LOS ANGELES COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EXECUTIVE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURT. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. NETGATEWAY, INC. By: --------------------------------- Name: Title: --------------------------------- Hanh Ngo 11 EXHIBIT B GROSS-UP PAYMENT In the event that any payment received by Executive or paid by the Company or the Employer on behalf of Executive under this Agreement or under any other plan, arrangement or agreement with the Company, the Employer or any person whose actions result in a Change in Control (provided that the Company and the Employer approve of the arrangement pursuant to which the payment by such person is made to Executive) or any person affiliated with the Company or the Employer or such person (collectively, the "Total Payments") will be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company or the Employer shall pay to Executive an additional amount (the "Gross-Up Payment") such that the net amount retained or to be retained by Executive, after deduction of any Excise Tax on the Total Payments and on any Federal, state and local income, excise and/or other taxes upon the Gross-Up Payment provided for hereunder, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive, the Total Payments (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay Federal income and other taxes at the highest applicable marginal rate of taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and other taxes at the highest applicable marginal rate of taxation in the state and locality of Executive's residence on the date the Gross-Up Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes and any other taxes. In the event that the Excise Tax is subsequently determined to be less than the amount originally taken into account hereunder, Executive shall repay to the Company or to the Employer, as the case may be, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and Federal, state and local income and other taxes imposed on the Gross-Up Payment being repaid by Executive to the extent that such repayment results in an actual reduction in Excise Tax and/or a Federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code (provided, however, that if all or any portion of the amount of any repayment made to Executive by any governmental entity shall be made at a higher rate of interest than that provided under Section 1274(b)(2)(B) of the Code (the "Higher Interest Rate Amount"), Executive shall also repay to the Company or to the Employer, as the case may be, interest on the Higher Interest Rate Amount at a rate equal to the excess of such higher rate of interest over the rate provided under Section 1274(b)(2)(B) of the Code). In the event that the Excise Tax is determined to exceed the amount originally taken into account hereunder (including 12 by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company or the Employer, as the case may be, shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions to tax payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. The parties agree that such excess will be considered to have been finally determined at the conclusion of Internal Revenue Service administrative appellate proceedings, unless the parties mutually agree to pay or settle such amount earlier, or agree to pursue an appeal further. Each of Executive, the Company and the Employer shall reasonably cooperate with each other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. In the event of an audit or other administrative or judicial proceeding relating to or arising from the issue of potential liability for the Excise Tax, the Company shall pay all attorneys' and accountants' fees and other costs reasonably incurred by the Executive in connection with the audit or other proceeding to the extent such fees and costs relate to such liability, provided, that in the case of judicial or administrative proceedings, the Company consents to the pursuit of such proceedings. The Gross-Up Payment payable pursuant hereto shall be payable (or, as applicable, withheld), in whole or in part as applicable, on the earlier of (i) the date the Company or the Employer is required to withhold the Excise Tax pursuant to Section 4999 of the Code, or (ii) the date the Executive is required to pay the Excise Tax. Executive shall notify the Company and the Employer of any audit or review by the Internal Revenue Service of Executive's Federal income tax return for the year in which a payment under this Agreement is made within ten days of Executive's receipt of such audit or review. In addition, Executive shall also notify the Company and the Employer of the final resolution of such audit or review within then days of such resolution. 13 EX-10.5 9 EMPLOYMENT AGREE BTW CO. & CRAIG GATARZ EMPLOYMENT AGREEMENT, dated as of April 5, 1999 (the "Agreement"), between Netgateway, Inc., a corporation organized under the laws of the State of Nevada (the "Company"), Netgateway, a corporation organized under the laws of the State of Nevada and a wholly owned subsidiary of the Company (the "Employer") and Craig Gatarz (the "Executive"). - ------------------------------------------------------------------------------ The Company and the Employer desires to retain the Executive to supply services to the Company and the Employer, and the Executive desires to provide the services to the Company and the Employer, on the terms and subject to the conditions set forth in this Agreement. In consideration of (i) the Executive's agreement to supply the services under this Agreement and (ii) the mutual agreements set forth below, the sufficiency of which is hereby acknowledged, the Company, the Employer and the Executive agree as follows: 1. SERVICES; TERM. (a) The Employer hereby employs the Executive, and the Executive hereby agrees to be employed by the Employer, as General Counsel of the Employer, and the Executive will use his best efforts to perform services for the Employer in accordance with directions given to Executive from time to time by the Board of Directors of the Company (the "Board"). (b) The Executive shall participate in the operation of the business of the Employer (the "Business"), and assume and perform all duties and responsibilities consistent with his title and position (the "Services") as from time to time requested by the Employer. (c) The Executive shall be employed for the period commencing on the date of this Agreement (the "Effective Date") and ending on April 4, 2002, unless sooner terminated pursuant to the provisions of this Agreement (such period being referred to as the "Employment Period"); provided, however, that on the second anniversary of the Effective Date (and on each succeeding anniversary of the Effective Date during the Employment Period), the Employment Period shall automatically be extended by an additional year (unless the Company, the Employer or Executive shall give the other at least 120 days' notice to the contrary). 2. PERFORMANCE BY EXECUTIVE. During the Employment Period, the Executive shall devote all of his business time, attention, knowledge and skills to, and use his best efforts to perform, the Services and shall promote the interests of the Employer in carrying out the Services. Other than the restrictions contained in Sections 5 and 6 of this Agreement, nothing herein shall be deemed to preclude the Executive from continuing to serve on the board of directors of any business corporation or any charitable organization on which he now serves or, subject to the prior approval of the Board, from accepting appointment to additional boards of directors, provided that such activities do not materially interfere with the performance of Executive's duties hereunder. 3. COMPENSATION AND BENEFITS. During the Employment Period: (a) BASE COMPENSATION. As compensation for the Services, the Company shall pay Executive an annual base salary at the rate of $120,000 per year or such higher amount as the Company's Compensation Committee (the "Committee") may from time to time determine (the "Base Salary"), payable in accordance with the Employer's payroll practices.. The Base Salary shall be increased (but not decreased) for cost of living adjustments, and subject to discretionary increase, as determined by an annual review by the Committee on or prior to each anniversary of the Effective Date, provided, however, that for the calendar year commencing January 1, 2000, Executive's Base Salary shall be $150,000 . (b) CASH BONUS Commencing July 1, 1999 through December 31, 1999, Executive shall be entitled to receive from the Company a monthly bonus in the amount of $3,750. For each succeeding calendar year during the Employment Period commencing on January 1, 2000, Executive shall be entitled to participate in any annual bonus plan of the Company or the Employer and to receive an annual performance bonus from the Company or the Employer in accordance with the terms thereof. (c) STOCK OPTIONS. The Executive will be granted a number of options pursuant to the Employer's 1998 Stock Option Plan (the "Options") to purchase 161,821 shares of the common stock, par value $.01 per share, of the Company, on terms and conditions to be embodied in separate agreements between the Employer and the Executive. Executive will be granted additional options for each succeeding calendar year during the Employment Period. (d) BENEFIT PLANS. The Executive shall be entitled to receive benefits from the Employer consistent with those in effect for the Employer's senior executives, as those benefits are revised from time to time by the Board of Directors of the Employer. Except as specifically provided in this Section 3, nothing contained herein is intended to require the Employer to maintain any existing benefits or create any new benefits. (e) VACATIONS AND HOLIDAYS. The Executive shall be entitled to vacation and paid holidays in accordance with the Employer's policy. 2 4. TERMINATION. (a) DEATH OR DISABILITY. If the Executive dies during the Employment Period, the Employment Period shall terminate as of the date of the Executive's death. If the Executive becomes unable to perform the Services for 180 consecutive days due to a physical or mental disability, (i) the Employer may elect to terminate the Employment Period any time thereafter, and (ii) the Employment Period shall terminate as of the date of such election. All disabilities shall be certified by a physician acceptable to both the Employer and the Executive, or, in case the Employer and the Executive cannot agree upon a physician within 15 days, then by a physician selected by physicians designated by each of the Employer and the Executive. The Executive's failure to submit to any physical examination by such physician after such physician has given reasonable notice of the time and place of such examination shall be conclusive evidence of the Executive's inability to perform his duties hereunder. (b) CAUSE. The Company or the Employer, at its option, may terminate the Employment Period and all of the obligations of the Company and the Employer under this Agreement for Cause. The Employer shall have "Cause" to terminate the Executive's employment hereunder in the event of (i) the Executive's conviction of, or plea of guilty or NOLO CONTENDERE to a felony, (ii) the Executive's gross negligence in the performance of the Services, which is not corrected within 15 business days after written notice, (iii) the Executive's knowingly dishonest act, or knowing bad faith or willful misconduct in the performance of the Services to the material detriment of the Company, which is not corrected within 15 business days after written notice, or (iv) the Executive's other material breach of his obligations under this Agreement, which is not corrected within a reasonable period of time (determined in light of the cure appropriate to such material breach, but in no event less than 15 business days) after written notice. (c) WITHOUT CAUSE. The Company or the Employer, at its option, may terminate the Employment Period without Cause at any time upon 30 days advance written notice. (d) TERMINATION BY EXECUTIVE FOR GOOD REASON. The Executive may terminate this Agreement upon 60 days' prior written notice to the Employer for Good Reason (as defined below) if the basis for such Good Reason is not cured within a reasonable period of time (determined in light of the cure appropriate to the basis of such Good Reason, but in no event less than 15 business days) after the Employer receives written notice specifying the basis of such Good Reason. "Good Reason" shall mean (i) the failure of the Employer to pay any undisputed amount due under this Agreement or a substantial diminution in benefits provided under this Agreement, (ii) a substantial diminution in status, position and responsibilities of the Executive, (iii) the Employer requiring the Executive to be based at any office or location that requires a relocation or commute greater than 50 miles from the office or location to which the Executive is currently assigned, or (iv) the Employer's other material breach of his obligations under this Agreement. 3 (e) WITHOUT GOOD REASON. The Executive, at his option, may terminate the Employment Period without Good Reason at any time upon 30 days advance written notice. (f) PAYMENTS IN THE EVENT OF TERMINATION. Upon the termination of the Employment Period for death, disability, by the Executive without Good Reason, or by the Employer for Cause, the Employer shall pay to the Executive, or his estate, as the case may be, the Base Salary and Performance Bonus earned to the date of death or termination for disability or Cause, as the case may be. In addition, all vested and unexercised Options shall remain exercisable by the Executive for a period of 365 days. Upon the termination of the Employment Period by the Employer without Cause or by the Executive for Good Reason, the Employer shall pay to the Executive (A) the Base Salary and Performance Bonus earned to the date of such termination, and (B) an additional amount in a lump sum in cash equal to the Base Salary at the time of termination for a period beginning on the date of such termination, and ending on the date that the Employment Period would have ended pursuant to this Agreement had there been no termination of Executive's employment, provided that in no event shall such period be less than twelve months. In addition, all vested and unexercised Options shall become and remain exercisable by the Executive until the expiration date of the Options pursuant to the Option Agreement. (g) TERMINATION FOLLOWING A CHANGE IN CONTROL. If, within the two year period following a Change in Control (as defined below), (X) Executive's employment is terminated by the Company or by the Employer for any reason other than Executive's death or disability or for Cause, or (Y) Executive terminates his employment for Good Reason, (i) the Company or the Employer shall pay Executive as severance a lump sum amount equal to (A) two times the sum of (1) Executive's then Base Salary plus (2) Executive's highest annual Performance Bonus in the three year period immediately preceding such Change in Control and (B) the present value of all other benefits otherwise payable through the then remaining Employment Period under Sections 3(d) and 3(f) of this Agreement, and (ii) all outstanding equity incentive awards shall immediately vest, and Executive shall be entitled to receive a lump sum amount equal to the "spread" on any then outstanding stock options or similar awards held by Executive in exchange for the surrender and cancellation of such awards. A Change in Control shall be deemed to have occurred if any of the following conditions shall have been satisfied: (i) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company; any trustee or other fiduciary holding securities under an employee benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership at such time of stock of the Company), is or becomes after the Effective Date the "beneficial owner" (as defined in Rules 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not included in the securities beneficially owned by such person any securities acquired directly from the Company) representing 35% or more of the combined voting power of the Company's then outstanding securities, (ii) during any period of two 4 consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described within this definition of Change in Control) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the Board of Directors then still in office who either were members of the Board of Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other entity and, in connection with such merger or consolidation, individuals who constitute the Board of Directors immediately prior to the time any agreement to effect such merger or consolidation is entered into fail for any reason to constitute at least a majority of the board of directors of the surviving corporation following the consummation of such merger or consolidation, or (iv) the stockholders of the Company approve (a) a plan of complete liquidation of the Company or (b) an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (h) EXCISE TAX GROSS UP. In the event any of the payments hereunder shall become subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar or successor provision of federal, state or local law, the Company or the Employer shall pay to Executive such additional amounts as may be necessary to offset fully the tax effects of such excise tax or taxes, in accordance with the procedures set forth in Exhibit B hereto. (i) TERMINATION OF OBLIGATIONS. In the event of termination of the Employment Period in accordance with this Section 4, all obligations of the Employer and the Executive under this Agreement shall terminate, except for any amounts payable by the Employer as specifically set forth in Sections 4(f) 4(g) and 4(h) of this Agreement; PROVIDED, however, that notwithstanding anything to the contrary in this Agreement, the provisions of Section 5 and Section 6 shall survive such termination in accordance with their respective terms, and the relevant provisions of Section 7 shall survive such termination indefinitely. In the event of termination of the Employment Period in accordance with this Section 4, the Executive agrees to cooperate with the Employer in order to ensure an orderly transfer of the Executive's duties and responsibilities. 5. CONFIDENTIALITY; NON-DISCLOSURE. (a) Except as provided in this Section 5(a), the Executive shall not disclose any confidential or proprietary information of the Company and the Employer or of their affiliates or subsidiaries to any person, firm, corporation, association or other entity (other than the Company, the Employer, their subsidiaries, officers or executives, attorneys, accountants, bank lenders, agents, advisors or representatives thereof) for any reason or purpose whatsoever (other than in the normal course of business on a need-to-know basis after the Company or the Employer has received assurances that the confidential or proprietary information shall be kept confidential), nor 5 shall the Executive make use of any such confidential or proprietary information for his own purposes or for the benefit of any person, firm, corporation or other entity, except the Company and the Employer. As used in this Section 5(a), the term "confidential or proprietary information" means all information which is or becomes known to the Executive and relates to matters such as trade secrets, research and development activities, new or prospective lines of business (including analysis and market research relating to potential expansion of the business), books and records, financial data, customer lists, marketing techniques, financing, credit policies, vendor lists, suppliers, purchases, potential business combinations, services procedures, pricing information and private processes as they may exist from time to time; PROVIDED that the term "confidential or proprietary information" shall not include information that is or become generally available to the public (other than as a result of a disclosure in violation of this Agreement by the Executive or by a person who received such information from the Executive in violation of this Agreement). (b) If the Executive is requested or (in the opinion of his counsel) required by law or judicial order to disclose any confidential or proprietary information, the Executive shall provide the Company or the Employer with prompt notice of any such request or requirement so that the Company or the Employer may seek an appropriate protective order or waiver of the Executive's compliance with the provisions of this Section 5(a). The Executive will not oppose any reasonable action by, and will cooperate with, the Employer to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the confidential or proprietary information. If, failing the entry of a protective order or the receipt of a waiver hereunder, he is, in the opinion of his counsel, compelled by law to disclose a portion of the confidential or proprietary information, the Executive may disclose to the relevant tribunal without liability hereunder only that portion of the confidential or proprietary information which counsel advises the Executive he is legally required to disclose, and each of the parties hereto agrees to exercise such party's best efforts to obtain assurance that confidential treatment will be accorded such confidential or proprietary information. During the Employment Period, and for matters arising from events or circumstances occurring during the Employment Period, the Company and the Employer will provide for the defense of matters arising under this provision. 6. NON-SOLICITATION. The Executive agrees that he shall not, during and for the period commencing on the Effective Date and ending on the date that is one year after the termination of the Employment Period, for any reason whatsoever, either individually or as an officer, director, stockholder, partner, agent or principal of another business firm, induce any executive of the Company, the Employer or any of their affiliates or subsidiaries to terminate such person's employment with the Company, the Employer or such affiliate or subsidiary or hire any executive of the Company, the Employer or any of their affiliates to work with any business affiliated with the Executive, provided, that the provisions of this Section 6 shall not apply in the event that the Company or the Employer materially breaches its obligations under this Agreement. 7. GENERAL PROVISIONS 6 (a) ENFORCEABILITY. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, although the Executive, the Company and the Employer consider the restrictions contained in this Agreement to be reasonable for the purpose of preserving the Employer's goodwill and proprietary right, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. It is expressly understood and agreed that although the Company, the Employer and the Executive consider the restrictions contained in Section 6 to be reasonable, if a final determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is unenforceable against the Executive, the provisions of this Agreement shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. (b) REMEDIES. The parties acknowledge that the Company's and the Employer's damages at law would be an inadequate remedy for the breach by the Executive of any provision of Section 5 or Section 6, and agree in the event of such breach that the Company or the Employer may obtain temporary and permanent injunctive relief restraining the Executive from such breach, and, to the extent permissible under the applicable statutes and rules of procedure, a temporary injunction may be granted immediately upon the commencement of any such suit. Nothing contained herein shall be construed as prohibiting the Company or the Employer from pursuing any other remedies available at law or equity for such breach or threatened breach of Section 5 or Section 6 of this Agreement. (c) WITHHOLDING. The Employer shall withhold such amounts from any compensation or other benefits referred to herein as payable to the Executive on account of payroll and other taxes as may be required by applicable law or regulation of any governmental authority. (d) ASSIGNMENT; BENEFIT. This Agreement is personal in its nature and the parties hereto shall not, without the written consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; PROVIDED that the provisions hereof shall inure to the benefit of, and be binding upon, each successor of the Company and the Employer, whether by merger, consolidation, transfer of all or substantially all of its assets, or otherwise. (e) INDEMNITY. The Company and the Employer hereby agrees to indemnify and hold the Executive harmless consistent with the Employer's policy against any and all liabilities, expenses (including attorney's fees and costs), claims, judgements, fines, and amounts paid in settlement actually and reasonably incurred in 7 connection with any proceeding arising out of the Executive's employment with the Employer (whether civil, criminal, administrative or investigative, other than proceedings by or in the right of the Company or the Employer), if with respect to the actions at issue in the proceeding the Executive acted in good faith and in a manner Executive reasonably believed to be in, or not opposed to, the best interests of the Company and the Employer, and (with respect to any criminal action) Executive had no reason to believe Executive's conduct was unlawful. Said indemnification arrangement shall (i) survive the termination of this Agreement, (ii) apply to any and all qualifying acts of the Executive which have taken place during any period in which he was employed by the Employer, irrespective of the date of this Agreement or the term hereof, including, but not limited to, any and all qualifying acts as an officer and/or director of any affiliate while the Executive is employed by the Employer and (iii) be subject to any limitations imposed from time to time under applicable law. (f) NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, sent by overnight courier, or sent by facsimile (with confirmation of receipt), addressed as follows: If to the Employer: NetGateway 300 Oceangate Long Beach, CA 90802 Attention: Secretary Facsimile: 562-308-0021 With a copy to NetGateway, Inc. 300 Oceangate Long Beach, CA 90802 Attention: General Counsel Facsimile: 562-308-0021 If to the Executive: Craig Gatarz 6123 Maryland Drive Los Angeles, California 90048 Facsimile: 562-308-0021 With a copy to Brock Silverstein LLC One Citicorp Center, 56th Floor 8 New York, New York 10022 Attention: Cynthia D. Mann, Esq. Facsimile: 212-371-5500 or at such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If such notice or communication is mailed, such communication shall be deemed to have been given on the fifth business day following the date on which such communication is posted. (g) DISPUTE RESOLUTION; ATTORNEY'S FEES. The Company, the Employer and the Executive agree that any dispute arising as to the parties' rights and obligations hereunder shall be resolved by binding arbitration before a private judge to be determined by mutually agreeable means. In such event, each of the Company, the Employer and the Executive shall have the right to full discovery. The Executive shall have the right, in addition to any other relief granted by such arbitrator, to attorneys' fees in the event that a claim brought by the Executive is decided in the Executive's favor (with the amount of such fees being limited to those expended defending the claim or claims decided in favor of the Executive). Any judgment by such arbitrator may be entered into any court with jurisdiction over the dispute. (h) ACKNOWLEDGEMENT. Executive acknowledges that he has been advised by Employer to seek the advice of independent counsel prior to reaching agreement with Employer or any of the terms of this Agreement. (i) AMENDMENTS AND WAIVERS. No modification, amendment or waiver, of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by the parties hereto. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. (j) DESCRIPTIVE HEADINGS; CERTAIN INTERPRETATIONS. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (k) COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. This Agreement and the Option Agreement contain the entire agreement among the parties with respect to the transactions contemplated by this Agreement and the Option Agreement and supersede all prior agreements or understandings among the parties with respect to the Executive's employment by the Employer. (l) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA. 9 (m) CONSENT TO JURISDICTION. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT LOCATED IN LOS ANGELES COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND THE EXECUTIVE AGREES NOT TO COMMENCE ANY LEGAL PROCEEDING RELATING THERETO EXCEPT IN SUCH COURT. EACH OF THE COMPANY, THE EMPLOYER AND THE EXECUTIVE IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH HE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. NETGATEWAY, INC. By: --------------------------------- Name: Title: --------------------------------- Craig Gatarz 11 EXHIBIT B GROSS-UP PAYMENT In the event that any payment received by Executive or paid by the Company or the Employer on behalf of Executive under this Agreement or under any other plan, arrangement or agreement with the Company, the Employer or any person whose actions result in a Change in Control (provided that the Company and the Employer approve of the arrangement pursuant to which the payment by such person is made to Executive) or any person affiliated with the Company or the Employer or such person (collectively, the "Total Payments") will be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company or the Employer shall pay to Executive an additional amount (the "Gross-Up Payment") such that the net amount retained or to be retained by Executive, after deduction of any Excise Tax on the Total Payments and on any Federal, state and local income, excise and/or other taxes upon the Gross-Up Payment provided for hereunder, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive, the Total Payments (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay Federal income and other taxes at the highest applicable marginal rate of taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income and other taxes at the highest applicable marginal rate of taxation in the state and locality of Executive's residence on the date the Gross-Up Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes and any other taxes. In the event that the Excise Tax is subsequently determined to be less than the amount originally taken into account hereunder, Executive shall repay to the Company or to the Employer, as the case may be, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and Federal, state and local income and other taxes imposed on the Gross-Up Payment being repaid by Executive to the extent that such repayment results in an actual reduction in Excise Tax and/or a Federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code (provided, however, that if all or any portion of the amount of any repayment made to Executive by any governmental entity shall be made at a higher rate of interest than that provided under Section 1274(b)(2)(B) of the Code (the "Higher Interest Rate Amount"), Executive shall also repay to the Company or to the Employer, as the case may be, interest on the Higher Interest Rate Amount at a rate equal to the excess of such higher rate of interest over the rate provided under Section 1274(b)(2)(B) of the Code). In the event that the Excise Tax is determined to exceed the amount originally taken into account hereunder (including 12 by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company or the Employer, as the case may be, shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions to tax payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined. The parties agree that such excess will be considered to have been finally determined at the conclusion of Internal Revenue Service administrative appellate proceedings, unless the parties mutually agree to pay or settle such amount earlier, or agree to pursue an appeal further. Each of Executive, the Company and the Employer shall reasonably cooperate with each other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. In the event of an audit or other administrative or judicial proceeding relating to or arising from the issue of potential liability for the Excise Tax, the Company shall pay all attorneys' and accountants' fees and other costs reasonably incurred by the Executive in connection with the audit or other proceeding to the extent such fees and costs relate to such liability, provided, that in the case of judicial or administrative proceedings, the Company consents to the pursuit of such proceedings. The Gross-Up Payment payable pursuant hereto shall be payable (or, as applicable, withheld), in whole or in part as applicable, on the earlier of (i) the date the Company or the Employer is required to withhold the Excise Tax pursuant to Section 4999 of the Code, or (ii) the date the Executive is required to pay the Excise Tax. Executive shall notify the Company and the Employer of any audit or review by the Internal Revenue Service of Executive's Federal income tax return for the year in which a payment under this Agreement is made within ten days of Executive's receipt of such audit or review. In addition, Executive shall also notify the Company and the Employer of the final resolution of such audit or review within then days of such resolution. 13 EX-10.6 10 1998 STOCK COMPENSATION PROGRAM Exhibit 10.6 NETGATEWAY, INC. 1998 STOCK COMPENSATION PROGRAM 1. Purpose. This 1998 Stock Compensation Program (the "Program") is intended to secure for NetGateway, Inc.(the "Company"). its subsidiaries, and its stockholders the benefits arising from ownership of the Company's common stock (the "Common Stock") by those selected individuals of the Company and its subsidiaries, who will be responsible for the future growth of such corporations. The Program is designed to help attract and retain superior personnel for positions of substantial responsibility with the Company and its subsidiaries, and to provide individuals with an additional incentive to contribute to the success of the corporations. Nothing contained herein shall be construed to amend or terminate any existing options, whether pursuant to any existing plans or otherwise granted by the Company. 2. Elements of the Program. In order to maintain flexibility in the award of stock benefits, the Program is composed of seven parts. The first part is the Incentive Stock Option Plan (the "Incentive Plan") under which are granted incentive stock options (the "Incentive Options"). The second part is the Non-Qualified Stock Option Plan (the "Nonqualified Plan") under which are granted nonqualified stock options (the "Nonqualified Options"). The third part is the Restricted Share Plan (the "Restricted Plan") under which are granted restricted shares of Common Stock. The fourth part is the Employee Stock Purchase Plan (the "Stock Purchase Plan"). The fifth part is the Non-Employee Director Stock Option Plan (the "Directors Plan") under which grants of options to purchase shares of Common Stock may be made to non-employee directors of the Company. The sixth part is the Stock Appreciation Rights Plan (the "SAR Plan") under which SARs (as defined therein) are granted. The seventh part is the Other Stock Rights Plan (the "Stock Rights Plan") under which (i) units representing the equivalent of shares of Common Stock (the "Performance Shares") are granted; (ii) payments of compensation in the form of shares of Common Stock (the "Stock Payments") are granted; and (iii) rights to receive cash or shares of Common Stock based on the value of dividends paid with respect to a share of Common Stock (the "Dividend Equivalent Rights") are granted. The Incentive Plan, the Nonqualified Plan, the Restricted Plan, the Stock Purchase Plan, the Directors Plan, the SAR Plan and the Stock Rights Plan are included herein as Part I, Part II, Part III, Part IV, Part V, Part VI and Part VII, respectively, and are collectively referred to herein as the "Plans." The grant of an option, SAR or restricted share or rights to purchase shares under one of the Plans shall not be construed to prohibit the grant of an option, SAR or restricted share or rights to purchase shares under any of the other Plans. 3. Applicability of General Provisions. Unless any Plan specifically indicates to the contrary, all Plans shall be subject to the General Provisions of the NETGATEWAY, Inc. 1998 Stock Compensation Program set forth below. 4. Administration of the Plans. The Plans shall be administered, construed. governed, and amended in accordance with their respective terms. GENERAL PROVISIONS OF STOCK COMPENSATION PROGRAM Article I. Administration. The Program shall be administered by the Company's Board of Directors (the "Board"). If an award is to be made to an "Executive Officer" as defined in the Exchange Act (as hereinafter defined), it must be approved if the Company has a class of equity securities registered under Section 12 or 15(d) of the Exchange Act, by the Board or by a committee of the Board, that is composed solely of two or more directors who are "Non-Employee Directors" within the meaning of Rule 16b-3 promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The members of the Board, such committee of the Board or such other persons appointed to administer the Program, when acting to administer the Program, are herein collectively referred to as the "Program Administrators." To the extent permitted under the Exchange Act, the Internal Revenue Code of 1986, as amended (the "Code") or any other applicable law, the Program Administrators, shall have the authority to delegate any and all power and authority to administer and operate the Program hereunder to such person or persons as the Program Administrators deems appropriate which if formed may be referred to by such title specified by the Board. Subject to the foregoing limitations, as applicable, the Board may from time to time remove members from the committee, fill all vacancies on the committee, however caused, and may select one of the members of the committee as its Chairman. The Program Administrators shall hold meetings at such times and places as they may determine and as necessary to approve all grants and other transactions under the Program as required under Rule 16b-3(d) of the Exchange Act, shall keep minutes of their meetings, and shall adopt, amend, and revoke such rules and procedures as they may deem proper with respect to the Program. Any action of the Program Administrators shall be taken by majority vote or the unanimous written consent of the Program Administrators. Article 2. Authority of Program Administrators. Subject to the other provisions of this Program, and with a view to effecting its purpose, the Program Administrators shall have sole authority, in their absolute discretion, (a) to construe and interpret the Program; (b) to define the terms used herein; (c) to determine the individuals to whom options and restricted shares and rights to purchase shares shall be granted under the Program; (d) to determine the time or times at which options and restricted shares or rights to purchase shares shall be granted under the Program; (e) to determine the number of shares subject to each option, restricted share and purchase right, the duration of each option granted under the Program, and the price of any share purchase; (f) to determine all of the other terms and conditions of options and restricted shares and purchase rights granted under the Program; and (g) to make all other determinations necessary or advisable for the administration of the Program and to do everything necessary or appropriate to administer the Program; provided, however, that the Board shall establish the price for all shares issued hereunder. All decisions, determinations, and interpretations made by the Program Administrators shall be binding and conclusive on all participants in the Program (the "Plan Participants") and on their legal representatives, heirs and beneficiaries. Article 3. Maximum Number of Shares Subject to the Program. The maximum aggregate number of shares of Common Stock subject to the Plans shall be 1,000,000 shares. The shares of Common Stock to be issued upon exercise of an option, to the extent exercised for shares of Common Stock, issued as restricted shares or issued upon stock purchases may be authorized but unissued shares, shares issued and reacquired by the Company or shares purchased by the Company on the open market. If any of the options granted under the Program expire or terminate for any reason before they have been exercised in full, the unpurchased shares subject to those expired or terminated options shall cease to reduce the number of shares available for purposes of the Program. If the conditions associated with the grant of restricted shares are not achieved within the period specified for satisfaction of the applicable conditions, or if the restricted share grant terminates for any reason before the date on which the conditions must be satisfied, the shares of Common Stock associated with such restricted shares shall cease to reduce the number of shares available for purposes of the Program. 2 The proceeds received by the Company from the sale of its Common Stock pursuant to the exercise of options, transfer of restricted shares or issuance of stock purchased under the Program, if in the form of cash, shall be added to the Company's general funds and used for general corporate purposes. Article 4. Eligibility and Participation. Officers, employees, directors (whether employee directors or non-employee directors), and independent contractors or agents of the Company or its subsidiaries who are responsible for or contribute to the management, growth or profitability of the business of the Company or its subsidiaries shall be eligible for selection by the Program Administrators to participate in the Program. However, Incentive Options may be granted under the Incentive Plan only to a person who is an employee of the Company or its subsidiaries. An employee may be granted Nonqualified Options under the Program; provided, however, that the grant of Nonqualified Options and Incentive Options to an employee shall be the grant of separate options and each Nonqualified Option and each Incentive Option shall be specifically designated as such in accordance with applicable provisions of the Treasury Regulations. The term "subsidiary" as used herein means any company, other than the Company, in an unbroken chain of companies, beginning with the Company if, at the time of any grant hereunder, each of the companies, other than the last company in the unbroken chain, owns stock possessing more than 50% of the total combined voting power of all classes of stock in one of the other companies in such chain. Article 5. Effective Date and Term of Program. The Restricted Plan, the Nonqualified Plan, the SAR Plan, the Stock Rights Plan and the Directors Plan shall become effective upon their adoption by the Board of Directors of the Company. The Incentive Plan and the Stock Purchase Plan shall become effective upon their adoption by the Board of Directors of the Company subject to approval of the Program by a majority of the voting shares of the Company voting in person or by proxy at a meeting of stockholders, in either case following adoption of the Program by the Board of Directors, which vote shall be taken or consent granted within 12 months of adoption of the Program by the Company's Board of Directors. The Program shall continue in effect for a term of 10 years unless sooner terminated under Article 7 of these General Provisions. Article 6. Adjustments. If the outstanding shares of Common Stock are increased, decreased, changed into, or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares as to which options and restricted shares may be granted under this Program. A corresponding adjustment changing the number and kind of shares allocated to unexercised options, restricted shares, or portions thereof, which shall have been granted prior to any such change, shall likewise be made. Any such adjustment in outstanding options shall be made without change in the aggregate purchase price applicable to the unexercised portion of the option, but with a corresponding adjustment in the price for each share or other unit of and security covered by the option. Article 7. Termination and Amendment of Program. The Program shall terminate 10 years from the date the Program is adopted by the Board of Directors, or, if applicable, the date a particular Plan is approved by the stockholders, whichever is earlier, or shall terminate at such earlier time as the Board of Directors may so determine. No options or restricted shares shall be granted and no stock shall be sold and purchased under the Program after that date. Subject to the limitation contained in Article 8 of these General Provisions, the Program Administrators may at any time amend or revise the terms of the Program, including the form and substance of the option, restricted share and stock purchase agreements to be used hereunder; provided, however, that without approval by the stockholders 3 of the Company representing a majority of the voting power (as contained in Article 5 of these General Provisions) no amendment or revision shall (a) increase the maximum aggregate number of shares that may be sold or distributed pursuant to options granted or stock sold and purchased under Part 1 or Part IV, except as permitted under Article 6 of these General Provisions; (b) change the minimum purchase price for shares under Section 4 of Part I or the Purchase Price for shares under Part IV; (c) increase the maximum term established under Parts I or IV for any option or restricted share; (d) permit the granting of an option, or right to purchase shares under Parts I or IV to anyone other than as provided in Article 4 of the General Provisions; (e) change the term of Parts I or IV described in Article 5 of these General Provisions; or (f) materially increase the benefits accruing to Plan Participants under Parts I or IV of the Program. Article 8. Prior Rights and Obligations. No amendment, suspension, or termination of the Program shall, without the consent of the individual who has received an option or restricted share or who has purchased a specified share or shares under Part IV, alter or impair any of that person's rights or obligations under any option or restricted share granted or shares sold and purchased under the Program prior to that amendment, suspension, or termination. Article 9. Privileges of Stock Ownership. Notwithstanding the exercise of any option granted pursuant to the terms of this Program, the achievement of any conditions specified in any restricted share granted pursuant to the terms of this Program or the election to purchase any shares pursuant to the terms of this Program, no individual shall have any of the rights or privileges of a stockholder of the Company in respect of any shares of stock issuable upon the exercise of his or her option, the satisfaction of his or her restricted share conditions or the sale, purchase and issuance of such purchased shares until certificates representing the shares have been issued and delivered. No shares shall be required to be issued and delivered upon exercise of any option, satisfaction of any conditions with respect to a restricted share or a purchaser under Part IV unless and until all of the requirements of law and of all regulatory agencies having jurisdiction over the issuance and delivery of the securities shall have been fully complied with. Article 10. Reservation of Shares of Common Stock. The Company, during the term of this Program, will at all times reserve and keep available such number of shares of its Common Stock as shall be sufficient to satisfy the requirements of the Program. In addition, the Company will from time to time, as is necessary to accomplish the purposes of this Program, seek or obtain from any regulatory agency having jurisdiction any requisite authority in order to issue and sell shares of Common Stock hereunder. The inability of the Company to obtain from any regulatory agency having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares of its stock hereunder shall relieve the Company of any liability in respect of the nonissuance or sale of the stock as to which the requisite authority shall not have been obtained. Article 11. Tax Withholding. The exercise of any option or restricted share granted or the sale and issuance of any shares to be purchased under this Program are subject to the condition that if at any time the Company shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in connection with, such exercise or the delivery or purchase of shares pursuant thereto, then in such event, the exercise of the option or restricted share or the sale and issuance of any shares to be purchased shall not be effective unless such withholding shall have been effected or obtained in a manner acceptable to the Company. At the Company's sole and complete discretion, the Company may, from time to time, accept shares of the Company's stock subject to one of the Plans as the source of payment for such liabilities. Article 12. Compliance with Law. It is the express intent of the Company that this Program complies in all respect with all applicable provisions of state and federal law, including without limitation Section 25102(o) of the California Corporations Code to the extent such Section is applicable 4 to the Company. It is the express intent of the Company that when the Company becomes publicly-traded that this Program shall comply in all respects with applicable provisions of the Rule 16b-3 or Rule 16a-1(c)(3) under the Exchange Act in connection with any grant of awards to, or other transaction by, a Plan Participant who is subject to Section 16 of the Exchange Act (except for transactions exempted under alternative Exchange Act Rules). Accordingly, if any provision of the Program or any agreement relating to any award thereunder does not comply with Rule 16b-3 or Rule 16a-1(c)(3) as then applicable to any such transaction, such provision will be construed or deemed amended to the extent necessary to conform to the applicable requirements of Rule 16b-3 or Rule 16a-1(c)(3) so that such Plan Participant shall avoid liability under Section 16(b). Unless otherwise provided in any grant or aware to any person who is or may thereafter be subject to Section 16 of the Exchange Act the approval of shall include the approval of the disposition of the Company of Company equity securities for the purposes of satisfying the payment of the exercise or purchase price or tax withholding obligations related to such grant or award within the meaning of Section 16b-3(e). Article 13. Performance-Based Awards. (a) Each agreement for the grant of Performance Shares shall specify the number of Performance Shares subject to such agreement, the Performance Period and the Performance Objective (each as defined below), and each agreement for the grant of any other award that the Program Administrators determine to make subject to a Performance Objective similarly shall specify the applicable number of shares of Common Stock, the period for measuring performance and the Performance Objective. As used herein, "Performance Objective" means a performance objective specified in the agreement for a Performance Share, or for any other award which the Program Administrators determine to make subject to a Performance Objective, upon which the vesting or settlement of such award is conditioned and "Performance Period" means the period of time specified in an agreement over which Performance Shares, or another award which the Program Administrators determine to make subject to a Performance Objective, are to be earned. Each agreement for a performance-based grant shall specify in respect of a Performance Objective the minimum level of performance below which no payment will be made, shall describe the method for determining the amount of any payment to be made if performance is at or above the minimum acceptable level, but falls short of full achievement of the Performance Objective, and shall specify the maximum percentage payout under the agreement. Such maximum percentage in no event shall exceed one hundred percent (100%) in the case of performance-based restricted shares and two hundred percent (200%) in the case of Performance Shares or performance-based Dividend Equivalent Rights. (b) The Program Administrators shall determine and specify, in their discretion, the Performance Objective in the agreement for a Performance Share or for any other performance-based award, which Performance Objective shall consist of: (i) one or more business criteria, including (except as limited under subparagraph (c) below for awards to Covered Employees (as defined below)) financial, service level and individual performance criteria: and (ii) a targeted level or levels of performance with respect to such criteria. Performance Objectives may differ between Plan Participants and between types of awards from year to year. (c) The Performance Objective for Performance Shares and any other performance-based award granted to a Covered Employee, if deemed appropriate by the Program Administrators, shall be objective and shall otherwise meet the requirements of Section 162(m)(4)(C) of the Code, and shall be based upon one or more of the following performance-based business criteria, either on a business unit or Company-specific basis or in comparison with peer group performance: net sales; gross sales; return on net assets; return on assets; return on equity; return on capital: return on revenues; cash flow; book value; share price performance (including Options and SARs tied solely to appreciation in the Fair Market Value of the shares); earnings per share; stock price earnings ratio; earnings before interest, taxes, depreciation and amortization expenses ("EBITDA"); earnings before interest and taxes ("EBIT"); or EBITDA, EBIT or earnings before taxes and unusual or nonrecurring 5 items as measured either against the annual budget or as a ratio to revenue. Achievement of any such Performance Objective shall be measured over a period of years not to exceed ten (10) as specified by the Program Administrators in the agreement for the performance-based award. No business criterion other than those named above in this Article 13(c) may be used in establishing the Performance Objective for an award to a Covered Employee under this Article 13. For each such award relating to a Covered Employee, the Program Administrators shall establish the targeted level or levels of performance for each such business criterion. The Program Administrators may, in their discretion, reduce the amount of a payout otherwise to be made in connection with an award under this Article 13(c), but may not exercise discretion to increase such amount, and the Program Administrators may consider other performance criteria in exercising such discretion. All determinations by the Program Administrators as to the achievement of Performance Objectives under this Article 13(c) shall be made in writing. The Program Administrators may not delegate any responsibility under this Article 13(c). As used herein, "Covered Employee" shall mean, with respect to any grant of an award, an executive of the Company or any subsidiary who is a member of the executive compensation group under the Company's compensation practices (not necessarily an executive officer) whom the Program Administrators deem may be or become a covered employee as defined in Section 162(m)(3) of the Code for any year that such award may result in remuneration over $1 million which would not be deductible under Section 162(m) of the Code but for the provisions of the Program and any other "qualified performance-based compensation" plan (as defined under Section 162(m) of the Code) of the Company; provided however, that the Program Administrators may determine that a Plan Participant has ceased to be a Covered Employee prior to the settlement of any award. (d) The Program Administrators, in their sole discretion, may require that one or more award agreements contain provisions which provide that, in the event Section 162(m) of the Code, or any successor provision relating to excessive employee remuneration, would operate to disallow a deduction by the Company with respect to all or part of any award under the Program, a Plan Participant's receipt of the benefit relating to such award that would not be deductible by the Company shall be deferred until the next succeeding year or years in which the Plan Participant's remuneration does not exceed the limit set forth in such provisions of the Code. Article 14. Death Beneficiaries. In the event of a Plan Participant's death, all of such person's outstanding awards, including his or her rights to receive any accrued but unpaid Stock Payments, will transfer to the maximum extent permitted by law to such person's beneficiary (except to the extent a permitted transfer of a Nonqualified Option or SAR was previously made pursuant hereto). Each Plan Participant may name, from time to time, any beneficiary or beneficiaries (which may be named contingently or successively) as his or her beneficiary for purposes of this Program. Each designation shall be on a form prescribed by the Program Administrators, will be effective only when delivered to the Company, and when effective will revoke all prior designations by the Plan Participant. If a Plan Participant dies with no such beneficiary designation in effect, such person's beneficiary shall be his or her estate and such person's awards will be transferable by will or pursuant to laws of descent and distribution applicable to such person. Article 15. Unfunded Program. The Program shall be unfunded and the Company shall not be required to segregate any assets that may at any time be represented by awards under the Program. Neither the Company, its affiliates, the Program Administrators, nor the Board shall be deemed to be a trustee of any amounts to be paid under the Program nor shall anything contained in the Program or any action taken pursuant to its provisions create or be construed to create a fiduciary relationship between any such party and a Plan Participant or anyone claiming on his or her behalf. To the extent a Plan Participant or any other person acquires a right to receive payment pursuant to an award under the Program, such right shall be no greater than the right of an unsecured general creditor of the Company. Article 16. Choice of Law and Venue. The Program and all related documents shall 6 be governed by, and construed in accordance with, the laws of the State of California. Acceptance of an award shall be deemed to constitute consent to the jurisdiction and venue of the state and federal courts located in Los Angeles County, State of California for all purposes in connection with any suit, action or other proceeding relating to such award, including the enforcement of any rights under the Program or any agreement or other document, and shall be deemed to constitute consent to any process or notice of motion in connection with such proceeding being served by certified or registered mail or personal service within or without the State of California, provided a reasonable time for appearance is allowed. Article 17. Arbitration. Any disputes involving the Program will be resolved by arbitration in Los Angeles County, California before one (1) arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Article 18. Program Administrators' Right. Except as may be provided in an award agreement, the Program Administrators may, in their discretion, waive any restrictions or conditions applicable to, or accelerate the vesting of, any award (other than the right to purchase shares pursuant to the Stock Purchase Plan). Article 19. Termination of Benefits Under Certain Conditions. The Program Administrators, in their sole discretion, may cancel any unexpired, unpaid or deferred award (other than a right to purchase shares pursuant to the Stock Purchase Plan) at any time if the Plan Participant is not in compliance with all applicable provisions of the Program or any award agreement or if the Plan Participant, whether or not he or she is currently employed by the Company or one of its subsidiaries, acts in a manner contrary to the best interests of the Company and its subsidiaries. Article 20. Conflicts in Program. In case of any conflict in the terms of the Program, or between the Program and an award agreement, the provisions in the Program which specifically grant such award shall control, and the provisions in the Program shall control over the provisions in any award agreement. Article 21. Optional Deferral. The right to receive any award under the Program (other than the right to purchase shares pursuant to the Stock Purchase Plan) may, at the request of the Plan Participant, be deferred to such period and upon such terms and conditions as the Program Administrators shall, in their discretion, determine, which may include crediting of interest on deferrals of cash and crediting of dividends on deferrals denominated in shares of Common Stock. Article 22. Information to Plan Participants. To the extent required by applicable law, the Company shall provide Plan Participants with the Company's financial statements at least annually. Article 23. Company Repurchase Rights. Upon the discontinuance of employment or service by any Plan Participant by resignation of such Plan Participant, termination of employment by the Company or for any reason, with or without cause (the "Termination"), the Company may elect, but is not obligated to, repurchase all or any portion of the securities issued to such Plan Participant hereunder. If the Company exercises its right to make such a repurchase, the Company shall promptly notify the Plan Participant in writing and repurchase the securities for cash within ninety (90) days of Termination (or in the case of securities issued after Termination, within ninety (90) days after the date of any such exercise). The repurchase price for the securities shall be equal to the fair market value of the securities (as determined by the Program Administrators) on the date of Termination. The Company's repurchase rights shall terminate when the Company's securities become publicly traded. Article 24. Lock-Up. To the extent requested by any managing underwriter to the Company, the Plan Participants shall enter into such market lock-up, escrow or other agreements as may be requested by such underwriter in connection with any public offering of the Company's securities. 7 PART I NETGATEWAY, INC. INCENTIVE STOCK OPTION PLAN Section 1. Purpose. The purpose of this NetGateway, Inc. Incentive Stock Option Plan (the "Incentive Plan") is to promote the growth and general prosperity of the Company by permitting the Company to grant options to purchase shares of its Common Stock. The Incentive Plan is designed to help attract and retain superior personnel for positions of substantial responsibility with the Company and its subsidiaries, and to provide individuals with an additional incentive to contribute to the success of the Company. The Company intends that options granted pursuant to the provisions of the Incentive Plan will qualify as "incentive stock options" within the meaning of Section 422 of the Code. This Incentive Plan is Part I of the Program. Unless any provision herein indicates to the contrary, this Incentive Plan shall be subject to the General Provisions of the Program. Section 2. Maximum Number of Shares. Option Terms and Conditions. The maximum aggregate number of shares of Common Stock subject to the Incentive Plan should be 1,000,000. The terms and conditions of options granted under the Incentive Plan may differ from one another as the Program Administrators shall, in its discretion, determine as long as all options granted under the Incentive Plan satisfy the requirements of the Incentive Plan. Section 3. Duration of Options. Each option and all rights thereunder granted pursuant to the terms of the Incentive Plan shall expire on the date determined by the Program Administrators, but in no event shall any option granted under the Incentive Plan expire later than ten (10) years from the date on which the option is granted. However, notwithstanding the above portion of this Section 3, if at the time the option is granted the grantee (the "Optionee") owns or would be considered to own by reason of Code Section 424(d) more than 10% of the total combined voting power of all classes of stock of the Company or its subsidiaries, such option shall expire not more than 5 years from the date the option is granted. In addition, each option shall be subject to early termination as provided in the Incentive Plan. Section 4. Purchase Price. The purchase price for shares acquired pursuant to the exercise, in whole or in part, of any option shall not be less than the fair market value of the shares at the time of the grant of the option. Fair market value (the "Fair Market Value") shall be determined by the Program Administrators on the basis of such factors as they deem appropriate; provided, however, that Fair Market Value on any day shall be deemed to be, if the Common Stock is traded on a national securities exchange, the closing price (or, if no reported sale takes place on such day, the mean of the reported bid and asked prices) of the Common Stock on such day on the principal such exchange, or, if the stock is included on the composite tape, the composite tape. In each case, the Program Administrators' determination of Fair Market Value shall be conclusive. Notwithstanding the above portion of this Section 4, if at the time an option is granted the Optionee owns or would be considered to own by reason of Code Section 424(d) more than 10% of the total combined voting power of all classes of stock of the Company or its subsidiaries, the purchase price of the shares covered by such option shall not be less than 110% of the Fair Market Value of a share of Common Stock on the date the option is granted. Section 5. Maximum Amount of Options Exercisable in Any Calendar Year. Notwithstanding any other provision of this Incentive Plan, the aggregate Fair Market Value (determined at the time any Incentive Stock Option is granted) of the Common Stock with respect to which Incentive Stock Options become exercisable for the first time by any employee during any calendar year under all stock option plans of the Company and its subsidiaries shall not exceed $100.000. 8 Section 6. Exercise of Options. Each option shall be exercisable in one or more installments during its term as determined by the Program Administrators, and the right to exercise may be cumulative as determined by the Program Administrators. Each option shall be exercisable at a rate of at least twenty percent (20%) per year over five (5) years from the date the option is granted, subject to such reasonable conditions as determined by the Program Administrators. No option may be exercised for a fraction of a share of Common Stock. The purchase price of any shares purchased shall be paid in full in cash or by certified or cashier's check payable to the order of the Company or by shares of Common Stock, if permitted by the Program Administrators, or by a combination of cash, check, or shares of Common Stock, at the time of exercise of the option. If any portion of the purchase price is paid in shares of Common Stock, those shares shall be tendered at their then Fair Market Value as determined by the Program Administrators in accordance with Section 4 of this Incentive Plan. Payment in shares of Common Stock includes the automatic application of shares of Common Stock received upon exercise of an option to satisfy the exercise price for additional options. Section 7. Reorganization. In the event of the dissolution or liquidation of the Company, any option granted under the Incentive Plan shall terminate as of a date to be fixed by the Program Administrators; provided that not less than 30 days' written notice of the date so fixed shall be given to each Optionee and each such Optionee shall have the right during such period (unless such option shall have previously expired) to exercise any option, including any option that would not otherwise be exercisable by reason of an insufficient lapse of time. In the event of a Reorganization (as defined below) in which the Company is not the surviving or acquiring company, or in which the Company is or becomes a subsidiary of another company after the effective date of the Reorganization, then: (a) if there is no plan or agreement respecting the Reorganization (the "Reorganization Agreement") or if the Reorganization Agreement does not specifically provide for the change, conversion or exchange of the outstanding options for options of another corporation, then exercise and termination provisions equivalent to those described in this Section 7 shall apply; or (b) if there is a Reorganization Agreement and if the Reorganization Agreement specifically provides for the change, conversion, or exchange of the outstanding options for options of another corporation, then the Program Administrators shall adjust the outstanding unexercised options (and shall adjust the options remaining under the Incentive Plan which have not yet been granted if the Reorganization Agreement makes specific provision for such an adjustment) in a manner consistent with the applicable provisions of the Reorganization Agreement. The term "Reorganization" as used in this Section 7 shall mean any statutory merger, statutory consolidation, sale of all or substantially all of the assets of the Company or a sale of the Common Stock pursuant to which the Company is or becomes a subsidiary of another company after the effective date of the Reorganization. Adjustments and determinations under this Section 7 shall be made by the Program Administrators, whose decisions as to such adjustments or determinations shall be final, binding, and conclusive. Section 8. Written Notice Required. Any option granted pursuant to the terms of the Incentive Plan shall be exercised when written notice of that exercise has been given to the Company at its principal office by the person entitled to exercise the option and full payment for the shares with respect to which the option is exercised, together with payment of applicable income taxes, has been received by the Company. 9 Section 9. Compliance with Securities Laws. Shares shall not be issued with respect to any option granted under the Incentive Plan, unless the exercise of that option and the issuance and delivery of the shares pursuant to that exercise shall comply with all applicable provisions of foreign, state and federal law including, without limitation, the Securities Act of 1933, as amended, and the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require an Optionee to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restriction imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Optionee shall consent to the imposition of a legend on the shares of Common Stock subject to his or her Option and the imposition of stop-transfer instructions restricting their transferability as required by law or by this Section 9. Section 10. Employment of Optionee. Each Optionee, if requested by the Program Administrators, must agree in writing as a condition of receiving his or her option, that he or she will remain in the employment of the Company or its subsidiary corporations following the date of the granting of that option for a period specified by the Program Administrators. Nothing in the Incentive Plan or in any option granted hereunder shall confer upon any Optionee any right to continued employment by the Company or its subsidiary corporations or limit in any way the right of the Company or its subsidiary corporations at any time to terminate or alter the terms of that employment. Section 11. Option Rights Upon Termination of Employment. If an Optionee ceases to be employed by the Company or any subsidiary corporation for any reason other than death or disability, his or her option shall immediately terminate; provided, however, that the Program Administrators may, in their sole and absolute discretion, allow the option to be exercised (to the extent exercisable on the date of termination of employment) at any time within sixty (60) days after the date of termination of employment, unless either the option or the Incentive Plan otherwise provides for earlier termination. Section 12. Option Rights Upon Disability. If an Optionee becomes disabled within the meaning of Code Section 422(e)(3) while employed by the Company or any subsidiary corporation, the Program Administrators, in their discretion, may allow the option to be exercised, to the extent exercisable on the date of termination of employment, at any time within one year after the date of termination of employment due to disability, unless either the option or the Incentive Plan otherwise provides for earlier termination. Section 13. Option Rights Upon Death of Optionee. Except as otherwise limited by the Program Administrators at the time of the grant of an option, if an Optionee dies while employed by the Company or any subsidiary corporation, his or her Option shall expire one year after the date of death unless by its terms it expires sooner. During this one year or shorter period, the option may be exercised, to the extent that it remains unexercised on the date of death, by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution, but only to the extent that the Optionee is entitled to exercise the option at the date of death. Section 14. Options Not Transferable. Options granted pursuant to the terms of the Incentive Plan may not be sold, pledged, assigned, or transferred in any manner otherwise than by will or the laws of descent or distribution and may be exercised during the lifetime of an Optionee only by that Optionee. No such options shall be pledged or hypothecated in any way nor shall they be subject to execution, attachment, or similar process. Section 15. Adjustments to Number and Purchase Price of Optioned Shares. All 10 options granted pursuant to the terms of this Incentive Plan shall be adjusted in the manner prescribed by Article 6 of the General Provisions of this Program. 11 NETGATEWAY, INC., INCENTIVE STOCK OPTION PLAN GRANT OF OPTION Date of Grant: ____________________, ___ THIS GRANT, dated as of the date of grant first stated above (the "Date of Grant"), is delivered by, NETGATEWAY, INC., a Nevada corporation (the "Company") to ________________ (the "Grantee"), who is an employee of the Company or one of its subsidiaries (the Grantee's employer is sometimes referred to herein as the "Employer"). WHEREAS, the Board of Directors of the Company (the "Board") on July 1, 1998, adopted, with subsequent stockholder approval, the NETGATEWAY, INC., Incentive Stock Option Plan (the "Plan"); WHEREAS, the Plan provides for the granting of incentive stock options by the Board or Program Administrators to employees of the Company or any subsidiary of the Company to purchase, or to exercise certain rights with respect to, shares of the Common Stock of the Company, no par value (the "Stock"), in accordance with the terms and provisions thereof; and WHEREAS, the Program Administrators consider the Grantee to be a person who is eligible for a grant of incentive stock options under the Plan, and has determined that it would be in the best interest of the Company to grant the incentive stock options documented herein. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Grant of Option. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Program Administrators, hereby grants to the Grantee, as of the Date of Grant, an option to purchase up to ______ shares of Stock at a price of $______ per share, the fair market value (or, with respect to 10% stockholders, 110% of fair market value). Such option is hereinafter referred to as the "Option" and the shares of stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." The Option is intended by the parties hereto to be, and shall be treated as, an incentive stock option (as such term is defined under Section 422 of the Internal Revenue Code of 1986). 2. Installment Exercise. Subject to such further limitations as are provided herein, the Option shall become exercisable in ____________ installments, the Grantee having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion as determined by the Program Administrators: ______________________ 3. Termination of Option. (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ______ years from the Date of Grant (the "Option Term" [no more than 10 years from Date of Grant or, in the case of a 10% owner, no more than 5 years from Date of Grant]). 12 (b) Upon the occurrence of the Grantee's ceasing for any reason to be employed by the Employer (such occurrence being a "termination of the Grantee's employment"), the Option, to the extent not previously exercised, shall terminate and become null and void immediately upon such termination of the Grantee's employment, except in a case where the Program Administrators may otherwise determine in its sole and absolute discretion for up to sixty (60) days following the termination of employment. As determined by the Program Administrators, upon a termination of the Grantee's employment by reason of disability or death, the Option may be exercised, but only to the extent that the Option was outstanding and exercisable on such date of disability or death, up to a one-year period following the date of such termination of the Grantee's employment. (c) In the event of the death of the Grantee, the Option may be exercised by the Grantee's legal representative, but only to the extent that the option would otherwise have been exercisable by the Grantee. (d) A transfer of the Grantee's employment between the Company and any subsidiary of the Company, or between any subsidiaries of the Company, shall not be deemed to be a termination of the Grantee's employment. 4. Exercise of Options. (a) The Grantee may exercise the option with respect to all or any part of the number of option Shares then exercisable hereunder by giving the Secretary of the Company written notice of intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised and the date of exercise thereof. (b) Full payment (in U.S. dollars) by the Grantee of the option price for the Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise in cash, or, with the prior written consent of the Program Administrators, in whole or in part through the surrender of shares of Stock at their fair market value on the exercise date. The Grantee shall also pay any required income tax withholding taxes which may be payable in U.S. dollars or Option shares if acceptable to the Company. (c) On the exercise date specified in the Grantee's notice or as soon thereafter as is practicable, the Company shall cause to be delivered to the Grantee, a certificate or certificates for the option Shares then being purchased (out of theretofore unissued stock or reacquired Stock, as the Company may elect) upon full payment for such option Shares. However, if (i) the Grantee is subject to Section 16 of the Securities Exchange Act of 1934 and (ii) the Grantee exercises the Option before six months have passed from the Date of Grant, the Company shall be permitted to hold in its custody any stock certificate arising from such exercise until six months has passed from the Date of Grant. The obligation of the Company to deliver Stock shall, however, be subject to the condition that if at any time the Program Administrators shall determine in its discretion that the listing, registration or qualification of the Option or the Option Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of Stock thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Program Administrators. (d) If the Grantee fails to pay for any of the Option Shares specified in such notice or fails to accept delivery thereof, the Grantee's right to purchase such Option Shares may be terminated by the Company. The date specified in the Grantee's notice as the date of exercise shall be deemed the date of exercise of the Option, provided that payment in full for the Option Shares to be purchased upon such exercise shall have been received by such date. 13 5. Adjustment of and Changes in Stock of the Company. In the event of a reorganization, recapitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or shares of capital stock of the Company, the Program Administrators shall make such adjustment as may be required under the applicable reorganization agreement in the number and kind of shares of Stock subject to the Option or in the option price; provided, however, that no such adjustment shall give the Grantee any additional benefits under the Option. If there is no provision for the treatment of the Option under an applicable reorganization agreement, the Option may terminate on a date determined by the Program Administrators following at least 30 days written notice to the Grantee. 6. Fair Market Value. As used herein, the "fair market value" of a share of Stock shall be determined by the Board. However, if the Stock is publicly-traded, fair market value of a share of Stock shall be based upon the closing or other appropriate trading price per share of Stock on a national securities exchange. 7. No Rights of Stockholders. Neither the Grantee nor any personal representative shall be, or shall have any of the rights and privileges of, a stockholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 8. Non-Transferability of Option. During the Grantee's lifetime, the Option hereunder shall be exercisable only by the Grantee or any guardian or legal representative of the Grantee, and the option shall not be transferable except, in case of the death of the Grantee, by will or the laws of descent and distribution, nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by the Grantee to alienate, assign, pledge, hypothecate or otherwise dispose of the option, except as provided for herein, or (b) the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Grantee and it shall thereupon become null and void. 9. Restriction on Exercise. The Option may not be exercised if the issuance of the Option Shares upon such exercise would constitute a violation of any applicable federal or State securities or other law or valid regulation. As a condition to the exercise of the Option, the Company may require the Grantee exercising the Option to make any representation or warranty to the Company as may be required by any applicable law or regulation and, specifically, may require the Grantee to provide evidence satisfactory to the Company that the Option Shares are being acquired only for investment purposes and without any present intention to sell or distribute the shares in violation of any federal or State securities or other law or valid regulation. 10. Employment Not Affected. The granting of the option or its exercise shall not be construed as granting to the Grantee any right with respect to continuance of employment of the Employer. Except as may otherwise be limited by a written agreement between the Employer and the Grantee, the right of the Employer to terminate at will the Grantee's employment with it at any time (whether by dismissal, discharge, retirement or otherwise) is specifically reserved by the Company, as the Employer or on behalf of the Employer 14 (whichever the case may be), and acknowledged by the Grantee. 11. Amendment of Option. The Option may be amended by the Program Administrators at any time (i) if the Program Administrators determine, in their sole discretion, that amendment is necessary or advisable in the light of any addition to or change in the Internal Revenue Code of 1986 or in the regulations issued thereunder, or any federal or state securities law or other law or regulation, which change occurs after the Date of Grant and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i), with the consent of the Grantee. 12. Notice. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or by certified mail, return receipt requested, as follows: To Employer: NETGATEWAY, INC. 300 Oceangate, Suite 500 Long Beach, California 90802 To Grantee: _________________________________ _________________________________ _________________________________ _________________________________ 13. Incorporation of Plan by Reference. The Option is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the option shall in all respects be interpreted in accordance with the Plan. The Program Administrators shall interpret and construe the Plan and this instrument, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. 14. Governing Law. The validity, construction, interpretation and effect of this instrument shall exclusively be governed by and determined in accordance with the law of the State of California, except to the extent preempted by federal law, which shall to the extent govern. 15 IN WITNESS WHEREOF, the Company has caused its duly authorized officers to execute this Grant of Option, and to apply the corporate seal hereto, and the Grantee has placed his or her signature hereon, effective as of the Date of Grant. NETGATEWAY, INC. By: ______________________________ Name: Title: ACCEPTED AND AGREED TO: __________________________________ [Grantee] By: ______________________________ Name: Title: 16 PART II NETGATEWAY, INC. NON-QUALIFIED STOCK OPTION PLAN Section 1. Purpose. The purpose of this NETGATEWAY, INC., Non-Qualified Stock Option Plan (the "Nonqualified Plan") is to permit the Company to grant options to purchase shares of its Common Stock. The Nonqualified Plan is designed to help attract and retain superior personnel for positions of substantial responsibility with the Company and its subsidiaries, and to provide individuals with an additional incentive to contribute to the success of the Company. Any option granted pursuant to the Nonqualified Plan shall be clearly and specifically designated as not being an incentive stock option, as defined in Section 422 of the Code. This Nonqualified Plan is Part II of the Program. Unless any provision herein indicates to the contrary, the Nonqualified Plan shall be subject to the General Provisions of the Program. Section 2. Option Terms and Conditions. The terms and conditions of options granted under the Nonqualified Plan may differ from one another as the Program Administrators shall in their discretion determine as long as all options granted under the Nonqualified Plan satisfy the requirements of the Nonqualified Plan. Section 3. Duration of Options. Each option and all rights thereunder granted pursuant to the terms of the Nonqualified Plan shall expire on the date determined by the Program Administrators, but in no event shall any option granted under the Nonqualified Plan expire later than ten (10) years from the date on which the option is granted. In addition, each option shall be subject to early termination as provided in the Nonqualified Plan. Section 4. Purchase Price. The purchase price for shares acquired pursuant to the exercise, in whole or in part, of any option shall not be less than the fair market value of the shares at the time of the grant of the option. Fair market value (the "Fair Market Value") shall be determined by the Program Administrators on the basis of such factors as they deem appropriate; provided, however, that Fair Market Value on any day shall be deemed to be, if the Common Stock is traded on a national securities exchange, the closing price (or, if no reported sale takes place on such day, the mean of the reported bid and asked prices) of the Common Stock on such day on the principal such exchange, or, if the stock is included on the composite tape, the composite tape. In each case, the Program Administrators' determination of Fair Market Value shall be conclusive. Section 5. Exercise of Options. Each option shall be exercisable in one or more installments during its term and the right to exercise may be cumulative as determined by the Program Administrators. Each option shall be exercisable a rate of at least twenty percent (20%) per year over five (5) years from the date the option is granted, subject to such reasonable conditions as determined by the Program Administrators. No option may be exercised for a fraction of a share of Common Stock. The purchase price of any shares purchased shall be paid in full in cash or by certified or cashier's check payable to the order of the Company or by shares of Common Stock, if permitted by the Program Administrators, or by a combination of cash, check, or shares of Common Stock, at the time of exercise of the option. If any portion of the purchase price is paid in shares of Common Stock, those shares shall be tendered at their then Fair Market Value as determined by the Program Administrators in accordance with Section 4 of the Nonqualified Plan. Payment in shares of Common Stock includes the automatic application of shares of Common Stock received upon exercise of an option to satisfy the exercise price for additional options. Section 6. Reorganization. In the event of the dissolution or liquidation of the Company, any option granted under the Nonqualified Plan shall terminate as of a date to be fixed by the Program Administrators; provided that not less than 30 days' written notice of the date so fixed shall be 17 given to each Optionee and each such Optionee shall have the right during such period (unless such option shall have previously expired) to exercise any option, including any option that would not otherwise be exercisable by reason of an insufficient lapse of time. In the event of a Reorganization (as defined below) in which the Company is not the surviving or acquiring company, or in which the Company is or becomes a subsidiary of another company after the effective date of the Reorganization, then: a. if there is no plan or agreement respecting the Reorganization ("Reorganization Agreement") or if the Reorganization Agreement does not specifically provide for the change, conversion or exchange of the outstanding options for options of another corporation, then exercise and termination provisions equivalent to those described in this Section 6 shall apply; or (b) if there is a Reorganization Agreement and if the Reorganization Agreement specifically provides for the change, conversion, or exchange of the outstanding options for options of another corporation, then the Program Administrators shall adjust the outstanding unexercised options (and shall adjust the options remaining under the Nonqualified Plan which have not yet been granted if the Reorganization Agreement makes specific provision for such an adjustment) in a manner consistent with the applicable provisions of the Reorganization Agreement. The term "Reorganization" as used in this Section 6 shall mean any statutory merger, statutory consolidation, sale of all or substantially all of the assets of the Company or a sale of the Common Stock pursuant to which the Company is or becomes a subsidiary of another company after the effective date of the Reorganization. Adjustments and determinations under this Section 6 shall be made by the Program Administrators, whose decisions as to such adjustments or determinations shall be final, binding, and conclusive. Section 7. Written Notice Required. Any option granted pursuant to the terms of this Nonqualified Plan shall be exercised when written notice of that exercise has been given to the Company at its principal office by the person entitled to exercise the option and full payment for the shares with respect to which the option is exercised has been received by the Company. Section 8. Compliance with Securities Laws. Shares shall not be issued with respect to any option granted under the Nonqualified Plan, unless the exercise of that option and the issuance and delivery of the shares pursuant thereto shall comply with all applicable provisions of foreign, state and federal law, including, without limitation, the Securities Act of 1933, as amended, and the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require an Optionee to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment purposes and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Optionee shall consent to the imposition of a legend on the shares of Common Stock subject to his or her option and the imposition of stop-transfer instructions restricting their transferability as required by law or by this Section 8. Section 9. Continued Employment or Service. Each Optionee, if requested by the Program Administrators, must agree in writing as a condition of receiving his or her Option, to remain in 18 the employment of, or service to, the Company or any of its subsidiaries following the date of the granting of that option for a period specified by the Program Administrators. Nothing in this Nonqualified Plan or in any option granted hereunder shall confer upon any Optionee any right to continued employment by, or service to, the Company or any of its subsidiaries, or limit in any way the right of the Company or any subsidiary at any time to terminate or alter the terms of that employment or service arrangement. Section 10. Option Rights Upon Termination of Employment or Service. If an Optionee under this Nonqualified Plan ceases to be employed by, or provide services to, the Company or any of its subsidiaries for any reason other than death or disability, his or her option shall immediately terminate; provided, however, that the Program Administrators may, in their sole and absolute discretion, allow the option to be exercised, to the extent exercisable on the date of termination of employment or service, at any time within sixty (60) days after the date of termination of employment or service, unless either the option or this Nonqualified Plan otherwise provides for earlier termination. Section 11. Option Rights Upon Disability. If an Optionee becomes disabled within the meaning of Code Section 422(e)(3) while employed by the Company or any subsidiary corporation, the Program Administrators, in their discretion, may allow the option to be exercised, to the extent exercisable on the date of termination of employment, at any time within one year after the date of termination of employment due to disability, unless either the option or the Nonqualified Plan otherwise provides for earlier termination. Section 12. Option Rights Upon Death of Optionee. Except as otherwise limited by the Program Administrators at the time of the grant of an option, if an Optionee dies while employed by, or providing services to, the Company or any of its subsidiaries, his or her option shall expire one year after the date of death unless by its terms it expires sooner. During this one year or shorter period, the option may be exercised, to the extent that it remains unexercised on the date of death, by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution, but only to the extent that the Optionee is entitled to exercise the option at the date of death. Section 13. Options Not Transferable. Options granted pursuant to the terms of this Nonqualified Plan may not be sold, pledged, assigned, or transferred in any manner otherwise than by will or the laws of descent or distribution and may be exercised during the lifetime of an Optionee only by that Optionee. No such options shall be pledged or hypothecated in any way nor shall they be subject to execution, attachment, or similar process. Section 14. Adjustments to Number and Purchase Price of Optioned Shares. All options granted pursuant to the terms of this Nonqualified Plan shall be adjusted in a manner prescribed by Article 6 of the General Provisions of the Program. 19 NETGATEWAY, INC. NON-QUALIFIED STOCK OPTION PLAN GRANT OF OPTION Date of Grant: ____________, ____ THIS GRANT, dated as of the date of grant first stated above (the "Date of Grant"), is delivered by NETGATEWAY, INC., a Nevada corporation (the "Company"), to ___________________ (the "Grantee"), who is a employee or non-employee of the Company or one of its subsidiaries (the Grantee's employer is sometimes referred to herein as the ("Employer"). WHEREAS, the Board of Directors of the Company (the "Board") on July 1, 1998, adopted the NETGATEWAY, INC., Non-Qualified Stock Option Plan (the "Plan"); WHEREAS, the Plan provides for the granting of stock options by the Board or the Program Administrators to employees or non-employees of the Company or any subsidiary of the Company to purchase, or to exercise certain rights with respect to, shares of the Common Stock of the Company, no par value (the "Stock"), in accordance with the terms and provisions thereof; and WHEREAS, the Program Administrators consider the Grantee to be a person who is eligible for a grant of non-qualified stock options under the Plan, and has determined that it would be in the best interest of the Company to grant the non-qualified stock options documented herein. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Grant of Option. Subject to the terms and conditions hereinafter set forth, the Company, with the approval and at the direction of the Program Administrators, hereby grants to the Grantee, as of the Date of Grant, an option to purchase up to ____________ shares of Stock at a price of $____________ per share, the fair market value. Such option is hereinafter referred to as the "Option" and the shares of stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." The Option is intended by the parties hereto to be, and shall be treated as, an option not qualified as an incentive stock option (as such term is defined under Section 422 of the Internal Revenue Code of 1986). 2. Installment Exercise. Subject to such further limitations as are provided herein, the Option shall become exercisable in ____________ installments, the Grantee having the right hereunder to purchase from the Company the following number of Option Shares upon exercise of the Option, on and after the following dates, in cumulative fashion as determined by the Program Administrators: _______________________ 20 3. Termination of Option. (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of ___________ years from the Date of Grant (the "Option Term") [no more than 10 years from Date of Grant]. (b) Upon the occurrence of the Grantee's ceasing for any reason to be employed by the Employer (such occurrence being a "termination of the Grantee's employment"), the Option, to the extent not previously exercised, shall terminate and become null and void immediately upon such termination of the Grantee's employment, except in a case where the Program Administrators may otherwise determine in its sole and absolute discretion for up to sixty (60) days following the termination of employment. As determined by the Program Administrators, upon a termination of the Grantee's employment by reason of disability or death, the Option may be exercised, but only to the extent that the Option was outstanding and exercisable on such date of disability or death, up to a one-year period following the date of such termination of the Grantee's employment. (c) In the event of the death of the Grantee, the Option may be exercised by the Grantee's legal representative, but only to the extent that the Option would otherwise have been exercisable by the Grantee. (d) A transfer of the Grantee's employment between the Company and any subsidiary of the Company, or between any subsidiaries of the Company, shall not be deemed to be a termination of the Grantee's employment. 4. Exercise of Options. (a) The Grantee may exercise the Option with respect to all or any part of the number of Option Shares then exercisable hereunder by giving the Secretary of the Company written notice of intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised and the date of exercise thereof. (b) Full payment (in U.S. dollars) by the Grantee of the option price for the Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise in cash, or, with the prior written consent of the Program Administrators, in whole or in part through the surrender of shares of Stock at their fair market value on the exercise date. The Grantee shall also pay any required income tax withholding taxes which may be payable in U.S. dollars or Option Shares if acceptable to the Company. (c) On the exercise date specified in the Grantee's notice or as soon thereafter as is practicable, the Company shall cause to be delivered to the Grantee, a certificate or certificates for the Option Shares then being purchased (out of theretofore unissued Stock or reacquired Stock, as the Company may elect) upon full payment for such Option Shares. However, if (i) the Grantee is subject to Section 16 of the Securities Exchange Act of 1934 and (ii) the Grantee exercises the Option before six months have passed from the Date of Grant, the Company shall be permitted to hold in its custody any stock certificate arising from such exercise until six months has passed from the Date of Grant. The obligation of the Company to deliver Stock shall, however, be subject to the condition that if at any time the Program Administrators shall determine in its discretion that the listing, registration or qualification of the Option or the Option Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Option or the issuance or purchase of Stock thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall 21 have been effected or obtained free of any conditions not acceptable to the Program Administrators. (d) If the Grantee fails to pay for any of the Option Shares specified in such notice or fails to accept delivery thereof, the Grantee's right to purchase such Option Shares may be terminated by the Company. The date specified in the Grantee's notice as the date of exercise shall be deemed the date of exercise of the Option, provided that payment in full for the Option shares to be purchased upon such exercise shall have been received by such date. 5. Adjustment of and Changes in Stock of the Company. In the event of a reorganization, recapitalization, change of shares, stock split, spin-off, stock dividend, reclassification, subdivision or combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or shares of capital stock of the Company, the Program Administrators shall make such adjustment as may be required under the applicable reorganization agreement in the number and kind of shares of Stock subject to the Option or in the option price; provided, however, that no such adjustment shall give the Grantee any additional benefits under the Option. If there is no provision for the treatment of the Option under an applicable reorganization agreement, the Option may terminate on a date determined by the Program Administrators following at least 30 days written notice to the Grantee. 6. Fair Market Value. As used herein, the "fair market value" of a share of Stock shall be determined by the Board. However, if the Stock is publicly-traded, fair market value of a share of Stock shall be based upon the closing or other appropriate trading price per share of Stock on a national securities exchange. 7. No Rights of Stockholders. Neither the Grantee nor any personal representative shall be, or shall have any of the rights and privileges of, a stockholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 8. Non-Transferability of Option. During the Grantee's lifetime, the option hereunder shall be exercisable only by the Grantee or any guardian or legal representative of the Grantee, and the Option shall not be transferable except, in case of the death of the Grantee, by will or the laws of descent and distribution, nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by the Grantee to alienate, assign, pledge, hypothecate or otherwise dispose of the Option, except as provided for herein, or (b) the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the option by notice to the Grantee and it shall thereupon become null and void. 9. Restriction on Exercise. The Option may not be exercised if the issuance of the Option Shares upon such exercise would constitute a violation of any applicable federal or state securities or other law or valid regulation. As a condition to the exercise of the Option, the Company may require the Grantee exercising the Option to make any representation or warranty to the Company as may be required by any applicable law or regulation and, specifically, may require the Grantee to provide evidence satisfactory to the Company that the Option Shares are being acquired only for investment purposes and without any present intention to sell or distribute the shares in violation of any federal or state securities or other law or valid 22 regulation. 10. Employment of Service Not Affected. The granting of the option or its exercise shall not be construed as granting to the Grantee any right with respect to continuance of employment or service relationship with the Employer. Except as may otherwise be limited by a written agreement between the Employer and the Grantee, the right of the Employer to terminate at will the Grantee's employment or service relationship with it at any time (whether by dismissal, discharge, retirement or otherwise) is specifically reserved by the Company, as the Employer or on behalf of the Employer (whichever the case may be), and acknowledged by the Grantee. 11. Amendment of Option. The Option may be amended by the Program Administrators at any time (i) if the Program Administrators determine, in their sole discretion, that amendment is necessary or advisable in the light of any addition to or change in the Internal Revenue Code of 1986 or in the regulations issued thereunder, or any federal or state securities law or other law or regulation, which change occurs after the Date of Grant and by its terms applies to the option; or (ii) other than in the circumstances described in clause (i), with the consent of the Grantee. 12. Notice All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or by certified mail, return receipt requested, as follows: To Employer: NETGATEWAY, INC. 300 Oceangate, Suite 500 Long Beach, California 90802 To Grantee: ________________________ ________________________ ________________________ ________________________ 13. Incorporation of Plan by Reference. The Option is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Program Administrators shall interpret and construe the Plan and this instrument, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. /// /// /// /// 23 14. Governing Law. The validity, construction, interpretation and effect of this instrument shall exclusively be governed by and determined in accordance with the law of the State of California, except to the extent preempted by federal law, which shall to the extent govern. IN WITNESS WHEREOF, the Company has caused its duly authorized officers to execute this Grant of Option, and to apply the corporate seal hereto, and the Grantee has placed his or her signature hereon, effective as of the Date of Grant. NETGATEWAY, INC. By: _________________________ Name: Title: ACCEPTED AND AGREED TO: _____________________________ [Grantee] By: _________________________ Name: Title: 24 PART III NETGATEWAY, INC. RESTRICTED SHARE PLAN Section 1. Purpose. The purpose of this Restricted Share Plan (the "Restricted Plan") is to promote the growth and general prosperity of the Company by permitting the Company to grant restricted shares to help attract and retain superior personnel for positions of substantial responsibility with the Company and its subsidiaries and to provide individuals with an additional incentive to contribute to the success of the Company. The Restricted Plan is Part III of the Program. Unless any provision herein indicates to the contrary, the Restricted Plan shall be subject to the General Provisions of the Program. Section 2. Terms and Conditions. The terms and conditions of restricted shares granted under the Restricted Plan may differ from one another as the Program Administrators shall, in their discretion, determine as long as all restricted shares granted under the Restricted Plan satisfy the requirements of the Restricted Plan. Each restricted share grant shall provide to the recipient (the "Holder") the transfer of a specified number of shares of Common Stock of the Company that shall become nonforfeitable upon the achievement of specified service or performance conditions within a specified period or periods (the "Restriction Period") as determined by the Program Administrators. At the time that the restricted share is granted, the Program Administrators shall specify the service or performance conditions and the period of duration over which the conditions apply. The Holder of restricted shares shall not have any rights with respect to such award, unless and until such Holder has executed an agreement evidencing the terms and conditions of the award (the "Restricted Share Award Agreement"). Each individual who is awarded restricted shares shall be issued a stock certificate in respect of such shares. Such certificate shall be registered in the name of the Holder and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the NETGATEWAY, INC., Restricted Share Plan and Restricted Share Award Agreement entered into between the registered owner and NETGATEWAY, Inc. Copies of such Plan and Agreement are on file in the offices of NETGATEWAY, Inc. The Program Administrators shall require that the stock certificates evidencing such shares be held in the custody of the Company until the restrictions thereon shall have lapsed, and that, as a condition of any restricted share award, the Holder shall have delivered a stock power. endorsed in blank, relating to the stock covered by such award. At the expiration of each Restriction Period, the Company shall redeliver to the Holder certificates held by the Company representing the shares with respect to which the applicable conditions have been satisfied. Section 3. Nontransferable. Subject to the provisions of the Restricted Plan and the Restricted Share Award Agreements, during the Restriction Period as may be set by the Program Administrators commencing on the grant date, the Holder shall not be permitted to sell. transfer, pledge, or assign shares of restricted shares awarded under the Restricted Plan. 25 Section 4. Restricted Share Rights Upon Employment or Service. If a Holder terminates employment or service with the company prior to the expiration of the Restriction Period, any restricted shares granted to him subject to such Restriction Period shall be forfeited by the Holder and shall be transferred to the Company. The Program Administrators may, in their sole discretion, accelerate the lapsing of or waive such restrictions in whole or in part based upon such factors and such circumstances as the Program Administrators may determine, in its sole discretion, including, but not limited to, the Plan Participant's retirement, death, or disability. Section 5. Stockholder Rights. The Holder shall have, with respect to the restricted shares granted, all of the rights of a stockholder of the Company, including the right to vote the shares, and the right to receive any dividends thereon. Certificates for shares of unrestricted stock shall be delivered to the grantee promptly after, and only after, the Restriction Period shall expire without forfeiture in respect of such restricted shares. Section 6. Compliance with Securities Laws. Shares shall not be issued under the Restricted Plan unless the issuance and delivery of the shares pursuant thereto shall comply with all relevant provisions of foreign, state and federal law, including, without limitation, the Securities Act of 1933, as amended, and the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require a Holder to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment purposes and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Holder shall consent to the imposition of a legend on the shares of Common Stock issued pursuant to the Restricted Share Plan and the imposition of stop-transfer instructions restricting their transferability as required by law or by this Section 6. Section 7. Continued Employment or Service. Each Holder, if requested by the Program Administrators, must agree in writing as a condition of the granting of his or her restricted shares, to remain in the employment of, or service to, the Company or any of its subsidiaries following the date of the granting of that restricted share for a period specified by the Program Administrators. Nothing in the Restricted Plan or in any restricted share granted hereunder shall confer upon any Holder any right to continued employment by, or service to, the Company or any of its subsidiaries, or limit in any way the right of the Company or any subsidiary at any time to terminate or alter the terms of that employment or service arrangement. 26 NETGATEWAY, INC. RESTRICTED SHARES PLAN RESTRICTED SHARE AWARD AGREEMENT THIS AGREEMENT is made as of ___________, _____, by and between NETGATEWAY, Inc. (the "Company"), and ______________________ ("Grantee"): WHEREAS, the Company maintains the NETGATEWAY, INC., Restricted Shares Plan ("Restricted Shares Plan") under which the Program Administrators may award shares of the Company's common stock, no par value ("Common Stock") to employees and non-employees as the Program Administrators may determine, subject to terms, conditions, or restrictions as it may deem appropriate; and WHEREAS, pursuant to the Restricted Shares Plan, the Program Administrators has awarded to Grantee a restricted stock award conditioned upon the execution by the Company and Grantee of a Restricted Share Award Agreement setting forth all the terms and conditions applicable to such award; NOW, THEREFORE, in consideration of the mutual promise and covenant contained herein, it is hereby agreed as follows: 1. Award of Shares. Under the terms of the Restricted Shares Plan, the Program Administrators hereby awards and transfers to Grantee a restricted stock award on _____________________ ("Grant Date"), covering shares of Common Stock ("Shares") subject to the terms, conditions, and restrictions set forth in this Agreement. This transfer of Shares shall constitute a transfer of such property in connection with Grantee's performance of service to the Company (which transfer is intended to constitute a "transfer" for purposes of Section 83 of the Internal Revenue Code). 2. Share Restrictions. During the period beginning on the Grant Date and ending on the date(s) specified by the Program Administrators (the "Restriction Period"), Grantee's ownership of the Shares shall be subject to a risk of forfeiture (which risk is intended to constitute a "substantial risk of forfeiture" for purposes of Section 83 of the Internal Revenue Code). Specifically, if Grantee's employment or service with the Company is terminated for any reason, including Grantee's death, disability, or retirement at any time before the Restriction Period ends, Grantee shall forfeit his or her ownership in the Shares. However, in the event of Grantee's termination of employment or service, the Program Administrators may, in its sole discretion, based upon relevant circumstances such as the Grantee's death, disability, or retirement, waive the minimum employment or service requirement and provide Grantee with a nonforfeitable right to the Shares as of the date of such termination of employment or service. 3. Stock Certificates. A stock certificate evidencing the Shares shall be issued in the name of Grantee as of the Grant Date. Grantee shall thereupon be the shareholder of all the Shares represented by the stock certificate. As such, Grantee shall be entitled to all rights of a stockholder of the Company, including the right to vote the Shares and receive dividends and/or other distributions declared on such Shares. 27 Physical possession or custody of the stock certificate shall be retained by the Company until such time as the Restriction Period lapses without the occurrence of any forfeiture of the Shares in a manner described in the above Paragraph 2. Upon the expiration of the Restriction Period without the occurrence of such a forfeiture, the Company shall cause the stock certificate covering the Shares to be delivered to Grantee. In the event that Grantee's employment or service with the Company is terminated prior to the lapse of the Restriction Period and there occurs a forfeiture of the Shares, the stock certificate representing such Shares shall be then canceled and revert to the Company. 4. Nontransferable. During the Restriction Period, the Shares covered by the restricted stock award shall not be transferable by Grantee by means of sale, assignment, sale, pledge, encumbrance, or otherwise. During the Restriction Period, the Company shall place a legend on the stock certificate restricting the transferability of such certificate and referring to the terms and conditions applicable to the Shares pursuant to the Restricted Shares Plan and this Agreement. Upon the lapse of the Restriction Period, the Shares shall not be delivered to Grantee if such delivery would constitute a violation of any applicable federal or state securities or other law or valid regulation. As a condition to the delivery of the Shares to Grantee, the Company may require Grantee to make any representation or warranty as may be required by any applicable law or regulation and, specifically, may require Grantee to provide evidence satisfactory to the Company that the Shares are being acquired only for investment purposes and without any present intention to sell or distribute the shares in violation of any federal or state securities or other law or valid regulation. 5. Administration. The Program Administrators shall have full authority and discretion (subject only to the express provisions of the Restricted Shares Plan) to decide all matters relating to the administration and interpretation of the Restricted Shares Plan and this Agreement. All such Program Administrators determinations shall be final, conclusive, and binding upon the Company, Grantee, and any and all interested parties. 6. Right to Continued Employment or Service. Nothing in the Restricted Shares Plan or this Agreement shall confer on a Grantee any right to continue in the employ of or service to the Company or, except as may otherwise be limited by a written agreement between the Company and the Grantee, in any way affect the Company's right to terminate Grantee's employment or service, at will, at any time without prior notice at any time for any or no reason (whether by dismissal, discharge, retirement or otherwise). 7. Amendment. This Agreement shall be subject to the terms of the Restricted Shares Plan as amended, the terms of which are incorporated herein by reference. However, the restricted stock award that is the subject of this Agreement may not in any way be restricted or limited by any Restricted Shares Plan amendment or termination approved after the date of the award without Grantee's written consent. 8. Force and Effect. 28 The various provisions of this Agreement are severable in their entirety. Any determination of invalidity or unenforceability of any one provision shall have no effect on the continuing force and effect of the remaining provisions. 9. Governing Law. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of California. 10. Successors. This Agreement shall be binding upon and inure to the benefit of the successors, assigns, and heirs of the respective parties. 11. Notice. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or by certified mail, return receipt requested, as follows: To Employer: NETGATEWAY, INC. 300 Oceangate, Suite 500 Long Beach, California 90802 To Grantee: ____________________________________ ____________________________________ ____________________________________ ____________________________________ 12. Incorporation of Plan by Reference. The Option is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Program Administrators shall interpret and construe the Plan and this instrument, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. 29 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date hereof NETGATEWAY, INC. ________________________ [Grantee] By: ________________________ ________________________ Name: Name. Title: Title: 30 PART IV NETGATEWAY, INC. EMPLOYEE STOCK PURCHASE PLAN Section 1. Purpose. The purpose of the NETGATEWAY, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan") is to promote the growth and general prosperity of the Company by permitting the Company to sell to employees of the Company and its subsidiaries shares of the Company's stock in accordance with Section 423 of the Code ("Section 423"), and it is the intention of the Company to have the Stock Purchase Plan qualify as an Employee Stock Purchase Plan in accordance with Section 423, and the Stock Purchase Plan shall be construed to administer stock purchases and to extend and limit participation consistent with the requirements of Section 423. The Stock Purchase Plan will be administered by the Program Administrators. Section 2. Maximum Number of Shares: Terms and Conditions. The maximum aggregate number of shares of Common Stock subject to the Stock Purchase price shall be _________. The terms and conditions of shares to be offered to be sold to employees of the Company and its subsidiaries under the Stock Purchase Plan shall comply with Section 423. Section 3. Offering Periods and Participation. The Stock Purchase Plan shall be implemented through a series of consecutive fiscal quarters of the Company (the "Offering Periods"). A full-time employee may participate in the Stock Purchase Plan and may enroll in an Offering Period by delivering to the Company's payroll office an agreement evidencing the terms and conditions of the stock subscription in a form prescribed by the Program Administrators (the "Purchase Agreement") at least thirty (30) business days prior to the Enrollment Date for that Offering Period (or such lesser number of business days as the Program Administrators, in their sole discretion, may permit). Eligible Employees who participate in the Stock Purchase Plan may do so in the Offering Period. Purchases will be made through payroll deductions, unless direct purchases have been approved by the Program Administrators. The first day of each Offering Period will be the "Enrollment Date" and the last day of each period will be the "Exercise Date." Section 4. Purchase Price. The "Purchase Price" means an amount as determined by the Program Administrators that is the lesser of: (a) the Purchase Price Discount from the Fair Market Value of a share of Common Stock on the Enrollment Date, or (b) the Purchase Price Discount from the Fair Market Value of a share of Common Stock on the Exercise Date. The "Purchase Price Discount" shall mean the amount of the discount from the Fair Market Value granted to Plan Participants not to exceed fifteen percent (15%) of the Fair Market Value as established by the Board from time to time. "Fair Market Value" of a share of stock shall be determined by the Board. However, if the Stock is publicly-traded, fair market value of a share of Stock shall be based upon the closing or other appropriate trading price per share of Stock on a national securities exchange. Section 5. Grants. (a) Grants. On the Enrollment Date for each Offering Period, each Eligible Employee participating in such Offering Period shall be granted the right to purchase on each Exercise Date during such Offering Period (at the Purchase Price) shares of Common Stock in an amount from time to time specified by the Program Administrators as set forth in Section 5(b) below. The Program Administrators will also establish the Purchase Price Discount and the Periodic Exercise Limit. The right to purchase shall expire immediately after the last Exercise Date of the Offering Period. (b) Grant Limitations. Any provisions of the Stock Purchase Plan to the 31 contrary notwithstanding, no Plan Participant shall be granted a right to purchase under the Stock Purchase Plan: (i) if, immediately after the grant, such Plan Participant would own stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary (applying the constructive ownership rules of Section 424(d) of the Code and treating stock that a Plan Participant may acquire under outstanding options as stock owned by the Plan Participant); (ii) that permits such Plan Participant's rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries to accrue at a rate that exceeds ______________ Dollars ($______) worth of stock (determined at the Fair Market Value of the shares at the time such purchase) in any calendar year (computed utilizing the rules of Section 423(b)(8) of the Code); or (iii) that permits a Plan Participant to purchase Stock in excess of twenty percent (20%) of his or her Compensation, which shall include the gross base salary or hourly compensation paid to a Plan Participant and the gross amount of any targeted bonus, without reduction for contributions to any 401(k) plan sponsored by the Company. (c) No Rights in Respect of Underlying Stock. The Plan Participant will have no interest or voting right in shares covered by a right to purchase until such purchase has been completed. (d) Plan Account. The Company shall maintain a plan account for the Plan Participants in the Stock Purchase Plan, to which are credited the payroll deductions made for such Plan Participant pursuant to Section 6 and from which are debited amounts paid for the purchase of shares. (e) Common Stock Account. As a condition of participation in the Stock Purchase Plan, each Plan Participant shall be required to receive shares purchased under the Stock Purchase Plan in a common stock account (the "Common Stock Account") maintained by the Company to hold the Common Stock purchased under the Stock Purchase Plan. (f) Dividends on Shares. Subject to the limitations of Section 5(a) hereof and Section 423(b)(8) of the Code, all cash dividends, if any, paid with respect to shares of Common Stock purchased under the Stock Purchase Plan and held in a Plan Participant's Common Stock Account shall be automatically invested in shares of Common Stock purchased at 100% of Fair Market Value on the next Exercise Date. All non-cash distributions on Common Stock purchased under the Stock Purchase Plan and held in a Plan Participant's Common Stock Account shall be paid to the Plan Participant as soon as practicable. Section 6. Payroll Deductions/Direct Purchases. (a) Plan Participant Designations. The Purchase Agreement applicable to an Offering Period shall designate payroll deductions to be made on each payday during the Offering Period as a whole number percentage specified by the Program Administrators of such Eligible Employee's Compensation for the pay period preceding such payday. Direct purchases may be permitted on such terms specified by the Program Administrators. 32 (b) Plan Account Balances. The Company shall make payroll deductions as specified in each Plan Participant's Subscription Agreement on each payday during the Offering Period and credit such payroll deductions to such Plan Participant's Plan Account. A Plan Participant may not make any additional payments into such Plan Account. No interest will accrue on any payroll deductions. All payroll deductions received or held by the Company under the Stock Purchase Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. (c) Plan Participant Changes. A Plan Participant may discontinue his or her participation in the Stock Purchase Plan as provided in Section 8, or may increase or decrease (subject to such limits as the Program Administrator may impose) the rate of his or her payroll deductions during any Offering Period by filing with the Company a new Subscription Agreement authorizing such a change in the payroll deduction rate. The change in rate shall be effective with the first full payroll period following fifteen (15) business days after the Company's receipt of the new Subscription Agreement, unless the Company elects to process a given change in participation more quickly. (d) Decreases. Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 4(b) herein, a Plan Participant's payroll deductions shall be decreased to zero percent at such time during any Purchase Period that is scheduled to end during a calendar year (the "Current Purchase Period") when the aggregate of all payroll deductions previously used to purchase stock under the Stock Purchase Plan in a prior Purchase Period which ended during that calendar year plus all payroll deductions accumulated with respect to the Current Purchase Period equal to the maximum permitted by Section 423(b)(8) of the Code. Payroll deductions shall recommence at the rate provided in such Plan Participant's Subscription Agreement at the beginning of the first Purchase Period that is scheduled to end in the following calendar year, unless terminated by the Plan Participant as provided in Section 8. (e) Tax Obligations. At the time of the purchase of shares, and at the time any Common Stock issued under the Stock Purchase Plan to a Plan Participant is disposed of, the Plan Participant must adequately provide for the Company's federal, state or other tax withholding obligations, if any, that arise upon the purchase of shares or the disposition of the Common Stock. At any time, the Company may, but will not he obligated to, withhold from the Plan Participant's Compensation the amount necessary for the Company to meet applicable withholding obligations, including, but not limited to, any withholding required to make available to the Company any tax deductions or benefit attributable to sale or early disposition of Common Stock by the eligible employee. (f) Statements of Account. The Company shall maintain each Plan Participant's Plan Account and shall give each Plan Participant a statement of account at least annually. Such statements will set forth the amounts of payroll deductions, the Purchase Price applicable to the Common Stock purchased, the number of shares purchased, the remaining cash balance and the dividends received, if any, for the period covered. 33 Section 7. Purchase of Shares. (a) Automatic Exercise on Exercise Dates. Unless a Plan Participant withdraws as provided in Section 8 below, his or her Option for the purchase of shares will be exercised automatically on each Exercise Date within the Offering Period in which such Plan Participant is enrolled for the maximum whole number of shares of Common Stock as can then be purchased at the applicable Purchase Price with the payroll deductions accumulated in such Plan Participant's Plan Account and not yet applied to the purchase of shares under the Stock Purchase Plan, subject to the Periodic Exercise Limit. All such shares purchased under the Stock Purchase Plan shall be credited to the Plan Participant's Common Stock Account. During a Plan Participant's lifetime, a Plan Participant's options to purchase shares under the Stock Purchase Plan shall be exercisable only by the Plan Participant. (b) Compliance With Securities Law. Shares of Common Stock shall not be issued with respect to any purchase of shares granted under the Stock Purchase Plan, unless the purchase of shares and the issuance and delivery of those shares pursuant to that exercise comply with all applicable provisions of foreign, state and federal law including, without limitation, the Securities Act of 1933, as amended and the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require a Plan Participant to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment purposes and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Plan Participant shall consent to the imposition of a legend on the shares of Common Stock purchased and the imposition of stop-transfer instructions restricting their transferability as required by law or by this Section 7. (c) Excess Plan Account Balances. If, due to application of the Periodic Exercise Limit or otherwise, there remains in a Plan Participant's Plan Account immediately following exercise of such Plan Participant's option to purchase shares on an Exercise Date any cash accumulated immediately preceding such Exercise Date and not applied to the purchase of shares under the Stock Purchase Plan, such cash shall promptly be returned to the Plan Participant; provided, however, that if the Plan Participant shall be enrolled in the Offering Period (including, without limitation, by not withdrawing pursuant to Section 8), such cash shall be contributed to the Plan Participant's Plan Account for such next Purchase Period. Section 8. Holding Period. The Program Administrators may establish, as a condition to participation, a holding period of up to one (1) year. Section 9. Withdrawal: Termination of Employment. (a) Voluntary Withdrawal. A Plan Participant may withdraw from an Offering Period by giving written notice to the Company's payroll office at least thirty (30) business days prior to the next Exercise Date. Such withdrawal shall be effective beginning thirty' (30) business days after receipt by the Company's payroll office of notice thereof. On or promptly following the effective date of any withdrawal, all (but not less than all) of the withdrawing Plan Participant's payroll deductions credited to his or her Plan Account and not yet applied to the purchase of shares under the Stock Purchase Plan will be paid to such Plan Participant, and on the effective date of such withdrawal such Plan Participant's option to 34 purchase shares for the Offering Period will be automatically terminated and no further payroll deductions for the purchase of shares will be made during the Offering Period. If a Plan Participant withdraws from an Offering Period, payroll deductions will not resume at the beginning of any succeeding Offering Period, unless the Plan Participant delivers to the Company a new Subscription Agreement with respect thereto. (b) Termination of Employment. Promptly after a Plan Participant's ceasing to be an employee for any reason all shares of Common Stock held in a Plan Participant's Common Stock Account and the payroll deductions credited to such Plan Participant's Plan Account and not yet applied to the purchase of shares under the Stock Purchase Plan will be returned to such Plan Participant or, in the case of his or her death, to the person or persons entitled thereto, and such Plan Participant's option to purchase shares will be automatically terminated, provided that, if the Company does not learn of such death more than five (5) business days prior to an Exercise Date, payroll deductions credited to such Plan Participant's Plan Account may be applied to the purchase of shares under the Stock Purchase Plan on such Exercise Date. Section 10. Non-transferability. Neither payroll deductions credited to a Plan Participant's Plan Account nor any rights with regard to the exercise of a purchase of shares or to receive shares under the Stock Purchase Plan may be assigned, transferred, pledged or otherwise disposed of by the Plan Participant in any way other than by will or the laws of descent and distribution, and any purchase of shares by a Plan Participant shall, during such Plan Participant's lifetime, be exercisable only by such Plan Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Program Administrator may treat such act as an election to withdraw from an offering period in accordance with Section 8. Section 11. Compliance with Securities Laws. Shares shall not be issued with respect to the Stock Purchase Plan, unless the issuance and delivery of the shares pursuant thereto shall comply with all applicable provisions of foreign, state and federal law, including, without limitation, the Securities Act of 1933, as amended, and the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require a Plan Participant to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment purposes and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Plan Participant shall consent to the imposition of a legend on the shares of Common Stock subject to his or her Option and the imposition of stop-transfer instructions restricting their transferability as required by law or by this Section 11. Section 12. Continued Employment or Service. Each Plan Participant. if requested by the Program Administrators, must agree in writing, to remain in the employment of, or service to, the Company or any of its subsidiaries following the date of the granting of that option to purchase shares for a period specified by the Program Administrators. Nothing in this Stock Purchase Plan shall confer upon any Plan Participant any right to continued employment by, or service to, the Company or any of its subsidiaries, or limit in any way the right of the Company or any subsidiary at any time to terminate or alter the terms of that employment or service arrangement. 35 PART V NETGATEWAY, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Section 1. Purpose; Plan. The purpose of this NETGATEWAY, INC., Non-Employee Director Stock Option Plan (the "Directors Plan") is to permit the Company to grant options to purchase shares of its Common Stock to non-employee directors of the Company. Any option granted pursuant to the Directors Plan shall be clearly and specifically designated as not being an incentive stock option, as defined in Section 422 of the Code. This Directors Plan is Part V of the Program. Unless any provision herein indicates to the contrary, the Directors Plan shall be subject to the General Provisions of the Program. On the next to last business day of each fiscal year of the Company, the Company shall grant to each non-employee director of the Company options to purchase that number of shares of Common Stock as determined annually by the Program Administrators. The terms and conditions of options granted under the Directors Plan shall be in duration, form and substance as the Program Administrators shall in their discretion determine, but in no event shall any option granted under the Directors Plan expire later than ten (10) years from the date on which the option is granted. Section 2. Compliance with Securities Laws. Shares of Common Stock shall not be issued with respect to any option granted under the Directors Plan, unless the exercise of that option and the issuance and delivery of the shares pursuant thereto shall comply with all applicable provisions of foreign, state and federal law, including, without limitation, the Securities Act of 1933, as amended, and the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require an Optionee to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment purposes and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Optionee shall consent to the imposition of a legend on the shares of Common Stock subject to his or her option and the imposition of stop-transfer instructions restricting their transferability as required by law or by this Section 2. Section 3. Adjustments to Number and Purchase Price of Optioned Shares. All options granted pursuant to the terms of this Directors Plan shall be adjusted in a manner prescribed by Article 6 of the General Provisions of the Program. 36 PART VI STOCK APPRECIATION RIGHTS PLAN Section 1. SAR Terms and Conditions. The purpose of this Stock Appreciation Rights Plan (the "SAR Plan") is to promote the growth and general prosperity of the Company by permitting the Company to grant restricted shares to help attract and retain superior personnel for positions of substantial responsibility with the Company and its subsidiaries and to provide individuals with an additional incentive to contribute to the success of the Company. The terms and conditions of SARs granted under the SAR Plan may differ from one another as the Program Administrators shall, in their discretion, determine in each SAR agreement (the "SAR Agreement"). Unless any provision herein indicates to the contrary, this SAR Plan shall be subject to the General Provisions of the Program. Section 2. Duration of SARs. Each SAR and all rights thereunder granted pursuant to the terms of the SAR Plan shall expire on the date determined by the Program Administrators as evidenced by the SAR Agreement, but in no event shall any SAR expire later than ten (10) years from the date on which the SAR is granted. In addition, each SAR shall be subject to early termination as provided in the SAR Plan. Section 3. Grant. Subject to the terms and conditions of the SAR Agreement, the Program Administrators may grant the right to receive a payment upon the exercise of a SAR which reflects the appreciation in the Fair Market Value of the number of shares of Common Stock for which such SAR was granted to any person who is eligible to receive Awards either: (i) in tandem with the grant of an Incentive Option; (ii) in tandem with the grant of a Nonqualified Option: or (iii) independent of the grant of an Incentive Option or Nonqualified Option. Each grant of a SAR which is in tandem with the grant of an Incentive Option or Nonqualified Option shall be evidenced by the same agreement as the Incentive Option or Nonqualified Option which is granted in tandem with such SAR and such SAR shall relate to the same number of shares of Common Stock to which such Option shall relate and such other terms and conditions as the Program Administrators, in their sole discretion, deem are not inconsistent with the terms of the SAR Plan, including conditions on the exercise of such SAR which relate to the employment of the Plan Participant or any requirement that the Plan Participant exchange a prior outstanding option and/or SAR. Section 4. Payment at Exercise. Upon the settlement of a SAR in accordance with the terms of the SAR Agreement, the Plan Participant shall (subject to the terms and conditions of the SAR Plan and SAR Agreement) receive a payment equal to the excess, if any, of the SAR Exercise Price (as defined below) for the number of shares of the SAR being exercised at that time over the SAR Grant Price (as defined below) for such shares. Such payment may be paid in cash or in shares of the Company's Common Stock or by a combination of the foregoing, at the time of exercise of the SAR specified by the Program Administrators in the SAR Agreement. If any portion of the payment is paid shares of the Company's Common Stock, such shares shall be valued for this purpose at the SAR Exercise Price on the date the SAR is exercised and any payment in shares which calls for a payment in fractional share shall automatically be paid in cash based on such valuation. As used herein, "SAR Exercise Date" shall mean the date on which the exercise of a SAR occurs under the SAR Agreement, "SAR Exercise Price" shall mean the Fair Market Value of a shares of Common Stock on a SAR Exercise Date and "SAR Grant Price" shall mean the price which would have been the option exercise price for one share of Common Stock if the SAR had been granted as an option, or if the SAR granted in tandem with an option, the option exercise price per share for the related option. 37 Section 5. Special Terms and Conditions. Each SAR Agreement which evidences the grant of a SAR shall incorporate such terms and conditions as the Program Administrators in their absolute discretion deem are not inconsistent with the terms of the SAR Plan and the agreement for Incentive Option or Nonqualified Option, if any, granted in tandem with such SAR except that: (i) if a SAR is granted in tandem with an Incentive Option or Nonqualified Option, the SAR shall be exercisable only when the related Incentive Option or Nonqualified Option is exercisable; and (ii) the Plan Participant's right to exercise a SAR granted in tandem with an Incentive Option or Nonqualified Option shall be forfeited to the extent that the Plan Participant exercises the related Incentive Option or Nonqualified Option and the Plan Participant's right to exercise the Incentive Option or Nonqualified Option shall be forfeited to the extent the Plan Participant exercises the related SAR, but any such forfeiture shall not count as a forfeiture for purposes of making the shares subject to such option or SAR again available for use under the General Provisions of the Plan. Section 6. Compliance with Securities Laws. Shares shall not be issued with respect to any option granted under the SAR Plan, unless the exercise of that option and the issuance and delivery of the shares pursuant thereto shall comply with all applicable provisions of foreign, state and federal law, including, without limitation, the Securities Act of 1933, as amended, and the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require an Optionee to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment purposes and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Optionee shall consent to the imposition of a legend on the shares of Common Stock subject to his or her option and the Imposition of stop-transfer instructions restricting their transferability as required by law' or by this Section 6. Section 7. Continued Employment or Service. Each Optionee, if requested by the Program Administrators, must agree in writing as a condition of receiving his or her option, to remain in the employment of, or service to, the Company or any of its subsidiaries following the date of the granting of that option for a period specified by the Program Administrators. Nothing in this SAR Plan or in any option granted hereunder shall confer upon any Optionee any right to continued employment by, or service to, the Company or any of its subsidiaries, or limit in any way the right of the Company or any subsidiary at any time to terminate or alter the terms of that employment or service arrangement. Section 8. Option Rights Upon Termination of Employment or Service. If an Optionee under this SAR Plan ceases to be employed by, or provide services to, the Company or any of its subsidiaries for any reason other than death or disability, his or her option shall immediately terminate; provided, however, that the Program Administrators may, in their sole and absolute discretion. allow the option to be exercised, to the extent exercisable on the date of termination of employment or service, at any time within sixty (60) days after the date of termination of employment or service, unless either the option or this Nonqualified Plan otherwise provides for earlier termination. Section 9. Option Rights Upon Disability. If an Optionee becomes disabled within the meaning of Code Section 422 (e) (3) while employed by the Company or any subsidiary corporation, the Program Administrators, in their discretion, may allow the option to be exercised, to the extent exercisable on the date of termination of employment, at any time within one year after the date of termination of employment due to disability, unless either the option or the SAR Plan otherwise provides for earlier termination. 38 PART VII OTHER STOCK RIGHTS PLAN Section 1. Terms and Conditions. The purpose of the Other Stock Rights Plan (the "Stock Rights Plan") is to promote the growth and general prosperity of the Company by permitting the Company to grant restricted shares to help attract and retain superior personnel for positions of substantial responsibility with the Company and its subsidiaries to provide individuals with an additional incentive to the success of the Company. The terms and conditions of Performance Shares, Stock Payments or Dividend Equivalent Rights granted under the Stock Rights Plan may differ from one another as the Program Administrators shall, in their discretion, determine in each stock rights agreement (the `Stock Rights Agreement"). Unless any provision herein indicates to the contrary, this Stock Rights Plan shall be subject to the General Provisions of the Program. Section 2. Duration. Each Performance Share or Dividend Equivalent Right and all rights thereunder granted pursuant to the terms of the Stock Rights Plan shall expire on the date determined by the Program Administrators as evidenced by the Stock Rights Agreement, but in no event shall any Performance Shares or Dividend Equivalent Rights expire later than ten (10) years from the date on which the Performance Shares or Dividend Equivalent Rights are granted. In addition, each Performance Share, Stock Payment or Dividend Equivalent Right shall be subject to early termination as provided in the Stock Rights Plan. Section 3. Grant. Subject to the terms and conditions of the Stock Rights Agreement, the Program Administrators may grant Performance Shares, Stock Payments or Dividend Equivalent Rights as provided under the Stock Rights Plant. Each grant of Performance Shares, Dividend Equivalent Rights and Stock Payments shall be evidenced by a Stock Rights Agreement, which shall state the terms and conditions of each as the Program Administrators, in their sole discretion, deem are not inconsistent with the terms of the Stock Rights Plan. Section 4. Performance Shares. Performance Shares shall become payable to a Plan Participant based upon the achievement of specified Performance Objectives and upon such other terms and conditions as the Program Administrators may determine and specify in the Stock Rights Agreement evidencing such Performance Shares. Each grant shall satisfy the conditions for performance-based awards hereunder and under the General Provisions. A grant may provide for the forfeiture of Performance Shares in the event of termination of employment or other events, subject to exceptions for death, disability, retirement or other events, all as the Program Administrators may determine and specify in the Stock Rights Agreement for such grant. Payment may be made for the Performance Shares at such time and in such form as the Program Administrators shall determine and specify in the Stock Rights Agreement and payment for any Performance Shares may be made in full in cash or by certified cashier's check payable to the order of the Company or, if permitted by the Program Administrators, by shares of the Company's Common Stock or by the surrender of all or part of an Award, or in other property, rights or credits deemed acceptable by the Program Administrators or, if permitted by the Program Administrators, by a combination of the foregoing. If any portion of the purchase price is paid in shares of the Company's Common Stock, those shares shall be tendered at their then Fair Market Value as determined by the Program Administrators in accordance herewith. Payment in shares of Common Stock includes the automatic application of shares of Common Stock received upon the exercise or settlement of Performance Shares or other option or Award to satisfy the exercise or settlement price. 39 Section 5. Stock Payments. The Program Administrators may grant Stock Payments to a person eligible to receive the same as a bonus or additional compensation or in lieu of the obligation of the Company or a subsidiary to pay cash compensation under other compensatory arrangements, with or without the election of the eligible person, provided that the Plan Participant will be required to pay an amount equal to the aggregate par value of any newly issued Stock Payments. A Plan Participant shall have all the voting, dividend, liquidation and other rights with respect to shares of Common Stock issued to the Plan Participant as a Stock Payment upon the Plan Participant becoming holder of record of such shares of Common Stock; provided, however, the Program Administrators may impose such restrictions on the assignment or transfer of such shares of Common Stock as they deem appropriate and as are evidenced in the Stock Rights Agreement for such Stock Payment. Section 6. Dividend Equivalent Rights. The Program Administrators may grant Dividend Equivalent Rights in tandem with the grant of Incentive Option or Nonqualified Option, SAR's, Restricted Shares or Performance Shares that otherwise do not provide for the payment of dividends on the shares of Common Stock subject to such awards for the period of time to which such Dividend Equivalent Rights apply, or may grant Dividend Equivalent Rights that are independent of any other such award. A Dividend Equivalent Right granted in tandem with another award may be evidenced by the agreement for such other award; otherwise, a Dividend Equivalent Right shall be evidenced by a separate Stock Rights Agreement. Payment may be made by the Company in cash or by shares of the Company's Common Stock or by a combination of the foregoing, may be immediate or deferred and may be subject to such employment, performance objectives or other conditions as the Program Administrators may determine and specify in the Stock Rights Agreement for such Dividend Equivalent Rights. The total payment attributable to a share of Common Stock subject to a Dividend Equivalent Right shall not exceed one hundred percent (100%) of the equivalent dividends payable with respect to an outstanding share of Common Stock during the term of such Dividend Equivalent Right, taking into account any assumed investment (including assumed reinvestment in shares of Common Stock) or interest earnings on the equivalent dividends as determined under the Stock Rights Agreement in the case of a deferred payment, provided that such percentage may increase to a maximum of two hundred percent (200%) if a Dividend Equivalent Right is subject to a Performance Objective. Section 7. Compliance with Securities Laws. Shares shall not be issued with respect to any option granted under the Stock Rights Plan, unless the exercise of that option and the issuance and delivery of the shares pursuant thereto shall comply with all applicable provisions of foreign, state and federal law, including, without limitation, the Securities Act of 1933, as amended, and the Exchange Act, and the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require an Optionee to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment purposes and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Optionee shall consent to the imposition of a legend on the shares of Common Stock subject to his or her option and the imposition of stop-transfer instructions restricting their transferability as required by law or by this Section 7. Section 8. Continued Employment or Service. Each Optionee, if requested by the Program Administrators, must agree in writing as a condition of receiving his or her option, to remain in the employment of, or service to, the Company or any of its subsidiaries following the date of the granting of that option for a period specified by the Program Administrators. Nothing in this Stock Rights Plan in any option granted hereunder shall confer upon any Optionee any right to continued employment by. or service to. the Company or any of its subsidiaries, or limit in any way the right of the Company or any subsidiary at any time to terminate or alter the terms of that employment or service 40 arrangement. Section 9. Option Rights Upon Termination of Employment or Service. If an Optionee under this Stock Rights Plan an ceases to be employed by, or provide services to, the Company or any of its subsidiaries for any reason other than death or disability, his or her option shall immediately terminate; provided, however, that the Program Administrators may, in their sole and absolute discretion, allow the option to be exercised, to the extent exercisable on the date of termination of employment or service, at any time within sixty (60) days after the date of termination of employment or service, unless either the option or this Stock Rights Plan otherwise provides for earlier termination. Section 10. Option Rights Upon Disability. If an Optionee becomes disabled within the meaning of Code Section 422 (e) (3) while employed by the Company or any subsidiary corporation, the Program Administrators, in their discretion, may allow the option to be exercised, to the extent exercisable on the date of termination of employment, at any time within one year after the date of termination of employment due to disability, unless either the option or the Stock Rights Plan otherwise provides for earlier termination. 41 EX-10.7 11 1998 STOCK OPTION PLAN FOR SENIOR EXECUTIVES Exhibit 10.7 NETGATEWAY, INC. 1998 STOCK OPTION PLAN FOR SENIOR EXECUTIVES 1. Purpose; Type of Awards; Construction. The purpose of the 1998 Stock Option Plan for Senior Executives (the "Plan") of NetGateway, Inc., a Nevada corporation (the "Company"), is to attract and retain senior executives (including officers) of the Company, or any Subsidiary or Affiliate which now exists or hereafter is organized or acquired, and to furnish additional incentives to such persons by encouraging them to acquire a proprietary interest in the Company. Pursuant to Section 6 of the Plan, there may be granted Options, including "incentive stock options" and "nonqualified stock options". The Plan is intended to satisfy the requirements of Rule 16b-3 promulgated under Section 16 of the Exchange Act and shall be interpreted in a manner consistent with the requirements thereof. 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Administrator" means the Board or, if and so long as a Committee has been established and is in existence, the Committee. (b) "Affiliate" means any entity if, at the time of granting of an Option, (i) the Company, directly, owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity or (ii) such entity, directly or indirectly, owns at least 20% of the combined voting power of all classes of stock of the Company. (c) "Beneficiary" means the person, persons, trust or trusts which have been designated by an Optionee in his or her most recent written beneficiary designation filed with the Company to receive the benefits specified under the Plan upon his or her death, or, if there is no designated Beneficiary or surviving designated Beneficiary, then the person, persons, trust or trusts entitled by will or the applicable laws of descent and distribution to receive such benefits. (d) "Board" means the Board of Directors of the Company. (e) "Change in Control" means a change in control of the Company which will be deemed to have occurred if: (i) any "person," as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than an Exempt Person), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 2(e)) whose election by the Board or nomination for election by the Company" stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinbefore defined), other than an Exempt Person, acquired 50% or more of the combined voting power of the Company's then outstanding securities, or (iv) the stockholders of the Company approve of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (g) "Committee" means the committee, consisting exclusively of two or more Non-Employee Directors (as defined in Rule 16b-3), if and as the same may be established by the Board to administer the Plan; provided, however, that to the extent required for the Plan to comply with the applicable provisions of Section 162(m) of the Code, "Committee" means either such committee or a subcommittee of that committee, as the case may be, which shall be constituted to comply with the applicable requirements of Section 162(m) of the Code and the regulations promulgated thereunder. (h) "Company" means NetGateway, Inc., a corporation organized under the laws of the State of Nevada, or any successor corporation. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases. (j) "Exempt Person" means (1) the Company, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, (3) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Stock, or (4) any person or group of persons who, immediately prior to the adoption of this Plan, owned more than 50% of the combined voting power of the Company's then outstanding voting securities. (k) "Fair Market Value" means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the administrator. Notwithstanding the foregoing, the per share Fair Market Value of Stock as of a particular date shall mean (I) if the shares of Stock are then listed on a national securities exchange, the closing sales price per share of Stock on the national securities exchange on which the Stock is principally traded, for the last preceding date on which there was a sale of such Stock on such exchange, or (ii) if the shares of Stock are then traded on the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the reported per share closing price of the Stock on the day prior to such date or, if there was no such price reported for such date, on the next preceding date for which such a price was reported, or (iii) if the shares of Stock are then traded in an over-the-counter market other than on the NASDAQ National Market System, the average of the closing bid and asked prices for the shares of Stock in such over-the-counter market for the last preceding date on which there was a sale of such Stock in such market, or (iv) if the shares of Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Administrator, in its sole discretion, shall determine in good faith. (l) "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. (m) "NQSO" means any Option not designated as an ISO. (n) "Option" means a right, granted to an Optionee under Section 6(b) of the Plan, to purchase shares of Stock. An Option may be either an ISO or an NQSO. (o) "Optionee" means a person who, as a senior executive of the Company, a Subsidiary or an Affiliate, has been granted an Option. (p) "Plan" means this NetGateway, Inc. 1999 Stock Option Plan for Senior Executives as amended from time to time. (q) "Rule 16b-3" means Rule 16b-3, as from time to time in effect, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, including any successor to such Rule. (r) "Stock" means the common stock, par value $.001 per share, of the Company. (s) "Stock Option Agreement" means any written agreement, contract, or other instrument or document evidencing an Option. (t) "Subsidiary" means any corporation in which the Company, directly or indirectly, owns stock possessing 50% or more of the total combined voting power of all classes of stock of such corporation. 3. Administration The Plan shall be administered by the Administrator. The Administrator shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Options; to determine the persons to whom and the time or times at which Options shall be granted; to determine the type and number of Options to be granted, the number of shares of Stock to which Options may relate and the terms, conditions, restrictions and performance criteria relating to any Options; to determine whether, to what extent, and under what circumstances Options may be settled, canceled, forfeited, exchanged, or surrendered; to make adjustments in the terms and conditions of, and the criteria and performance objectives included in, Options in recognition of unusual or non-recurring events affecting the Company or any Subsidiary or Affiliate or the financial statements of the company or any Subsidiary or Affiliate, or in response to changes in applicable laws, regulations, or accounting principles; to designate Affiliates; to construe and interpret the Plan and any Options; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Stock Option Agreements (which need not be identical for each Optionee); and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Administrator may appoint a chairperson and a secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. All determinations of the Administrator shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by written consent. The Administrator may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Administrator or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Administrator or such person may have under the Plan. All decisions, determinations and interpretations of the Administrator shall be final and binding on all persons, including the Company, and any Subsidiary, Affiliate or Optionee (or any person claiming any rights under the Plan from or through any Optionee) and any stockholder. No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder. 4. Eligibility. Options may be granted to senior executives of the Company and its present or future Subsidiaries and Affiliates, in the discretion of the Administrator. In determining the person to whom Options shall be granted and the type of Options granted (including the number of shares to be covered by such Options), the Administrator shall take into account such factors as the Administrator shall deem relevant in connection with accomplishing the purposes of the Plan. 5. Stock Subject to the Plan. The maximum number of shares of Stock reserved for the grant of Options under the Plan shall be 5,000,000 shares of Stock, subject to adjustment as provided herein. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in the open market, in private transactions or otherwise. The number of shares of Stock available for issuance under the Plan shall be reduced by the number of shares of Stock subject to outstanding Options. If any shares subject to an Option are forfeited, canceled, exchanged or surrendered or if an Option otherwise terminates or expires without a distribution of shares to the Optionee, the shares of Stock with respect to such Option shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Options under the Plan. In no event shall any Optionee acquire, pursuant to any awards of Options under this Plan, more than 40% of the aggregate number of shares of Stock reserved for awards under the Plan. In the event that the Administrator shall determine that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of an Optionee under the Plan, then the Administrator shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (I) the number and kind of shares of Stock which may thereafter be issued in connection with Options, (ii) the number and kind of shares of Stock issued or issuable in respect of outstanding Options, and (iii) the exercise price, grant price, or purchase price relating to any Option; provided that, with respect to ISOs, such adjustment shall be made in accordance with Section 424(h) of the Code. 6. Specific Terms of Options. (a) General. The term of each Option shall be for such period as may be determined by the Administrator. The Administrator may make rules relating to Options, and may impose on any Option or the exercise thereof, at the date of grant or thereafter, such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Administrator shall determine. (b) Options. The Administrator is authorized to grant Options to Optionees on the following terms and conditions: (i) Type of Option. The Stock Option Agreement evidencing the grant of an Option under the Plan shall designate the Option as an ISO (in the event its terms, and the individual to whom it is granted, satisfy the requirements for ISOs under the Code), or an NQSO. (ii) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be determined by the Administrator; provided that in the case of an ISO, such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option and, in the case of an ISO granted to the holder of more than 10% of the Stock outstanding at the date of grant of such Option, such exercise price shall be not less than 110% of the Fair Market Value on such date of grant. In no event shall the exercise price for the purchase of shares of Stock be less than par value. The exercise price for Stock subject to an Option may be paid in cash or by an exchange of Stock previously owned by the Optionee, or a combination of both, in an amount having a combined value equal to such exercise price. Any shares of Stock exchanged upon the exercise of any Option shall be valued at the Fair Market Value on the date on which such shares are exchanged. An Optionee also may elect to pay all or a portion of the aggregate exercise price by having shares of Stock with a Fair Market Value on the date of exercise equal to the aggregate exercise price withheld by the Company or sold by a broker-dealer in accordance with applicable law. (iii) Term and Exercisability of Options. The date on which the Administrator adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted. Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant or five years from the date of grant in the case of an ISO granted to a holder of more than 10% of Stock outstanding as of such date), at such times and upon such conditions as the Administrator may determine, as reflected in the Stock Option Agreement. An Option may be exercised to the extent of any or all full shares of Stock as to which the Option has become exercisable, by giving written notice of such exercise to the Company's Secretary and paying the exercise price as described in Section 6(b)(ii). (iv) Termination of Employment, etc. An Option may not be exercised unless the Optionee is then in the employ of the Company or any Subsidiary or Affiliate (or a company or a parent or subsidiary company of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Optionee has continuously maintained any of such relationships, since the date of grant of the Option; provided that, the Stock Option Agreement may contain provisions extending the exercisability of Options, in the event of specified terminations, to a date not later than the expiration date of such Option. The Administrator may establish a period during which the Beneficiaries of an Optionee who died while an employee, director or independent contractor of the Company or any Subsidiary or Affiliate or during any extended period referred to in the immediately preceding proviso may exercise those Options which were exercisable on the date of the Optionee's death; provided that, no Option shall be exercisable after its expiration date. (v) Nontransferability. Options shall not be transferable by an Optionee except by will or the laws of descent and distribution and shall be exercisable during the lifetime of an Optionee only by such Optionee or his guardian or legal representative. (vi) Other Provisions. Options may be subject to such other conditions as the Administrator may prescribe in its discretion. 7. Change in Control Provisions. In the event of a Change in Control, any and all Options then outstanding shall become fully exercisable and vested, whether or not theretofore vested and exercisable. 8. General Provisions. (a) Compliance with Legal and Exchange Requirements. The Plan, the granting and exercising of Options thereunder, and the other obligations of the Company under the Plan and any Stock Option Agreement, shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Stock under any Option until completion of such stock exchange listing or registration or qualification of such Stock or other required action under any state, federal or foreign law, rule or regulation as the Company may consider appropriate, and may require any Optionee to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Stock in compliance with applicable laws, rules and regulations. (b) No Right to Continued Employment, etc. Nothing in the Plan or in any Option granted or Stock Option Agreement entered into pursuant to the Plan shall confer upon any Optionee the right to continue in the employ of the Company, any Subsidiary or any Affiliate, as the case may be, or to be entitled to any remuneration or benefits not set forth in the Plan or such Stock Option Agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate such Optionee's employment, directorship or independent contractor relationship. (c) Taxes. The Company or any Subsidiary or Affiliate is authorized to withhold from any Option granted, any payment relating to an Option under the Plan (including from a distribution of Stock), or any other payment to an Optionee, amounts of withholding and other taxes due in connection with any transaction involving an Option, and to take such other action as the Administrator may deem advisable to enable the Company and an Optionee to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Option. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of an Optionee's tax obligations. (d) Amendment and Termination of the Plan. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part; provided that, no amendment which requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3 or Sections 422 and 424 of the Code and the regulations promulgated thereunder shall be effective unless the same shall be approved by the requisite vote of the stockholders of the Company entitled to vote thereon. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Optionee, without such Optionee's consent, under any Option theretofore granted under the Plan. (e) No Rights to Options; No Stockholder Rights. No Optionee shall have any claim to be granted any Option under the Plan, and there is no obligation for uniformity of treatment of Optionees. Except as provided specifically herein, an Optionee or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate to such Optionee for such shares. (f) Unfunded Status of Options. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. Nothing contained in the Plan or any Option shall give any such Optionee any rights that are greater than those of a general creditor of the Company. (g) No Fractional Shares. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Option. The Administrator shall determine whether cash, other Options, or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. (h) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of California without giving effect to the conflict of laws principles thereof. (i) Effective Date. The Plan shall take effect upon its adoption by the Board. (j) Plan Termination. The Board may terminate the Plan at any time with respect to any shares of Stock that are not subject to Options. Unless terminated earlier by the Board, the Plan shall terminate ten years after the effective date and no Options shall be granted under the Plan after such date. Termination of the Plan under this Section 8(j) will not affect the rights and obligations of any Optionee with respect to Options granted prior to termination EX-10.8 12 OFFICE LEASE 6/26/98 BT NET & PACIFIC Exhibit 10.8 - -------------------------------------------------------------------------------- PACIFIC TOWERS ASSOCIATES STANDARD FORM OFFICE LEASE LANDLORD: PACIFIC TOWERS ASSOCIATES, a California Limited Partnership TENANT: NETGATEWAY, Inc., a Nevada corporation --------------------------------------------------------------------- Dated for reference purposes as of: June 26, 1998 ----------------------------------------- - -------------------------------------------------------------------------------- PACIFIC TOWERS ASSOCIATES OFFICE LEASE Basic Lease Information Lease Date June 26, 1998 Tenant NETGATEWAY, INC., a Nevada Corporation Address 300 Oceangate, Suite 500 Long Beach, CA 90802 Contact Person --------------------------------------- Telephone --------------------------------------- Landlord PACIFIC TOWERS ASSOCIATES, a California Limited Partnership Address 200 Oceangate, Suite 310 Long Beach, CA 90802 Contact Person Building Manager Telephone (562) 435-8200 Building ARCO Center Building Rentable Area 436,596 rentable square feet Premises 300 Oceangate Suite 500 Floor(s) a portion of fifth floor Rentable Area 4,140 rentable square feet Term 3 years with one three-year option to extend Commencement Date July 10, 1998 Expiration Date July 9, 2001 Annual Base Rental Months 1-12: $1.29 per rentable sq. ft. per month Months 13-24: $1.34 per rentable sq. ft. per month Months 25-36: $1.40 per rentable sq. ft. per month Tenant's Share (of Increased Operating Expenses and Taxes) 0.95% Excess Taxes Factor (See P.4.1(d)) Landlord's taxes calculated for the 1998 Calendar Year Excess Expenses Factor (See P.4.1(g)) Landlord's 1998 annual expenses Use General office purposes 1 Security Deposit One month's rent equal to rent for last month of term Parking Number of Stalls 4 per 1000 rentable square feet of premises Rent Per Stall Market rate - see Exhibit D PACIFIC TOWERS ASSOCIATES, a California Limited Partnership By: SIC - Long Beach a California Limited Partnership, Its General Partner By: The Swig Company, a California Corporation, Its General Partner /s/ Jeanne Wye - ----------------------------------------- NETGATEWAY, INC., a Nevada corporation By: /s/ David Bassett - Parkins ------------------------------------- Title: C.O.O. ------------------------- David Bassett - Parkins By: /s/ Donald M. Corliss, Jr. ------------------------------------- Title: President ------------------------- Donald M. Corliss, Jr. 2
Page Article Description Number 1. Premises 1 2. Term 1 3. Rent; Additional Charges 2 4. Additional Charges for Increased Operating Expenses and Taxes 2 5. Terms of Payment 5 6. Construction of the Building and Premises 5 7. Conduct of Business by Tenant 6 8. Alterations and Tenant's Property 6 9. Repairs 8 10. Liens 8 11. Compliance with Laws and Insurance Requirements 8 12. Subordination 9 13. Inability to Perform 9 14. Destruction 10 15. Eminent Domain 11 16. Assignment 11 17. Utilities 13 18. Default 15 19. Indemnity 17 20. Tenant's Insurance 17 21. Limitation of Landlord's Liability 17 22. Access to Premises 17 23. Notices 18 24. No Waiver 18 25. Tenant's Certificates 18 26. Rules and Regulations 19 27. Tax on Tenant's Personal Property and Overstandard Tenant Improvements 19 28. Security Deposit 19 29. Authority 20 30. Miscellaneous 20
EXHIBIT A -- Floor Plan EXHIBIT B -- Work Agreement EXHIBIT C -- Rules & Regulations EXHIBIT D -- Parking 3 1 OFFICE LEASE This lease is made and entered into this 26th day of June, 1998, by and between Pacific Towers Associates, a California Limited Partnership (herein called "Landlord"), and NETGATEWAY, Inc., a Nevada Corporation (herein called "Tenant"). WITNESSETH: Landlord and tenant hereby covenant and agree as follows: 1. PREMISES 1.1 Upon and subject to the terms, covenants and conditions hereinafter set forth, Landlord hereby leases to Tenant and Tenant hereby hires from Landlord those premises (herein called the "Premises") in the building specified in the Basic Lease Information attached hereto (herein called the "Building") comprising the area substantially as shown on the floor plan or plans attached hereto as Exhibit A. The Premises are located on the floor(s) of the Building that is (are) specified in the Basic Lease information. The term "Building" includes the entire complex consisting of two office buildings and a parking garage currently known as the Arco Center and the land and improvements surrounding the complex and designated from time to time by Landlord as land or common areas appurtenant to the complex together with utilities, facilities, drives, walkways and other amenities appurtenant to or servicing the complex. 1.2 As used herein, the term "rentable area" shall be computed in accordance with the modified standards of the Building Owners and Managers Association (BOMA) as follows: The rentable area of a floor shall be computed by measuring to the inside surface of the exterior glass building surface excluding any major vertical penetrations of the floor. No deductions shall be made for columns and projections necessary to the building. The rentable area of an office on the floor shall be computed by multiplying the usable area of the office by the quotient of the division of the rentable area of the floor by the usable area of the floor. 1.3 Landlord hereby reserves the right from time to time to relocate Tenant to another part of the Building prior to or during the Term, as hereinafter defined, so long as (a) the number of square feet so substituted equals or exceeds the number of square feet in the Premises and (b) Landlord pays Tenant's reasonable costs of relocation including preparation of the Premises for occupancy. Landlord shall not have any other liability with respect to any such relocation. 2. TERM 2.1 The Premises are leased for a term (herein called the "Term") to commence and end on the dates respectively specified in the Basic Lease Information, unless the Term shall sooner terminate as hereinafter provided. If, on or prior to the date set forth in the Basic Lease Information for the commencement of the Term, Landlord fails to deliver possession of the Premises, either (a) because Landlord's Work (as hereinafter defined in Article 6 hereof) shall not have been substantially completed, or (b) because a previous occupant is holding over, or (c) because of any other cause or reason beyond the reasonable control of Landlord, then the following provisions shall apply: (i) the Term shall not commence on the date set forth above but shall, instead, commence on a date fixed by Landlord in a notice to Tenant, which notice shall state that the Premises are, or prior to the commencement date fixed in such notice will be, substantially completed and ready for occupancy by Tenant; (ii) neither the validity of this Lease nor the obligations of Tenant under this Lease shall be affected by such failure to deliver possession, except that the Term shall begin as provided in clause (i) above; (iii) Tenant shall have no claim against Landlord because of Landlord's failure to deliver possession of the Premises on the date originally fixed therefor; and (iv) in no event shall the expiration date of the Term be extended beyond the date specified in the 2 Basic Lease Information. 2.2 The dates upon which the Term shall commence and terminate pursuant to this Article 2 are herein called the "Commencement Date" and the "Expiration Date," respectively. 2.3 Notwithstanding anything to the contrary herein contained, in the event that the Term shall not have commenced on or before such date as shall be 2 months from the date of this Lease, then this Lease shall be automatically terminated without any further act of either party hereto and both parties hereto shall be released from all obligations hereunder. 3. RENT; ADDITIONAL CHARGES 3.1 Tenant shall pay to Landlord during the Term the Annual Base Rental specified in the Basic Lease Information (herein called the "Rent"), which sum shall be payable by Tenant in equal consecutive monthly installments on or before the first day of each month, in advance, at the address specified for Landlord in the Basic Lease Information, or such other place as Landlord shall designate, without any prior demand therefor and without any deductions or set-off whatsoever. If the Commencement Date should occur on a day other than the first day of a calendar month, or the Expiration Date should occur on a day other than the last day of a calendar month, then the rental for such fractional month shall be prorated upon a daily basis based upon a thirty (30) day month. 3.3 Tenant shall pay to Landlord all charges and other amounts required under this Lease as additional rent hereunder (herein called "Additional Rent"), including, without limitation, any increase in the Rent resulting from the provisions of Article 4 hereof. All such amounts and charges shall be payable to Landlord at the place where the Rent is payable. Landlord shall have the same remedies for a default in the payment of Additional Rent as for a default in the payment of Rent. 4. ADDITIONAL CHARGES FOR INCREASED OPERATING EXPENSES AND TAXES 4.1 For purposes of this Article 4, the following terms shall have the meanings hereinafter set forth: (a) "Tenants Share" shall mean the percentage figure so specified in the Basic Lease Information. Tenant's Share has been computed by dividing the rentable area of the Premises by the total rentable area of the office space in the Building. In the event that either the rentable area of the Premises or the total rentable area of the office space of the Building is changed, Tenant's Share will be appropriately 3 adjusted, and, as to the Tax Year or Expense Year (as said terms are hereinafter defined) in which such change occurs, for purposes of this Article 4, Tenant's Share shall be determined on the basis of the number of days during such Tax Year and Expense Year at each such percentage. (b) "Tax Year" shall mean each twelve (12) consecutive month period commencing January 1st of each year during the Term, including any partial year during which the Lease may commence, provided that Landlord, upon notice to Tenant, may change the Tax Year from time to time to any other twelve (12) consecutive month period and, in the event of any such change, Tenant's Share of Excess Taxes (as hereinafter defined) shall be equitably adjusted for the Tax Year involved in any such change. (c) "Real Estate Taxes" shall mean all taxes, assessments and charges levied upon or with respect to the Building or any personal property of Landlord used in the operation thereof, or Landlord's interest in the Building or such personal property. Real Estate Taxes shall include, without limitation, all general real property taxes and general and special assessments, charges, fees or assessments for transit, housing, police, fire or other governmental services or purported benefits to the Building, service payments in lieu of taxes, and any tax, fee or excise on the act of entering into this Lease or any other lease of space in the Building, or on the use or occupancy of the Building or any part thereof, or on the rent payable under any lease or in connection with the business of renting space in the Building, that are now or hereafter levied or assessed against Landlord by the United States of America, the State of California, or any political subdivision, public corporation, district or other political or public entity, and shall also include any other tax, fee or other excise, however described, that may be levied or assessed as a substitute for, or as an addition to, in whole or in part, any other Real Estate Taxes, whether or not now customary or in the contemplation of the parties on the date of this Lease, Real Estate Taxes shall not include franchise, transfer, inheritance or capital stock taxes or income taxes measured by the net income of Landlord from all sources, unless, due to a change in the method of taxation, any of such taxes is levied or assessed against Landlord as a substitute for, or as an addition to, in whole or in part, any other tax that would otherwise constitute a Real Estate Tax. Real Estate Taxes shall also include reasonable legal fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce Real Estate Taxes. (d) "Excess Taxes" with respect to any Tax Year shall mean the amount, if any, by which Real Estates Taxes for such Tax Year exceed or are less than the amount set forth in the Basic Lease Information. (e) "Expense Year" shall mean each twelve (12) consecutive month period commencing January 1st of each year during the Term, including any partial year during which the Lease may commence, provided that Landlord, upon notice to Tenant, may change the Expense Year from time to time to any other twelve (12) consecutive month period, and, in the event of any such change, Tenant's Share of Excess Expenses (as hereinafter defined) shall be equitably adjusted for the Expense Years involved in any such change. (f) "Expenses" shall mean the total cost and expenses paid or incurred by Landlord in connection with the management, operation, maintenance and repair of the office space and the common areas of the Building, including, without limitation, (i) the cost of air conditioning, electricity, steam, heating, mechanical, ventilating, escalator and elevator systems and all other utilities and the cost of supplies and equipment and maintenance and service contracts in connection therewith, (ii) the cost of repairs and general maintenance cleaning, (iii) the cost of fire, extended coverage, boiler, sprinkler, public liability, property damage, rent, earthquake and other insurance, (iv) wages, salaries and other labor costs, including taxes, insurance, retirement, medical and other employee benefits, (v) fees, charges and other costs, including management fees, consulting fees, legal fees and accounting fees, of all independent contractors engaged by Landlord or reasonably charged by Landlord if Landlord performs management services in connection with the Building, (vi) the cost of supplying, replacing and cleaning employee uniforms, (vii) the fair market rental value of Landlord's and the property manager's offices in the Building, (viii) the cost of any capital improvements made to the Building after completion of its construction as a labor-saving device or to effect other economies in the operation or maintenance of the Building, or made 4 to the Building after the date of this Lease, that are required under a governmental law or regulation that was not applicable to the Building at the time that permits for the construction thereof were obtained, such cost to be amortized over such reasonable period as Landlord shall determine, together with interest on the unamortized balance at the rate of fifteen percent (15%) per annum or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing such capital improvements, and (ix) any other expenses of any other kind whatsoever reasonably incurred in managing, operating, maintaining, and repairing the Building. For purposes of computing Tenant's Additional Charges pursuant to this Article 4, Expenses for the entire Building that are not, in Landlord's sole discretion, allocable or chargeable solely to either the office or retail space of the Building shall be allocated between and charged to the office and retail space of the Building on an equitable basis as determined by Landlord. Expenses shall be adjusted to reflect a ninety-five percent (95%) occupancy of the Building during any period in which the Building is not at least ninety-five percent (95%) occupied. (g) "Excess Expenses" with respect to any Expense Year shall mean the amount, if any, by which Expenses for such Expense Year exceed the amount set forth in the Basic Lease Information. 4.2 Tenant shall pay to Landlord as Additional Charges one twelfth (1/12th) of Tenant's Share of the Excess Taxes of each Tax Year on or before the first day of each month during such Tax Year, in advance, in an amount estimated by Landlord and billed by Landlord to Tenant; provided that Landlord shall have the right initially to determine monthly estimates and to revise such estimates one time per year. With reasonable promptness after Landlord has received the tax bills for any Tax Year, Landlord shall furnish Tenant with a statement (herein called "Landlord's Tax Statement") setting forth the amount of Real Estate Taxes for such Tax Year, and Tenant's Share, if any, of Excess Taxes. If the actual Excess Taxes for such Tax Year exceed the estimated Excess Taxes paid by Tenant for such Tax Year, Tenant shall pay to to Landlord the difference between the amount paid by Tenant and the actual Excess Taxes within 30 days after the receipt of Landlord's Tax Statement, and if the total amount paid by Tenant for any such Tax Year shall exceed the actual Excess Taxes for such Tax Year, such excess shall be credited against the next installment of Excess Taxes due from Tenant to Landlord hereunder. 4.3 Tenant shall pay to Landlord as Additional Charges one twelfth (1/12th) of Tenant's Share of the Excess Expenses for each Expense Year on or before the first day of each month of such Expense Year, in advance, in an amount estimated by Landlord and billed by Landlord to Tenant; provided that Landlord shall have the right initially to determine monthly estimates and to revise such estimates from time to time. With reasonable promptness after the expiration of each Expense Year, Landlord shall furnish Tenant with a statement (herein called "Landlord's Expense Statement"), setting forth in reasonable detail the Expenses for the Base Expense Year and such Expense Year, and Tenant's Share, if any, of Excess Expenses. If the actual Excess Expenses for such Expense Year exceed the estimated Excess Expenses paid by Tenant for such Expense Year, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual Excess Expenses within 30 days after the receipt of Landlord's Expense Statement, and if the total amount paid by Tenant for any such Expense Year shall exceed the actual Excess Expenses for such Expense Year, such excess shall be credited against the next installment of the estimated Excess Expenses due from Tenant to Landlord hereunder. 4.4 If the Expiration Date fixed for this Lease shall occur on a date other than the end of a Tax Year or Expense Year, Tenant's Share of Excess Taxes, if any, and Excess Expenses, if any, for the Tax Year and the Expense Year in which the Expiration Date falls shall be in the proportion that the number of days from and including the first day of the Tax Year of Expense Year in which the Expiration Date occurs to and including the Expiration Date bears to 365; provided, however, Landlord may, pending the determination of the amount, if any, of Excess Taxes and Excess Expenses for such partial Tax Year and Expense Year, furnish Tenant with statements of estimated Excess Taxes, estimated Excess Expenses, and Tenant's Share of each thereof for such partial Tax Year and Expense Year. Within 30 days after receipt of such estimated statement, Tenant shall remit to Landlord, as Additional Charges, the amount of Tenant's Share of such Excess Taxes and Excess Expenses. After such Excess Taxes and 5 such Excess Expenses have been finally determined and Landlord's Tax Statement and Landlord's Expense Statement have been furnished to Tenant pursuant to Articles 4.2 and 4.3 hereof, respectively, and if there shall have been an underpayment of Tenant's Share of Excess Taxes or Excess Expenses, Tenant shall remit the amount of such underpayment to Landlord within fifteen (15) days of receipt of such statements, and if there shall have been an overpayment, Landlord shall remit the amount of any such overpayment to Tenant within fifteen (15) days of the issuance of such statements. 5. TERMS OF PAYMENT 5.1 Except as specifically provided to the contrary in this Lease, Tenant shall pay to Landlord, within five (5) days after delivery by Landlord to Tenant of bills or statements therefor: (a) sums equal to all expenditures made and monetary obligations incurred by Landlord including, without limitation, expenditures made and obligations incurred for reasonable counsel fees, in connection with the remedying by Landlord for Tenant's account pursuant to the provisions of Article 18 hereof; (b) sums equal to all losses, costs, liabilities, damages and expenses referred to in Article 18 hereof; (c) sums equal to all expenditures made and monetary obligations incurred by Landlord, including, without limitation, expenditures made and obligations incurred for reasonable counsel fees, in collecting or attempting to collect the Rent, any Additional Charges or any other sum of money accruing under this Lease or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law; and (d) all other sums of money (other than Rent) accruing from Tenant to Landlord under the provisions of this Lease. Any sum of money (other than Rent) accruing from Tenant to Landlord pursuant to any provision of this Lease, including, without limitation, the provisions of Exhibit B attached hereto, whether prior to or after the Commencement Date, may, at Landlord's option, be deemed Additional Charges. Tenant's obligations under this Article 5.1 shall survive the expiration or sooner termination of the Term. 5.2 If Tenant shall fail to pay any Rent or Additional Charges within three (3) days after the date same is due and payable, such unpaid amounts shall be subject to a late payment charge equal to 5% percent of such unpaid amounts in each instance to cover Landlord's additional administrative cost and cost of funds resulting from Tenant's failure. Such late payment charge shall not impair any other remedies available to Landlord. 5.3 If any of the Rent or Additional Charges payable under the terms and provisions of this Lease shall be or become uncollectible, reduced or required to be refunded because of any act or law enacted by a governmental authority, Tenant shall enter into such agreement(s) and take such other steps (without additional expense to Tenant) as Landlord may request and as may be legally permissible to permit Landlord to collect the maximum rents which from time to time during the continuance of such legal rent restriction may be legally permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction, (a) the Rent and/or Additional Charges shall become and thereafter be payable in accordance with the amounts reserved herein for the periods following such termination, and (b) Tenant shall pay to Landlord promptly upon being billed, to the maximum extent legally permissible, an amount equal to (i) the Rent and/or Additional Charges which would have been paid pursuant to this Lease but for such legal rent restriction less (ii) the rents paid by Tenant during the period such legal rent restriction was in effect. 6. LANDLORD'S WORK 6.1 Prior to the Commencement Date, Landlord will perform the work and make the installations in the Premises substantially as set forth in Exhibit B annexed hereto and made a part hereof (such work and installations being herein called "Landlord's Work"). Landlord's obligation to perform Landlord's Work shall not require Landlord to incur overtime costs and expenses and shall be subject to unavoidable delays due to acts of God, governmental restrictions, strikes, labor disturbances, shortages of material and supplies, and for any other cause or event beyond Landlord's reasonable control. Landlord shall, when construction progress so permits, notify Tenant in advance of the approximate date on which Landlord's Work will be substantially completed in accordance with Exhibit B and will notify Tenant when Landlord's Work is in fact so completed, which latter notice shall constitute delivery of possession of the Premises to 6 Tenant and notice to Tenant of the Commencement Date pursuant to Article 2.1. If any dispute shall arise as to whether the Premises are substantially completed and ready for Tenant's occupancy, a certificate furnished by Landlord's architect certifying the date of substantial completion shall be conclusive of that fact and date and binding upon Landlord and Tenant. It is understood and agreed by Tenant that any minor changes from any plans or from said Exhibit B that may be necessary during construction of the Building or the Premises shall not affect or change this Lease or invalidate same. It is agreed that by occupying the Premises, Tenant formally accepts same and acknowledges that the Premises are in the condition called for hereunder. Failure of Landlord to deliver possession of the Premises within the time and in the condition provided for in this Lease will not give rise to any claim for damages by Tenant against Landlord or Landlord's contractor. 6.2 The manner in which the common areas are maintained and operated and the expenditures therefor shall be at the sole discretion of Landlord, and the use of such areas and facilities shall be subject to such rules and regulations as Landlord shall make from time to time. The term "common areas" as used herein shall mean the pedestrian sidewalk, malls, truckways, loading docks, hallways, lobby, corridors, delivery areas, elevators and escalators and stairs not contained in the leased areas, public bathrooms and comfort stations and all other areas or improvements that may be provided by Landlord for the convenience and use of the tenants of the Building and their respective sub-tenants, agents, employees, customers, invitees and any other licensees of Landlord. Landlord reserves the rights, from time to time, to utilize portions of the common areas for entertainment, displays, product shows, the leasing of kiosks or such other uses that, in Landlord's judgment, do not unreasonably interfere with Tenant's use and enjoyment of the Premises. 6.3 The purpose of attached Exhibit A is to show the approximate location of the Premises in the Building and Landlord hereby reserves the right, at any time and from time to time, to make alterations or additions to the Building and the common areas. Landlord also reserves the right at any time and from time to time to construct other improvements in the Building (including within the common areas) and to enlarge same and make alterations therein or additions thereto. 7. CONDUCT OF BUSINESS BY TENANT 7.1 Tenant shall use and occupy the Premises during the Term of this Lease solely for the use specified in the Basic Lease Information and for no other use or uses without the prior written consent of Landlord. 7.2 Tenant shall not use or occupy, or permit the use or occupancy of, the Premises or any part thereof for any use other than the use specifically set forth in Article 7.1 hereof, or in any manner that, in Landlord's judgment, would adversely affect or interfere with any services required to be furnished by Landlord to Tenant or to any other tenant or occupant of the Building, or with proper and economical rendition of any such service, or with the use or enjoyment of any part of the Building by any other tenant or occupant. 8. ALTERATIONS AND TENANT'S PROPERTY 8.1 Tenant shall make no changes or alterations in or to the Premises of any nature without Landlord's prior written approval. Prior to commencing any work in the Premises, Tenant shall submit to Landlord for Landlord's written approval complete drawings, plans and specifications (herein collectively referred to as "Tenant's Plan") for the improvements and installations to be made by Tenant (herein collectively referred to as "Tenant's Work"). Tenant's Plan shall be fully detailed and shall show complete dimensions, shall not be in conflict with Landlord's basic plans for the Building, shall not require any changes in the structure of the Building and shall not be in violation of any laws, orders, rules or regulations of any governmental department or bureau having jurisdiction over the Premises. After submission to Landlord of Tenant's Plan, Landlord shall either approve same or shall set forth in writing the particulars in which Landlord does not approve same, in which latter case Tenant shall, 7 within 5 days after Landlord's notification, return to Landlord appropriate corrections thereto. Such corrections shall be subject to Landlord's approval. Tenant shall pay to Landlord, promptly upon being billed and as Additional Charges, any charges or expenses Landlord may incur in reviewing Tenant's Plan. Tenant agrees that any review or approval by Landlord of Tenant's Plan is solely for Landlord's benefit, and without any representation or warranty whatsoever to Tenant with respect to the adequacy, correctness or efficiency thereof or otherwise. Tenant further agrees that if Tenant makes any changes in Tenant's Plan subsequent to its approval by Landlord and if Landlord consents to such changes, Tenant shall pay to Landlord all costs and expenses caused by such changes, which Landlord may incur or sustain by reason of delays or changes necessitated in the performance by Landlord of any construction or work it is performing in the Building; it being understood and agreed, however, that Landlord shall have the right to refuse to consent to any such changes. Any charges payable under this Section 8.1 shall be paid by Tenant from time to time under demand as Additional Charges, whether or not the Lease Term shall have commenced. Following compliance by Tenant with its obligations under the foregoing sections of this article, Tenant shall timely commence Tenant's Work in order to complete same within a reasonable period of time. Tenant's Work shall be diligently pursued and shall be performed in a good and workmanlike manner. Tenant agrees that in the performance of Tenant's Work (i) neither Tenant nor its agents or employees shall interfere with the work being done by Landlord and its agents and employees, (ii) that Tenant shall comply with any reasonable work schedule, rules and regulations proposed by Landlord, its agents and employees, (iii) that the labor employed by Tenant shall be harmonious and compatible with the labor employed by Landlord in the Building, it being agreed that if in Landlord's judgment the labor is incompatible Tenant shall forthwith upon Landlord's demand withdraw such labor from the Premises, (iv) that Tenant shall procure and deliver to Landlord workmen's compensation, public liability, property damage and such other insurance policies, in such amounts as shall be reasonably acceptable to Landlord in connection with Tenant's Work, and shall upon Landlord's request cause Landlord to be named as an insured thereunder, (v) that Tenant shall hold Landlord harmless from and against any and all claims arising from or in connection with any act or omission of Tenant or its agents or employees, (vi) that Tenant's Work shall be performed in accordance with the approved Tenant's Plan and in compliance with the laws, orders, rules and regulations of any governmental department or bureau having jurisdiction over the Premises, and (vii) that Tenant shall promptly pay for Tenant's Work in full and shall not permit any lien to attach to the Premises or the Building. As a condition precedent to any such written consent of Landlord, Tenant shall deliver to Landlord written and unconditional waivers of mechanics' and materialmen's liens upon the Building for all work, labor and services to be performed and material to be furnished in connection with proposed alterations. 8.2 All appurtenances, fixtures, improvements, additions and other property attached to or installed in the Premises, whether by Landlord or by or on behalf of Tenant, and whether at Landlord's expense or Tenant's expense, or at the joint expense of Landlord and Tenant, shall be and remain the property of Landlord. Any furnishings and personal property placed in the Premises that are removable without material damage to the Building or the Premises, whether the property of Tenant or leased by Tenant, are herein sometimes called "Tenant's Property." Any replacements of any property of Landlord, whether made at Tenant's expense or otherwise, shall be and remain the property of Landlord. 8.3 Any of Tenant's Property remaining on the Premises at the expiration of the Term shall be removed by Tenant at Tenant's cost and expense, and Tenant shall, at its cost and expense, repair any damage to the Premises or the Building caused by such removal. Any of Tenant's Property not removed from the Premises prior to the expiration of the Term shall, at Landlord's option, become the property of Landlord or Landlord may remove such Tenant's Property, and Tenant shall pay to Landlord Landlord's cost of removal and of any repairs in connection therewith within ten (10) days after the receipt of a bill therefor. Tenant's obligation to pay any such costs shall survive any termination of this Lease. 8 9. REPAIRS 9.1 Tenant shall take good care of the Premises and at Tenant's cost and expense shall make all repairs and replacements, as and when Landlord deems necessary, to preserve the Premises in good working order and in a clean, safe and sanitary condition, except that any structural repairs or structural replacements deemed necessary by Landlord shall be made by Landlord on behalf of Tenant and at Tenant's expense. Landlord shall not be liable for and, except as provided in Article 14 hereof, there shall be no abatement of Rent with respect to any injury to or interference with Tenant's business arising from any repairs, maintenance, alteration or improvement in or to any portion of the Building, including the Premises, or in or to the fixtures, appurtenances and equipment therein. Tenant hereby waives and releases its right to make repairs at Landlord's expense under Sections 1941 and 1942 of the California Civil Code or under any similar law, statute or ordinance now or hereafter in effect. 9.2 All repairs and replacements made by or on behalf of Tenant or any person claiming through or under Tenant shall be made and performed (a) at Tenant's cost and expense and at such time and in such manner as Landlord may reasonably designate, (b) by contractors or mechanics approved by Landlord, (c) so that same shall be at least equal in quality, value, and utility to the original work or installation, and (d) in accordance with the Rules and Regulations for the Building adopted by Landlord from time to time and in accordance with all applicable laws and regulations of governmental authorities having jurisdiction over the Premises. If Landlord gives Tenant notice of the necessity of any repairs or replacements required to be made under Article 9.1 above and Tenant fails to commence diligently to effect the same within 10 days thereafter, Landlord may proceed to make such repairs or replacements and the expenses incurred by Landlord in connection therewith shall be due and payable from Tenant upon demand as Additional Charges; provided that Landlord's making any such repairs or replacements shall not be deemed a waiver of Tenant's default in failing to make the same. Landlord shall operate, maintain and repair the Building in a first class manner. 10. LIENS 10.1 Tenant shall keep the Premises free from any liens arising out of any work performed, material furnished or obligations incurred by or for Tenant or any person or entity claiming through or under Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, cause same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right but not the obligation to cause same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith shall be considered Additional Charges and shall be payable to it by Tenant on demand. Any such action by Landlord shall not in any event be deemed a waiver of Tenant's default with respect thereto. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or that Landlord shall deem proper, for the protection of Landlord, the Premises, the Building, and any other party having an interest therein, from mechanics' and materialmen's liens, and Tenant shall give to Landlord at least ten (10) business days' prior notice of commencement of any construction on the Premises. 11. COMPLIANCE WITH LAWS AND INSURANCE REQUIREMENTS 11.1 Tenant, at Tenant's cost and expense, shall comply with all laws, orders and regulations of federal, state, county and municipal authorities, and with all directions, pursuant to law, of all public officers, that shall impose any duty upon Landlord or Tenant with respect to the Premises or the use or occupancy thereof, except that Tenant shall not be required to make any structural Alterations in order to comply unless such Alterations shall be necessitated or occasioned, in whole or in part, by the acts, omissions or negligence of Tenant or any person claiming through or under Tenant, or any of their servants, employees, contractors, agents, visitors or licensees, or by use or occupancy or manner of use of occupancy of the Premises by Tenant or any such person. Any work or installations made or performed by or on behalf of Tenant or any person claiming through or under Tenant pursuant to the provisions of this Article 11 shall be made in conformity with, and subject to the provisions of, Article 9.2 hereof. 9 11.2 Tenant shall not do anything, or permit anything to be done, in or about the Premises which shall (a) invalidate or be in conflict with the provisions of any fire or other insurance policies covering the Building or any property located therein, or (b) result in a refusal by fire insurance companies of good standing to insure the Building or any such property in amounts reasonably satisfactory to Landlord, or (c) subject Landlord to any liability or responsibility for injury to any person or property by reason of any business operation being conducted in the Premises, or (d) cause any increase in the fire insurance rates applicable to the Building or property located therein at the beginning of the Term or at any time thereafter. Tenant, at Tenant's expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body that shall hereafter perform the function of such Association. 12. SUBORDINATION 12.1 Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, Tenant agrees that this Lease and Tenant's tenancy hereunder are and shall be automatically subject and subordinate at all times to (a) all ground leases or underlying leases that may now exist or hereafter be executed affecting the Building, (b) the lien of any mortgage, deed or trust or similar security instrument that may now exist or hereafter be executed in any amount for which the Building, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security, provided that the mortgages or beneficiaries named in said mortgages or deeds of trust or other parties secured thereunder shall agree to recognize the interest of Tenant under this Lease in the event of foreclosure, if Tenant is not then in default, and (c) all renewals, modifications, consolidations, replacements and extensions of any of the foregoing. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. In the event that any ground lease or underlying lease terminated for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination of any ground lease, underlying lease or lien to this Lease, attorn to and become the Tenant of the successor in interest to Landlord at the option of such successor in interest. Upon such attornment this Lease shall continue in full force and effect as a direct Lease between the successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Lease, except that the successor Landlord shall not (a) be liable for any previous act or omission of Landlord under this Lease; (b) be subject to any offset, not expressly provided for in this Lease, which theretofore shall have accrued to Tenant against Landlord; or (c) be bound by any previous modification of this Lease or by any previous prepayment of more than one month's Rent or Additional Charges, unless such modification or prepayment shall have been expressly approved in writing by the lessor of the superior Lease or the holder of the superior mortgage through or by reason of which the successor Landlord shall have succeeded to the rights of Landlord under this Lease. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents evidencing the priority or subordination of this Lease with request to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust. 13. INABILITY TO PERFORM 13.1 If, by reason of the occurrence of any of the events of unavoidable delay specified in Article 6.1 hereof, Landlord is unable to furnish or is delayed in furnishing any utility or service required to be furnished by Landlord under the provisions of Article 17 or of any other Article of this Lease or of any collateral instrument, or is unable to perform or make or is delayed in performing or making any installations, decorations, repairs, alterations, additions or improvements, whether required to be performed or made under this Lease or under any collateral instrument, or is unable to fulfill or is delayed in fulfilling any of Landlord's other obligations under this Lease or any collateral instrument, no such inability or delay shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of Rent or Additional Charges, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or its agents by reason of inconvenience or annoyance to Tenant or by reason of injury to or interruption of Tenant's business, or otherwise. Tenant hereby waives and releases 10 its right to terminate this Lease under Section 1932(1) of the California Civil Code or under any similar law, statute or ordinance now or hereafter in effect. 14. DESTRUCTION 14.1 If the Premises shall be damaged by fire or other casualty insured against by Landlord's fire and extended coverage insurance policy covering the Building, and if Tenant shall give prompt notice to Landlord of such damage, Landlord, at Landlord's expense, shall repair such damage; provided, however, that Landlord shall have no obligation to repair any damage to or to replace Tenant's Property, Alterations or any other property or effects of Tenant. Except as otherwise provided in this Article 14, if the entire Premises shall be rendered untenantable by reason of any such damage, the Rent shall abate for the period from the date of such damage to the date when such damage to the Premises shall have been repaired, and if only a part of the Premises shall be rendered untenantable, the Rent shall abate for such period in the proportion that the rentable area of the part of the Premises so rendered untenantable bears to the total rentable area of the Premises; provided, however, if, prior to the date when all of such damage shall have been repaired, any part of the Premises so damaged shall be rendered tenantable or shall be used or occupied by Tenant or any person or persons claiming through or under Tenant, then the amount by which the Rent shall abate shall be equitably apportioned for the period from the date of any such use or occupancy to the date when all such damage shall have been repaired. 14.2 Notwithstanding the provisions of Article 14.1 hereof, if, prior to or during the Term (a) the Premises shall be totally damaged or rendered wholly untenantable by fire or other casualty, and if Landlord shall determine, in its sole discretion, not to restore the Premises, or (b) the Building shall be so damaged by fire or other casualty that, in Landlord's opinion, substantial alteration, demolition or reconstruction of the Building shall be required (whether or not the Premises shall have been damaged or rendered untenantable), then, in any of such events, Landlord, at Landlord's option, may give to Tenant, within ninety (90) days after such fire or other casualty, a thirty (30) days' notice of termination of this Lease and, in the event such notice is given, this Lease and the Term shall terminate upon the expiration of such thirty (30) days with the same effect as if the date of expiration of such thirty (30) days were the Expiration Date; and the Rent and Additional Charges shall be apportioned as of such date and any prepaid portion of Rent or Additional Charges of any period after such date shall be refunded by Landlord to Tenant. 14.3 Landlord shall attempt to obtain and maintain, throughout the Term, in Landlord's property insurance policies, provisions to the effect that such policies shall not be invalidated should the insured waive, in writing, prior to loss, any or all right of recovery against any party for loss occurring to the Building. In the event that at any time Landlord's property insurance carriers shall exact an additional premium for the inclusion of such or similar provisions, Landlord shall give Tenant notice thereof. In such event, if Tenant agrees, in writing, to reimburse Landlord for such additional premium for the remainder of the Term, Landlord shall require the inclusion of such or similar provisions by Landlord's property insurance carriers. As long as such or similar provisions are included in Landlord's property insurance policies then in force, Landlord hereby waives any right of recovery against Tenant, any other permitted occupant of the Premises, and any of their servants, employees, agents or contractors, for any loss occasioned by fire or other property that is an insured risk under such policies. In the event that at any time Landlord's property insurance carriers shall not include such or similar provisions in Landlord's property insurance policies, the waivers set forth in the foregoing sentence shall, upon notice given by Landlord to Tenant, be deemed of no further force or effect. 14.4 Except to the extent expressly provided in Article 14.3 hereof, nothing contained in this Lease shall relieve Tenant of any liability to Landlord or to its insurance carriers which Tenant may have under law or under the provisions of this Lease in connection with any damage to the Premises or the Building by fire or other casualty. 14.5 Notwithstanding the provisions of Article 14.1 hereof, if any such damage is due to the fault or neglect of Tenant, any person claiming through or under Tenant, or any of their servants, employees, agents, contractors, visitors or licensees, then there shall be no abatement of Rent or Additional Charges 11 by reason of such damages, unless Landlord is reimbursed for such abatement of Rent or Additional Charges pursuant to any rental insurance policies that Landlord may, in its sole discretion, elect to carry. 14.6 The Provisions of this Lease, including this Article 14, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises or any other portion of the Building, and any statute or regulation of the State of California, including, without limitations, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of any express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises or the Building. 15. EMINENT DOMAIN 15.1 If all of the Premises is condemned or taken in any manner for public or quasi-public use, including but not limited to a conveyance or assignment in lieu of a condemnation or taking, this Lease shall automatically terminate as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or other taking. If a part of the Premises is so condemned or taken, this Lease shall automatically terminate as to the portion of the Premises so taken as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or taking. If such portion of the Building is condemned or otherwise taken so as to require, in the opinion of Landlord, a substantial alteration or reconstruction of the remaining portions thereof, this Lease may be terminated by Landlord, as of the earlier of the date of the vesting of title or the date of dispossession of Tenant as a result of such condemnation or taking, by written notice to Tenant within sixty (60) days following notice to Landlord of the date on which said vesting or dispossession will occur. If such portion of the Premises is taken so as to render the remaining portion untenantable and unusable by Tenant, this Lease may be terminated by Tenant as of the earlier of the date of the vesting of title or the date of dispossesion of Tenant as a result of such condemnation or taking, by written notice to Landlord within sixty (60) days following notice to Tenant of the date on which said vesting or dispossession will occur. 15.2 Landlord shall be entitled to the entire award in any condemnation proceeding or other proceeding for taking for public or quasi-public use, including, without limitation, any award made for the value of the leasehold estate created by this Lease. No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award that may be made in such condemnation or other taking, together with any and all rights of Tenant now or hereafter arising in or to same or any part thereof; provided, however, that nothing contained herein shall be deemed to give Landlord any interest in or to require Tenant to assign to Landlord any award made to Tenant specifically for its relocation expenses or the taking of personal property and fixtures belonging to Tenant. 15.3 In the event of a partial condemnation or other taking that does not result in a termination of this Lease as to the entire Premises, the Rent and Additional Charges shall abate in proportion to the portion of the Premises taken by such condemnation or other taking. 15.4 If all or any portion of the Premises is condemned or otherwise taken for public or quasi-public use for a limited period of time, this Lease shall remain in full force and effect and Tenant shall continue to perform all of the terms, conditions and covenants of this Lease; provided, however, the Rent and Additional Charges shall abate during such limited period in proportion to the portion of the Premises that is rendered untenantable and unusable as a result of such condemnation or other taking. Landlord shall be entitled to receive the entire award made in connection with any such temporary condemnation or other taking. 16. ASSIGNMENT 16.1 Tenant shall not directly or indirectly, voluntarily or by operation of law, sell, assign, encumber, pledge or otherwise transfer or hypothecate all or any part of the Premises or Tenant's leasehold estate hereunder (collectively, "Assignment"), or permit the Premises to be occupied by anyone other than 12 Tenant or sublet the Premises (collectively, "Sublease") or any portion thereof without Landlord's prior written consent in each instance. 16.2 If Tenant desires at any time to enter into an Assignment of this Lease or a Sublease of the Premises or any portion thereof, it shall first give written notice to Landlord of its desire to do so, which notice shall contain (a) the name of the proposed assignee, subtenant or occupant, (b) the nature of the proposed assignee's, subtenant's or occupant's business to be carried on in the Premises, (c) the portion(s) (including all) of the Premises to be subject to such Assignment or Sublease and the other terms and provisions of the proposed Assignment or Sublease, and (d) such financial information as Landlord may reasonably request concerning the proposed assignee, subtenant or occupant. 16.3 At any time within sixty (60) days after Landlord's receipt of the notice specified in Article 16.2 hereof, Landlord may by written notice to Tenant elect to (a) Sublease itself the portion of the Premises specified in Tenant's notice or any portion thereof, (b) take an Assignment of Tenant's leasehold estate specified in Tenant's notice hereunder, or any portion thereof, (c) terminate this Lease as to the portion (including all) of the Premises that is specified in Tenant's notice, with a proportionate abatement in the Rent, (d) consent to the Sublease or Assignment, or (e) disapprove the Sublease or Assignment. In the event Landlord elects to Sublease or take an Assignment from Tenant as described in subsections (a) and (b) above, the rent payable by Landlord shall be the lower of that set forth in Tenant's notice or the Rent payable by Tenant under this Lease at the time of the Assignment or Sublease (or a proportionate amount thereof representing the portion of the Premises subject to the Assignment or Sublease, if less than the entire Premises is subject to the Assignment or Sublease). In the event Landlord elects any of the options set forth in subsections (a), (b) and (c) above, with respect to a portion of the Premises, (i) Tenant shall at all times provide reasonable and appropriate access to such portion of the Premises and use of any common facilities, and (ii) Landlord shall have the right to use such portion of the Premises for any legal purpose in its sole discretion and the right to further assign or sublease the portion of the Premises subject to Landlord's election without the consent of Tenant. If Landlord consents to the Sublease or Assignment within said sixty (60) day period, Tenant may thereafter within ninety (90) days after Landlord's consent, but not later than the expiration of said ninety (90) days, enter into such Assignment or Sublease of the Premises or portion thereof, upon the terms and conditions set forth in the notice furnished by Tenant to Landlord pursuant to Article 16.2 hereof; provided that if any amounts are payable to Tenant in consideration of Tenant's entering into such Sublease or Assignment or as rent thereunder, Tenant shall pay to Landlord monthly during the term of such Sublease or Assignment as Additional Rent an amount equal to any amount by which the total of all such amounts payable to Tenant exceeds the monthly Rent then otherwise in effect under the Lease. 16.4 No consent by Landlord to any Assignment or Sublease by Tenant shall relieve Tenant of any obligation to be performed by Tenant under this Lease, whether arising before or after the Assignment or Sublease. The consent by Landlord to any Assignment or Sublease shall not relieve Tenant from the obligation to obtain Landlord's express written consent to any other Assignment or Sublease. Any Assignment or Sublease that is not in compliance with this Article 16 shall be void and, at the option of Landlord, shall constitute a material default by Tenant under this Lease. The acceptance of Rent or Additional Charges by Landlord from a proposed assignee or sublessee shall not constitute the consent to such Assignment or Sublease by Landlord. 16.5 Any sale or other transfer, including by consolidation, merger or reorganization, of a majority of the voting stock of Tenant, if Tenant is a corporation, or any sale or other transfer of a majority of the partnership interests in Tenant, if Tenant is a partnership, shall be an Assignment for purposes of this Article 16. As used in this Article 16.5, the term "Tenant" shall also mean any entity which has guaranteed Tenant's obligations under this Lease, and the prohibition hereof shall be applicable to any sales or transfers of the stock or partnership interests of said guarantor. 16.6 Each assignee, sublessee, or other transferee, other than Landlord, shall assume, as provided in this Article 16.6, all obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for the payment of Rent and Additional Charges, and for the performance of all 13 the terms, covenants, conditions and agreements herein contained on Tenant's part to be performed for the Term; provided, however, that the assignee, sublessee, mortgagee, pledgee or other transferee shall be liable to Landlord for rent only in the amount set forth in the Assignment or Sublease. No Assignment shall be binding on Landlord unless the assignee or Tenant shall deliver to Landlord a counterpart of the Assignment and an instrument in recordable form that contains a covenant of assumption by the assignee satisfactory in substance and form to Landlord, consistent with the requirements of this Article 16.6, but the failure or refusal of the assignee to execute such instrument of assumption shall not release or discharge the assignee from its liability as set forth above. 16.7 In no event shall this Lease be assigned or assignable by operation of law or by voluntary or involuntary bankruptcy proceedings or otherwise, and in no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency, reorganization or other debtor relief proceedings. 16.8 If Tenant is a partnership (or is comprised of two (2) or more persons, individually and/or as co-partners of a partnership) or if Tenant's interest in this Lease shall be assigned to a partnership (or to two (2) or more persons, individually and/or as co-partners of a partnership) pursuant to this article (any such partnership and such persons are referred to in this section as "Partnership Tenant"), the following provisions of this section shall apply to such Partnership Tenant: (a) the liability of each of the parties comprising Partnership Tenant shall be joint and several, and (b) each of the parties comprising Partnership Tenant hereby consents in advance to, and agrees to be bound by, any written instrument which may hereafter be executed, changing, modifying or discharging this Lease, in whole or in part, or surrendering all or any part of the Premises to Landlord or renewing or extending this Lease and by any notices, demands, requests or other communications which may hereafter be given, by Partnership Tenant or by any of the parties comprising Partnership Tenant, and (c) any bills, statements, notices, demands, requests or other communications given or rendered to Partnership Tenant or to any of the parties comprising Partnership Tenant shall be deemed given or rendered to Partnership Tenant and to all such parties and shall be binding upon Partnership Tenant and to all such parties, and (d) if Partnership Tenant shall admit new partners, all of such new partners shall, by their admission to Partnership Tenant, be deemed to have assumed performance of all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, and (e) Partnership Tenant shall give prompt notice to Landlord of the admission of any such new partners and, upon demand of Landlord, shall cause each such new partner to execute and deliver to Landlord an agreement in form satisfactory to Landlord, wherein each such new partner shall assume performance of all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed (but neither Landlord's failure to request any such agreement nor the failure of any such new partner to execute or deliver any such agreement to Landlord shall vitiate the provisions of subdivision (d) of this section). 17. UTILITIES 17.1 As long as Tenant is not in default in the performance of its obligations under this Lease, Landlord shall furnish to the Premises during the period from 8:00 a.m. to 6:00 p.m., Monday through Friday, except for New Year's Day, Washington's Birthday, Memorial Day, Independence Day, Labor Day, Thanksgiving, Christmas and such other holidays as are generally recognized in the area where the Building is located, and subject to rules and regulations from time to time established by Landlord: (a) heating, air conditioning and ventilation in amounts required, in Landlord's reasonable judgment, for the use and occupancy of the Premises, (b) freight and passenger elevator service, (c) electric current in amounts required for normal lighting by building standard overhead fluorescent fixtures and for normal fractional horsepower office machines, and (d) water for lavatory and drinking purposes. It is understood that such freight and passenger elevator service, electric current and water will be available twenty-four (24) hours a day, subject to Articles 17.2, 17.3 and 17.4 hereof. Landlord shall provide janitorial service five days per week generally consistent with that furnished in other first-class office buildings in the area in which the Building is located, and window washing as determined by Landlord. Anything contained herein to the contrary notwithstanding, Tenant shall not permit the electrical current for the lighting devices located upon the Premises, including, without limitation, building standard lighting fixtures, non-building 14 standard lighting fixtures and task lighting, to at any time exceed an average of 2.2 watts per Gross Square Foot of Conditioned Floor Area (as said term is defined in the California Administrative Code, Title 24, Part 6, Division T-20, Chapter 2, Subchapter 4) of the Premises. 17.2 Landlord may impose a reasonable charge and establish reasonable rules and regulations At Tenant's request, Landlord shall provide a schedule of after-hours charges. Any increases shall be limited to actual increases experienced by Landlord. for the use of any heating, air conditioning, ventilation or electric current by Tenant at any time other than during the hours set forth in Article 17.1, and for the usage of any additional or unusual janitorial services required because of any non-building standard improvements in the Premises, the carelessness of Tenant, the nature of Tenant's business (including the operation of Tenant's business other than from 8:00 a.m. to 6:00 p.m., Monday through Friday) and the removal of any refuse and rubbish from the Premises except for discarded material placed in wastepaper baskets and left for emptying as an incident to Landlord's normal cleaning of the Premises. Landlord shall not be required to provide janitorial services for portions of the Premises used for preparing or consuming food or beverages, for storage or as a mail room or storage room or for similar purposes or as a lavatory other than the lavatory rooms shown on Exhibit A attached hereto. 17.3 Landlord shall not be liable for any interruption in or failure to furnish any services or utilities when such interruption or failure is caused by acts of God, accidents, breakage, repairs, strikes, lockouts, other labor disputes, the making of repairs, alterations or improvements to the Premises or the Building, the inability to obtain an adequate supply of fuel, steam, water, electricity, labor or other supplies or by any other condition beyond Landlord's reasonable control, including, without limitation, any governmental energy conservation program, and Tenant shall not be entitled to any damages resulting from such failure nor shall such failure relieve Tenant of the obligation to pay the full Rent and Additional Charges reserved hereunder or constitute or be construed as a constructive or other eviction of Tenant. In the event any governmental entity promulgates or revises any statute, ordinance or building, fire or other code or imposes mandatory or voluntary controls or guidelines on Landlord or the Building or any part thereof, relating to the use or conservation of energy, water, gas, light or electricity or the reduction of automobile or other emissions or the provision of any other utility or service provided with respect to this Lease or in the event Landlord is required or elects to make alterations to any part of the Building in order to comply with such mandatory or voluntary controls or guidelines, Landlord may, in its sole discretion, comply with such mandatory or voluntary controls or guidelines or make such alterations to the Building. Such compliance and the making of such alterations shall in no event entitle Tenant to any damages, relieve Tenant of the obligation to pay the full Rent and Additional Charges reserved hereunder or constitute or be construed as a constructive or other eviction of Tenant. 17.4 Without the prior written consent of Landlord, which Landlord may refuse in its sole discretion, Tenant shall not use any apparatus or device in the Premises, including, without limitation, electronic data processing machines, punch card machines and machines using current in excess of 110 volts or that will in any way increase the amount of electricity or water usually furnished or supplied for use of the Premises as general office space; nor shall Tenant connect any apparatus, machine or device with water pipes or electric current (except through existing electrical outlets in the Premises), for the purposes of using electric current or water. If Tenant shall utilize such excess electric current, Landlord shall have the right to install an electric current meter in the Premises to measure the amount of electric current consumed on the Premises. The cost of any such meter and separate conduit, wiring or panel requirements and the installation, maintenance and repair thereof shall be paid for by Tenant and Tenant agrees to reimburse Landlord promptly upon demand therefor by Landlord for all such excess electric current as shown by said meter, at the rates charged for such services by the city in which the Building is located or the local public utility furnishing the same, plus any additional expense incurred in keeping the account of the electric current so consumed. If the temperature otherwise maintained in any portion of the Premises by the heating, air conditioning or ventilation systems is affected as a result of (a) any lights, machines or equipment (including without limitation electronic data processing machines) used by Tenant in the Premises, (b) the occupancy of the Premises by more than two persons per one hundred seventy-five (175) square feet of rentable area therein, or (c) an electrical load in excess of four watts per square foot of rentable area of the Premises, Landlord shall have the right to install any machinery and equipment that Landlord reasonably deems necessary to restore temperature balance, including, without limitation, modifications to the standard air conditioning equipment, and the cost thereof, including the cost of 15 installation and any additional cost of operation and maintenance incurred thereby, shall be paid by Tenant to Landlord as Additional Rent hereunder upon demand by Landlord. In addition, Tenant shall be responsible for any HVAC problems that occur in the Premises or the Building as a result of occupancy by more than 1 person per 175 rentable square feet of space or as a result of an electrical load in excess of three watts per rentable square foot of Premises. 18. DEFAULT 18.1 Events of Default. The occurrence of any of the following shall constitute an event of default on the part of Tenant: (a) Nonpayment of Rent. Failure to pay an installment of Rent or Additional Charges due and payable hereunder, upon the date when said payment is due, such failure continuing for a period of three (3) business days after written notice of such failure; provided, however, that Landlord shall not be required to provide such notice more than twice during the Term, the third such non-payment constituting default without requirement of notice; (b) Other obligations. Failure to perform any obligations, agreement or covenant under this lease other than those matters specified in subparagraph (a) of this Article 18.1, such failure continuing for ten (10) business days after written notice of such failure (or such longer period as is reasonably necessary to remedy such default), provided that Tenant shall continuously and diligently pursue such remedy at all times until such default is cured; (c) Abandonment. Vacation or abandonment of the Premises together with non-payment of rent for a continuous period in excess of five (5) business days. Tenant waives any right to notice Tenant may have under Section 1951.3 of the Civil Code of the State of California, the terms of this subparagraph (c) being deemed such notice to Tenant as required by said Section 1951.3; (d) General Assignment. A general assignment by Tenant for the benefit of creditors; (e) Bankruptcy. The filing of any voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition by Tenant's creditors, which involuntary petition remains undischarged for a period of ten (10) business days; (f) Receivership. The employment of a receiver to take possession of substantially all of Tenant's assets or the Premises, if such receivership remains undissolved for a period of ten (10) business days after creation thereof; (g) Attachment. The attachment, execution or other judicial seizure of all or substantially all of Tenant's assets or the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of ten (10) business days after the levy thereof; (h) Insolvency. The admission by Tenant in writing of its inability to pay its debts as they become due, the filing by Tenant of a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the filing by Tenant of any answer admitting or failing timely to contest a material allegation of a petition filed against Tenant in any such proceeding or, if within ten (10) days after the commencement of any proceeding against Tenant seeking any reorganization, or arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed. 18.2 Upon the occurrence of any event of default by Tenant which is not cured by Tenant within the grace periods specified in Article 18.1 hereof, Landlord shall have the following rights and remedies in addition to all other rights or remedies available to Landlord in law or equity: (a) The rights and remedies provided by California Civil Code Section 1951.2, including but not limited to the right to terminate Tenant's right to possession of the Premises and to recover the 16 worth at the time of award of the amount by which the unpaid Rent and Additional Charges for the balance of the Term after the time of award exceeds the amount of rental loss for the same period that the Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2; (b) The rights and remedies provided by California Civil Code Section 1951.4, that allows Landlord to continue this Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover Rent and Additional Charges as they become due, for so long as Landlord does not terminate Tenant's right to possession; provided, however, if Landlord elects to exercise its remedies described in this subsection (b) and Landlord does not terminate this Lease, and if Tenant requests Landlord's consent to an Assignment of this Lease or a Sublease of the Premises at such time as Tenant is in default, Landlord shall not unreasonably withhold its consent to such assignment or sublease. Acts of maintenance or preservation, efforts to relet the Premises or the appointment of a receiver upon the Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession; (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law; (d) The right and power, as attorney-in-fact for Tenant, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply the proceeds therefrom pursuant to applicable California law. Landlord, as attorney-in-fact for Tenant, may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the Term) and at such rent and at such other terms as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each such subletting, (i) Tenant shall be immediately liable for payment to Landlord of, in addition to indebtedness other than Rent and Additional Charges due hereunder, the cost of such subletting and such alterations and repairs incurred by Landlord and the amount, if any, by which the Rent and Additional Charges for the period of such subletting (to the extent such period does not exceed the Term) exceeds the amount to be paid as Rent and Additional Charges for the Premises for such period, or (ii) at the option of Landlord, rents received from such subletting shall be applied, first, to payment of any indebtedness other than Rent and Additional Charges due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third, to payment of Rent and Additional Charges due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future Rent and Additional Charges as the same become due hereunder. If Tenant has been credited with any rent to be received by such subletting under clause (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under clause (ii) during any month are less than those to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. For all purposes set forth in this Article 18.2 (d), Landlord is hereby irrevocably appointed attorney-in-fact for Tenant, with power of substitution. No taking possession of the Premises by Landlord, as attorney-in-fact for Tenant, shall be construed as an election on its part to terminate this Lease unless a written notice of such intention is given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach; (e) The right to have a receiver appointed for Tenant, upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord as attorney-in-fact for Tenant pursuant to Article 18.2(d) hereof; and (f) The right, without notice, to remedy default for Tenant's account and at Tenant's expense, without thereby waiving any other rights or remedies of Landlord with respect to such default. 17 19. INDEMNITY 19.1 Tenant agrees to indemnify Landlord and save Landlord harmless from any and all loss, cost, liability, damage and expense including, without limitation, penalties, fines and reasonable counsel fees, incurred in connection with or arising from any cause whatsoever in or about the Premises, including, without limiting the generality of the foregoing, (a) any default by Tenant in the observance or performance of any of the items, covenants or conditions of this Lease on Tenant's part to be observed or performed, or (b) the use or occupancy or manner of use or occupancy of the Premises by Tenant or any person claiming through or under Tenant, or (c) the condition of the Premises or any occurrence or happening on the Premises from any cause whatsoever, or (d) any acts, omissions or negligence of Tenant or any person claiming through or under Tenant, or of the contractors, agents, servants, employees, visitors or licensees of Tenant or any such person, in or about the Premises or the building, either prior to, during, or after the expiration of, the Term including, without limitation, any acts, omissions or negligence in the making or performing of any alterations. Tenant further agrees to indemnify and save harmless Landlord, Landlord's agents, and the lessor under all ground or underlying leases, from and against any and all loss, cost, liability, damage and expense including, without limitation, reasonable counsel fees, incurred in connection with or arising from any claims by any persons by reason of injury to persons or damage to property occasioned by any use, occupancy, condition, occurrence, happening, act, omission or negligence referred to in the preceding sentence. 20. TENANTS INSURANCE 20.1 Tenant shall procure at its cost and expense and keep in effect during the Term comprehensive general liability insurance including contractual liability with a minimum combined single limit of liability of two million dollars ($2,000,000). Such insurance shall name Landlord as an additional insured, shall specifically include the liability assumed hereunder by Tenant (provided that the amount of such insurance shall not be construed to limit the liability of Tenant hereunder), and shall provide that it is primary insurance, and not excess over or contributory with any other valid, existing and applicable insurance in force for or on behalf of Landlord, and shall provide that Landlord shall receive thirty (30) days' written notice from the insurer prior to any cancellation or change of coverage. Tenant shall deliver policies of such insurance or certificates thereof to Landlord on or before the Commencement Date, and thereafter at least thirty (30) days before the expiration dates of expiring policies; and, in the event Tenant shall fail to procure such insurance, or to deliver such policies or certificates, Landlord may, at its option, procure same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Charges within five (5) days after delivery to Tenant of bills therefor. Tenant's compliance with the provisions of this Article 20.1 shall in no way limit Tenant's liability under any of the other provisions of this Article 20. 21. LIMITATION OF LANDLORD'S LIABILITY 21.1 Landlord shall not be responsible for or liable to Tenant for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining premises or any part of the premises adjacent to or connected with the Premises or any part of the Building or for any loss or damage resulting to Tenant or its property from burst, stopped or leaking water, gas, sewer or steam pipes or for any damage or loss of property within the Premises from any causes whatsoever, including theft. 22. ACCESS TO PREMISES 22.1 Upon reasonable notice to Tenant, Landlord reserves and shall at all times have the right to enter the Premises at all reasonable times to inspect same, to supply any service to be provided by Landlord to Tenant hereunder, to show the Premises to prospective purchasers, mortgagees or tenants, to post notices of nonresponsibility, and to alter, improve or repair the Premises and any portion of the Building, without abatement of Rent or Additional Charges, and may for that purpose erect, use and maintain scaffolding, pipes, conduits and other necessary structures in and through the Premises where reasonably required by the character of the work to be performed, provided that the entrance to the Premises shall not be blocked thereby, and further provided that the business of Tenant shall not be interfered with unreasonably. Tenant hereby 18 waives any claim for damages for any injury or inconvenience to or interference with Tenants business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes, or special security areas (designated in advance), and Landlord shall have the right to use any and all means that Landlord may deem necessary or proper to open said doors in an emergency, in order to obtain entry to any portion of the Premises, and any entry to the Premises or portions thereof obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time, without same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor, to change the arrangement and/or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets and other public parts of the Building. 23. NOTICES 23.1 Except as otherwise expressly provided in this Lease, any bills, statements, notices, demands, requests or other communications given or required to be given under this Lease shall be effective only if rendered or given in writing, sent by registered or certified mail or delivered personally, (a) to Tenant (i) at Tenant's address set forth in the Basic Lease Information, if sent prior to Tenant's taking possession of the Premises, or (ii) at the Building if sent subsequent to Tenant's taking possession of the Premises, or (iii) at any place where Tenant or any agent or employee of Tenant may be found if sent subsequent to Tenant's vacating, deserting, abandoning or surrendering the Premises, or (b) to Landlord at Landlord's address set forth in the Basic Lease Information, or (c) to such other address as either Landlord or Tenant may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Article 23.1. Any such bill, statement, notice, demand, request or other communication shall be deemed to have been rendered or given two (2) days after the date when it shall have been mailed as provided in this Article 23 sent by registered or certified mail, or upon the date personal delivery is made. If Tenant is notified of the Identity and address of Landlord's mortgagee or ground or underlying lessor, Tenant shall give to such mortgagee or ground or underlying lessor notice of any default by Landlord under the terms of this Lease in writing sent by registered or certified mail, and such mortgagee or ground or underlying lessor shall be given a reasonable opportunity to cure such default prior to Tenant exercising any remedy available to it. 24. NO WAIVER 24.1 No failure by Landlord to insist upon the strict performance of any obligation of Tenant under this Lease or to exercise any right, power or remedy consequent upon a breach thereof, no acceptance of full or partial Rent or Additional Charges during the continuance of any such breach, and no acceptance of the keys to or possession of the Premises prior to the termination of the Term by any employee of Landlord shall constitute a waiver of any such breach or of such term, covenant or condition or operate as a surrender of this Lease. No payment by Tenant or receipt by Landlord of a lesser amount than the aggregate of all Rent and Additional Charges then due under this Lease shall be deemed to be other than on account of the first items of such Rent and Additional Charges then accruing or becoming due, unless Landlord elects otherwise; and no endorsement or statement on any check and no letter accompanying any check or other payment of Rent or Additional Charges in any such lesser amount and no acceptance of any such check or other such payment by Landlord shall constitute an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or Additional Charges or to pursue any other legal remedy. 25. TENANTS CERTIFICATES 25.1 Tenant, at any time and from time to time upon not less than ten (10) days' prior written notice from Landlord, will execute, acknowledge and deliver to Landlord and, at Landlord's request, to any prospective purchaser, ground or underlying lessor or mortgagee of any part of the Real Property, a 19 certificate of Tenant stating: (a) that Tenant has accepted the Premises (or, if Tenant has not done so, that Tenant has not accepted the Premises and specifying the reasons therefor), (b) the Commencement and Expiration Dates of this Lease, (c) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that same is in full force and effect as modified and stating the modifications), (d) whether or not there are then existing any defenses against the enforcement of any of the obligations of Tenant under this Lease (and, if so, specifying same), (e) whether or not there are then existing any defaults by Landlord in the performance of its obligations under this Lease (and, if so, specifying same), (f) the dates, if any, to which the Rent and Additional Charges and other charges under this Lease have been paid, and (g) any other information that may reasonably be required by any of such persons. It is intended that any such certificate of Tenant delivered pursuant to this Article 25.1 may be relied upon by Landlord and any prospective purchaser, ground or underlying lessor or mortgagee of any part of the real property. 26. RULES AND REGULATIONS 26.1 Tenant shall faithfully observe and comply with the rules and regulations attached to this Lease as Exhibit C and all modifications thereof and additions thereto from time to time put into effect by Landlord. Landlord shall not be responsible for the nonperformance by any other tenant or occupant of the Building of any said rules and regulations. In the event of an express and direct conflict between the terms, covenants, agreements and conditions of this Lease and the terms, covenants, agreements and conditions of such rules and regulations, as modified and amended from time to time by Landlord, this Lease shall control. Landlord shall enforce all such rules and regulations in a non-discriminatory manner. 27. TAX ON TENANTS PERSONAL PROPERTY AND OVERSTANDARD TENANT IMPROVEMENTS 27.1 prior to delinquency, Tenant shall pay all taxes levied or assessed upon Tenant's equipment, furniture, fixtures and other personal property located in or about the Premises. If the assessed value of Landlord's property is increased by the inclusion therein of a value placed upon Tenant's equipment, furniture, fixtures or other personal property, Tenant shall pay to Landlord, upon written demand, the taxes so levied against Landlord, or the portion thereof resulting from said increase in assessment. 27.2 Tenant shall pay to Landlord, upon written demand, such portion of all real estate taxes levied or assessed against Landlord that are attributable to the value of the Tenant improvements placed in the Premises in excess of the value of the Building Standard Work (as defined in Exhibit B attached hereto) for the Premises. If the assessing authority allocated a specific value to said over-building standard tenant improvements of Tenant, the amount payable by Tenant shall be the tax attributable to such specific value. If the assessing authority does not allocate a specific value to said over-building standard tenant improvements of Tenant, the amount payable by Tenant pursuant to this Article 27.2 shall be an amount equal to the total tax assessed against improvements that include said Tenant improvements multiplied by a fraction, the numerator of which is the cost of said over-building standard tenant improvements in excess of the cost of the Building Standard Work for the Premises and the denominator of which is the total cost of the improvements covered by assessment. 27.3 The portion of real estate taxes payable by Tenant pursuant to Article 27.1 and .27.2 hereof and by other tenants of the Building pursuant to similar provisions in their leases shall be excluded from Real Estate Taxes for purposes of computing the Additional Charges to be paid under Article 4 hereof. 28. SECURITY DEPOSIT 28.1 By execution of this Lease, Landlord acknowledges receipt of Tenant's security deposit for the faithful performance of all terms, covenants and conditions of this Lease. The sum of the security deposit is specified in the Basic Lease Information. Tenant shall also pay such reasonable additional security deposit that Landlord may require for the issuance of each "key card" Landlord may issue to Tenant. Tenant agrees that Landlord may, without waiving any of Landlord's other rights and remedies under this Lease upon the occurrence of any of the events of default described in Article 18 hereof, apply the security deposit to remedy any failure by Tenant to repair or maintain the Premises or to perform any 20 other terms, covenants or conditions contained herein. If Tenant has kept and performed all terms, covenants and conditions of this Lease during the Term, Landlord will within thirty (30) days following the termination hereof return said sum to Tenant or the last permitted assignee of Tenant's interest hereunder at the expiration of the Term. Should Landlord use any portion of the security deposit to cure any default by Tenant hereunder, Tenant shall forthwith replenish the security deposit to the original amount. Landlord shall not be required to keep the security deposit separate from its general funds, and Tenant shall not be entitled to interest on any such deposit. Upon the occurrence of any of the events of default described in Article 18 hereof, the security deposit shall become due and payable to Landlord to the extent required to compensate Landlord for damages incurred, or to reimburse Landlord as provided herein, in connection with any such event of default. 29. AUTHORITY 29.1 If Tenant signs as a corporation or a partnership, each of the persons executing this Lease on behalf of Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing entity, that Tenant has and is qualified to do business in California, that Tenant has full right and authority to enter into this Lease, and that each and both of the persons signing on behalf of Tenant are authorized to do so. Upon Landlord's request, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord confirming the foregoing covenants and warranties. 30. MISCELLANEOUS 30.1 The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. The words used in neuter gender include the masculine and feminine. If there is more than one Tenant, the obligations under this Lease imposed on Tenant shall be joint and several. The captions preceding the articles of this Lease have been inserted solely as a matter of convenience and such captions in no way define or limit the scope or intent of any provision of this Lease. 30.2 The terms, covenants and conditions contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided herein, their respective personal representatives and successors and assigns; provided, however, upon the sale, assignment or transfer by the Landlord named herein (or by any subsequent landlord) of its interest in the Building as owner or lessee, including any transfer by operation of law, the Landlord (or subsequent landlord) shall be relieved from all subsequent obligations or liabilities under this Lease, and all obligations subsequent to such sale, assignment or transfer (but not any obligations or liabilities that have accrued prior to the date of such sale, assignment or transfer) shall be binding upon the grantee, assignee or other transferee, who, by accepting such interest, shall be deemed to have assumed such subsequent obligations and liabilities. A lease of the entire Building to a person other than for occupancy thereof shall be deemed a transfer within the meaning of this Article 30.2 30.3 If any provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and be enforced to the full extent permitted by law. 30.4 This Lease shall be construed and enforced in accordance with the laws of the State of California. 30.5 Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 30.6 This instrument, including the Exhibits hereto, which are made a part of this Lease, contains the entire agreement between the parties and all prior negotiations and agreements are merged herein. Neither Landlord nor Landlord's agents have made any representations or warranties with respect to the Premises, the Building or this Lease except as expressly set forth herein, and no rights, easements or 21 licenses are or shall be acquired by Tenant by implication or otherwise unless expressly set forth herein. 30.7 The review, approval, inspection or examination by Landlord of any item to be reviewed, approved, inspected or examined by Landlord under the terms of this Lease or the exhibits attached hereto shall not constitute the assumption of any responsibility by Landlord for either the accuracy or sufficiency of any such item or the quality or suitability of such item for its intended use. Any such review, approval, inspection or examination by Landlord is for the sole purpose of protecting Landlord's interests in the Building and under this Lease, and no third parties, including, without limitation, Tenant or any person or entity claiming through or under Tenant, or the contractors, agents, servants, employees, visitors or licensees of Tenant or any such person or entity, shall have any rights hereunder. 30.8 In the event that either Landlord or Tenant fails to perform any of its obligations under this Lease or in the event a dispute arises concerning the meaning or interpretation of any provision of this Lease, the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable counsel fees. 30.9 Upon the expiration or sooner termination of the Term, Tenant will quietly and peacefully surrender to Landlord the Premises in the condition in which they are required to be kept as provided in Article 9 hereof, ordinary wear and tear and the provisions of Article 14 excepted. 30.10 Upon Tenant paying the Rent and Additional Charges and performing all of Tenant's obligations under this Lease, Tenant may peacefully and quietly enjoy the Premises during the Term as against all persons or entities lawfully claiming by or through Landlord; subject, however, to the provisions of this Lease and to any mortgages or ground or underlying leases referred to in Article 12 hereof. 30.11 Tenant covenants and agrees that no diminution of light, air or view by any structure that may hereafter be erected (whether or not by Landlord) shall entitle Tenant to any reduction of Rent or Additional Charges under this Lease, result in any liability of Landlord or Tenant, or in any other way affect this Lease or Tenant's obligations hereunder. 30.12 Any holding over after the expiration of the Term with the consent of Landlord shall be construed to be a tenancy from month to month at one hundred twenty-five percent (125%) of the Rent herein specified (prorated on a monthly basis), unless Landlord shall specify a different rent in its sole discretion, together with an amount estimated by Landlord for the monthly Additional Charges payable under this Lease, and shall otherwise be on the terms and conditions herein specified so far as applicable. Any holding over without Landlord's consent shall constitute a default by Tenant and entitle Landlord to reenter the Premises as provided in Article 18 hereof. 30.13 Neither this Lease nor any term or provision hereof may be changed, waived, discharged or terminated orally, and no breach thereof shall be waived, altered or modified, except by a written instrument signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. No waiver of any breach shall affect or alter this Lease, but each and every term, covenant and condition of this Lease shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. 30.14 The Tenant herein covenants by and for itself, its heirs, executors, administrators and assigns, and all persons claiming under or through it, and this Lease is made and accepted upon and subject to the following conditions: that there shall be no discrimination against or segregation of any person or group of persons, on account of race, color, creed, religion, sex, marital status, age, handicaps, national origin or ancestry, in the leasing, subleasing, transferring, use, occupancy, tenure or enjoyment of the Premises herein leased nor shall the Tenant itself, or any person claiming under or through it, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy, of tenants, lessees, subtenants, sublessees or vendees in the Premises herein leased. 22 30.15 Tenant shall look only to Landlord's estate in the Building for the satisfaction of Tenant's remedies or for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default by Landlord hereunder, and no other property or assets of Landlord or its partners or principals, disclosed or undisclosed, shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder or Tenant's use or occupancy of the Premises. 30.16 If Tenant shall request Landlord's consent and Landlord shall fail or refuse to give such consent, Tenant shall not be entitled to any damages for any withholding by Landlord of its consent, it being intended that Tenant's sole remedy shall be an action for specific performance or injunction, and that such remedy shall be available only in those cases where Landlord has expressly agreed in writing not to unreasonably withhold its consent or where as a matter of law Landlord may not unreasonably withhold its consent. PACIFIC TOWERS ASSOCIATES, a California Limited Partnership NETGATEWAY, Inc. By: SIC-Long Beach, a California By: /s/ [Illegible] Limited Partnership, General Partner ------------------------------- Its: C.O.O. By: The Swig Company, a California ------------------------------ Corporation, General Partner By: /s/ [Illegible] By: /s/ Jeanne Wye ------------------------------- ---------------------- Its: President Its: President ------------------------------ --------------------- A-1 PACIFIC TOWERS ASSOCIATES STANDARD FORM OFFICE LEASE EXHIBIT A FLOOR PLAN EXHIBIT A [FLOOR PLAN OMITTED] PACIFIC TOWERS ASSOCIATES STANDARD FORM OFFICE LEASE EXHIBIT B WORK AGREEMENT SEE LEASE ADDENDUM - -------------------------------------------------------------------------------- C1 PACIFIC TOWERS ASSOCIATES STANDARD FORM OFFICE LEASE EXHIBIT C RULES AND REGULATIONS 1. BUILDING RULES AND REGULATIONS (a) The sidewalks, halls, passages, exits, entrances, elevators, shopping areas, escalators and stairways of the Building shall not be obstructed by Tenant or used by it for any purpose other than for ingress to and egress from the Premises. The halls, passages, exits, entrances, elevators, shopping areas, escalators and stairways are not for the use of the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of its business, unless such person are engaged in illegal activities. Tenant shall not go upon the roof of the Building, except in areas that Landlord may designate as "common areas" from time to time. (b) No sign, placard, picture, name, advertisement or notice visible from the exterior of the Premises shall be inscribed, painted, affixed or otherwise displayed by Tenant on any part of the Building without the prior written consent of Landlord. Landlord will adopt and furnish to Tenant general guidelines relating to signs inside the Building on the office floors. Tenant agrees to conform to such guidelines. All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord. Material visible from outside the Building will not be permitted. (c) The Premises shall not be used for the storage of merchandise held for sale to the general public or for lodging. No cooking shall be done or permitted by Tenant on the Premises, except that use by Tenant of Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, provided that such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations. (d) Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises, unless otherwise agreed to by Landlord in writing. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the C2 purpose of cleaning the Premises or any portion of the Building. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Janitorial service will not be furnished on nights when rooms are occupied after 9:30 P.M. unless, by agreement in writing, service is extended to a later hour for specifically designated rooms. (e) Landlord will furnish Tenant with two (2) keys to the Premises, free of charge. No additional locking devices shall be installed without the prior written consent of Landlord. Landlord may impose a reasonable charge for any additional lock or any bolt installed on any door of the Premises without the prior consent of Landlord. Tenant shall in each case furnish Landlord with a key for any such lock. Tenant, upon the termination of its tenancy, shall deliver to Landlord all keys to doors in the Premises. (f) The freight elevator shall be available for use by Tenant, subject to such reasonable scheduling as Landlord shall deem appropriate. The persons employed by Tenant to move equipment or other items in or out of the Building must be acceptable to Landlord. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, supplies, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute the weight of such objects, Landlord will not be responsible for loss of or damage to any such property from any cause, and all damage done to the Building by moving or maintaining Tenant's property shall be repaired at the expense of Tenant. (g) Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or flammable or combustible fluid or materials or use any method of heating or air conditioning other than that supplied by Landlord. Tenant shall not use, keep or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, and/or vibrations, or interfere in any way with other tenants or those having business in the Building. (h) Landlord reserves the right to exclude from the Building between the hours of 6 P.M. and 8 A.M. and at all hours on Saturdays, Sundays, and legal holidays all persons who do not present a pass to the Building signed by Landlord. Landlord will furnish passes to persons for whom Tenant requests same in writing. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In the case of invasion, mob, dot, public excitement or other circumstances rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building during the continuance of same by such action as Landlord may deem appropriate, including closing doors. C3 (i) The directory of the Building will be provided for the display of the name and location of tenants and a reasonable number of the principal officers and employees of tenants, and Landlord reserves the right to exclude any other names therefrom. Any additional name that Tenant shall desire to place upon the directory must first be approved by Landlord and, if so approved, a charge will be made therefor. (j) No curtains, draperies, blinds, shutters, shades, screens or other coverings, hangings or decorations shall be attached to, hung or placed in, or used in connection with any window of the Building without the prior written consent of Landlord. In any event, with the prior written consent of Landlord, such items shall be installed on the office side of Landlord's standard window covering and shall in no way be visible from the exterior of the Building. (k) Tenant shall not obtain for use in the Premises ice, drinking water, food, beverage, towel or other similar services, except at such reasonable hours and under such reasonable regulations as may be fixed by Landlord. (l) Tenant shall see that the doors of the Premises are closed and locked and that all water faucets, water apparatus and utilities are shut off before Tenant or Tenant's employees leave the Premises, so as to prevent waste or damage, and for any default or carelessness in this regard Tenant shall make good all injuries sustained by other tenants or occupants of the Building or Landlord. On multiple-tenancy floors, all tenants shall keep the doors to the Building corridors closed at all times except for ingress and egress. (m) The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than for which they were constructed, no foreign substance of any kind whatsoever shall be deposited therein, and any damage resulting to same from Tenant's misuse thereof shall be paid by Tenant. (n) Except with the prior consent of Landlord, Tenant shall not sell, or permit the sale from the Premises of, or use or permit the use of any sidewalk or mail area adjacent to the Premises for the sale of, newspapers, magazines, periodicals, theater tickets or any other goods, merchandise or service, nor shall Tenant carry on, or permit or allow any employees or other person to carry on, business in or from the Premises for the service or accommodation of occupants of any other portion of the complex, nor shall the Premises be used for manufacturing of any kind, or for any business or activity other than that specifically provided for in Tenant's lease. (o) Tenant shall not install any radio or television antenna, loudspeaker, or other device on the root or exterior walls of the Building. C4 (p) Tenant shall not use in any space, or in the common areas of the Building, any hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. No other vehicle of any kind shall be brought by Tenant into the Building or kept in or about the Premises. (q) Tenant shall store all its trash and garbage within the Premises until removal of same to such location in the Building as' may be designated from time to time by Landlord. No material shall be placed in the Building trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the City of Long Beach without being in violation of any law or ordinance governing such disposal. (r) All loading and unloading of merchandise, supplies, materials, garbage and refuse shall be made only through such entryways and elevators and at such time as Landlord shall designate. In its use of the loading areas on the first basement floor, Tenant shall not obstruct or permit the obstruction of said loading areas, and at no time shall Tenant park vehicles therein except for loading and unloading. (s) Canvassing, soliciting, peddling or distribution of handbills or any other written material in the Building is prohibited and Tenant shall cooperate to prevent same. (t) Tenant shall immediately, upon request from Landlord (which request need not be in writing), reduce its lighting in the Premises for temporary periods designated by Landlord, when required in Landlord's judgment to prevent overloads of the mechanical or electrical systems of the Building. (u) Landlord reserves the right to select the name of the Building and to make such change or changes of name as it may deem appropriate from time to time, and Tenant shall not refer to the Building by any name other than: (1) the name selected by Landlord (as same may be changed from time to time), or (if) the postal address, approved by the United States Post Office. Tenant shall not use the name of the Building in any respect other than as an address of its operation in the Building without the prior written consent of Landlord. (v) The requirements of Tenant will be attended to only upon application by telephone or writing or in person at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. (w) Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of these Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. C5 (x) Wherever the word "Tenant" occurs in these Rules and Regulations, it is understood and agreed that it shall mean Tenant's associates, agents, clerks, employees and visitors. Wherever the word "Landlord" occurs in these Rules and Regulations, it is understood and agreed that it shall mean Landlord's assigns, agents, clerks, employees and visitors. (y) These Rules and Regulations are in addition to, and shall not be construed in any way to modify, alter or amend, in whole or pail, the terms, covenants, agreements and conditions of any lease of premises in the Building. (z) Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building, and for the preservation of good order therein. 2. PARKING RULES AND REGULATIONS Tenant and its agents, employees, invitees and other authorized users (collectively "Authorized Users") shall strictly comply at all times with the following rules and regulations in their use of the Arco Center parking facilities. (a) Tenant and its Authorized Users shall not park vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building. (b) Tenant and Authorized Users shall not leave vehicles in the Building parking areas overnight nor park any vehicles in the Building parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks; said vehicles shall be subject to towing. Landlord may, in its sole discretion, designate separate areas for bicycles and motorcycles. (c) Cars must be parked entirely within the stall lines painted on the floor. (d) All directional signs and arrows must be observed. (e) The speed limit shall be 5 miles per hour. (f) Parking is prohibited, unless a floor parking attendant approved by Landlord directs otherwise: (i) In areas not striped for parking (ii) In aisles; C6 (iii) Where "No Parking" or "Handicap" signs are posted; (iv) On ramps; (v) In crosshatched areas; or (vi) In such other areas as may be designated by Landlord, its agent, lessee or licensee. (g) Parking stickers or any other device or form of identification supplied by Landlord shall remain the property of Landlord. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferrable, and any device in the possession of an unauthorized holder will be void. There will be a replacement charge to the Tenant or Authorized Users of $35.00 for loss of any magnetic parking card or other parking identification device. Tenant acknowledges that Tenant shall not be entitled a greater number of parking stickers or other devices or forms of identification than parking privileges allotted to Tenant (h) Garage managers or attendants are not authorized to make or allow any exceptions to these Rules and Regulations. (i) Every Authorized User is requested to park and lock his own car. All responsibility, for damage to cars is assumed by Authorized Users. Tenant shall repair or cause to be repaired at its sole cost and expense any and a1l damage to the Building parking facility or any part thereof caused by Tenant or its Authorized Users or resulting from vehicles of Authorized Users. (j) Loss or theft of parking identification devices from automobiles must be reported to the garage manager immediately. Any parking identification devices found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution. Lost or stolen devices previously reported and then found must be reported found to the office of the garage immediately. (k) Spaces are for the express purpose of one automobile per space unless a floor parking attendant approved by Landlord directs otherwise. Washing, waxing, cleaning or servicing of any vehicle by the Authorized Users and/or his agents is prohibited. (1) The garage management reserves the right to refine the issuance of monthly stickers or other parking identification devices to any Tenant, Authorized Users, or person and/or his agents or representatives who willfully refuse to comply with the above Rules and Regulations or any city, state or federal ordinance, law or agreement. C7 (m) Authorized Users shall not load or unload in areas other than those designated by Landlord for such activities. (n) Authorized Users and unauthorized users parked in prohibited areas are subject to towing at their own expense. (o) Landlord reserves the right to revoke parking privileges for vehicles creating or causing a nuisance, as such shall be determined by Landlord in Landlord's sole discretion. D1 PACIFIC TOWERS ASSOCIATES STANDARD FORM OFFICE LEASE EXHIBIT D PARKING AGREEMENT The undersigned, as Landlord and Tenant respectively, are executing, simultaneously with this Parking Agreement, a written Lease covering Premises as described in the Lease and hereby attach this Parking Agreement to said Lease as Exhibit D thereto. Landlord shall make available to Tenant the right to park in the Building (on a self-parking basis or on such other basis as may be presently in effect as determined by the operator of the parking facilities of the Building) throughout the Term of this Lease up to at least the number of parking spaces specified in the Basic Lease Information. Said parking shall be on a non-reserved basis unless otherwise specified. Tenant must specify in writing to Landlord no later than the commencement of the Term of this Lease the number of parking spaces desired by Tenant during the Term of this Lease. Tenant shall pay to Landlord at the beginning of the Lease Term the monthly amount specified in the Basic Lease Information per parking space, and thereafter the then current fair market rental as defined below. In the event that Tenant elects at any time not to utilize its full parking allowance, Landlord shall have the right to make such unused spaces available to other tenants of the Building and Tenant's allowance of parking spaces shall be reduced accordingly. Landlord shall individually contract with Tenant or Tenant's employees for the parking spaces referred to above, The "fair market rental" for parking in the Building for those spaces that Tenant elects to utilize shall be that rent which is reasonably determined in good faith by Landlord to be the then current fair market rental rate for such spaces giving consideration to the parking charges for similar space in buildings within the same community boundaries as the Building. PACIFIC TOWER ASSOCIATES, a California Limited Partnership By: SIC - Long Beach, a California Limited Partnership, General Partner By: The Swig Company, a California Corporation, General Partner By: /s/ [Illegible] ------------------------------------ Title: President --------------------------------- NETGATEWAY, INC., a Nevada corporation By: /s/ [Illegible] ------------------------------------ Title: C.O.O. --------------------------------- By: /s/ [Illegible] ------------------------------------ Title: President --------------------------------- Tenant If Tenant is a corporation, this Lease must be executed by (1) the Chairman, President, or Vice-President and (2) the Secretary, any Assistant Secretary, the Chief Financial Officer or any Assistant Treasurer. EX-10.9 13 FORM IDCS AGREE BTW NET & EXODUS Exhibit 10.9 EXODUS COMMUNICATIONS, INC. INTERNET DATA CENTER SERVICES AGREEMENT THIS INTERNET DATA CENTER SERVICES AGREEMENT (this "Agreement") is made effective as of the Submission Date (___________ ___, 1998) indicated in the initial Internet Data Center Services Order Form accepted by Exodus, by and between Exodus Communications, Inc. ("Exodus") and the customer identified below ("Customer"). PARTIES: CUSTOMER NAME: NETGATEWAY ADDRESS: 300 OCEANGATE, SUITE 500 LONG BEACH, CA 90802 PHONE: 562-435-0664 FAX: 562-453-9701 EXODUS COMMUNICATIONS, INC. 2650 San Tomas Expressway Santa Clara, CA 95051 Phone: (408) 346-2200 Fax: (408) 346-2206 1. INTERNET DATA CENTER SERVICES. Subject to the terms and conditions of this Agreement, during the term of this Agreement, Exodus will provide to Customer the services described in the Internet Data Center Services Order Form(s) ("IDC Services Order Form(s)") accepted by Exodus, or substantially similar services if such substantially similar services would provide Customer with substantially similar benefits, provided that such substantially similar services are first approved by Customer in writing. ("Internet Data Center Services"). All IDC Services Order Forms accepted by Exodus are incorporated herein by this reference, each as of the Submission Date indicated in such form. 2. FEES AND BILLING. 2.1 Fees. Customer will pay all fees due according to the IDC Services Order Form(s). 2.2 Billing Commencement. Billing for Internet Data Center Services, other than Setup Fees, indicated in the initial IDC Services Order Form shall commence on the earlier to occur of (i) the "Installation Date" indicated in the initial IDC Services Order Form, regardless of whether Customer has commenced use of the Internet Data Center Services, unless Customer is unable to install the Customer Equipment and/or use the Internet Data Center Services by the Installation Date due to the fault of Exodus, then billing will not begin until the date Exodus has remedied such fault and (ii) the date the "Customer Equipment" (Customer's computer hardware and other tangible equipment, as identified in the Customer Equipment List which is incorporated herein by this reference) is placed by Customer in the "Customer Area" (the portion(s) of the Internet Data Centers, as defined in Section 3.1 below, made available to Customer hereunder for the placement of Customer Equipment) and is operational. All Setup Fees will be billed upon receipt of a Customer signed IDC Services Order Form. In the event that Customer orders additional Internet Data Center Services, billing for such services shall commence on the date Exodus first provides such additional Internet Data Center Services to Customer or as otherwise agreed to by Customer and Exodus. 2.3 Billing and Payment Terms. Customer will be billed monthly in advance of the provision of Internet Data Center Services, and payment of such fees will be due within thirty (30) days of the date of each Exodus 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 Exodus determines that Customer is not creditworthy or is otherwise not financially secure, Exodus may, upon fifteen (15) days prior written notice to Customer, modify the payment terms to require full payment before the provision of Internet Data Center Services or other assurances to secure Customer's payment obligations hereunder. 2.4 Taxes. All payments required by this Agreement are exclusive of all national, state, municipal or other governmental excise, sales, value-added, use, personal property, and occupational taxes, excises, withholding taxes and obligations and other levies now in force or enacted in the future, all of which Customer will be responsible for and will pay in full, except for taxes based on Exodus' net income. 3. CUSTOMER'S OBLIGATIONS. 3.1 Compliance with Law and Rules and Regulations. Customer agrees that Customer will comply at all times with all applicable laws and regulations and Exodus' general rules and regulations relating to its provision of Internet Data Center Services, as updated and provided by Exodus to customer from time to time ("Rules and Regulations"). Customer acknowledges that Exodus exercises no control whatsoever over the content of the information passing through its sites containing the Customer Area and equipment and facilities used by Exodus to provide Internet Data Center Services ("Internet Data Centers"), and that it is the sole responsibility of Customer to ensure that the information it transmits and receives complies with all applicable laws and regulations. 3.2 Customer's Costs. Intentionally Deleted. 3.3 Access and Security. Customer will be fully responsible for any charges, costs, expenses (other than those included in the Internet Data Center Services), and third party claims that may result from its use of, or access to, the Internet Data Centers and/or the Customer Area including but not limited to any unauthorized use of any access devices provided by Exodus hereunder. Except with the advanced written consent of Exodus, Customer's access to the Internet Data Centers will be limited solely to the individuals identified and authorized by Customer to have access to the Internet Data Centers and the Customer Area in accordance with this Agreement, as identified in the Customer Registration Form, as amended from time to time, which is hereby incorporated by this reference ("Representatives"). 3.4 No Competitive Services. Customer may not at any time permit any Internet Data Center Services to be utilized for the provision of any services that compete with any Exodus services, without Exodus' prior written consent. 3.5 Insurance. (a) Minimum Levels. Both parties will keep in full force and effect during the term of this Agreement: (i) comprehensive general liability insurance in an amount not less than $2 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. Both parties also agree that each will, and 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 both parties and their agents' industries. (b) Certificates of Insurance. Prior to installation of any Customer Equipment in the Customer Area, the parties will furnish each other with certificates of insurance which evidence the minimum levels of insurance set forth above. (c) Naming Exodus as an Additional Insured. Both parties agree that prior to the installation of any Customer Equipment, the parties will cause their insurance provider(s) to name the other party as an additional insured and notify the other party 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 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 Customer. (a) Customer Equipment. Customer represents and warrants that it owns or has the legal right and authority, and will continue to own or maintain the legal right and authority during the term of this Agreement, to place and use the Customer Equipment as contemplated by this Agreement. Customer further represents and warrants that its placement, arrangement, and use of the Customer Equipment in the Internet Data Centers complies with the Customer Equipment Manufacturer's environmental and other specifications. (b) Customer's Business. Customer represents and warrants that Customer's services, products, materials, data, information and Customer Equipment used by Customer in connection with this Agreement as well as Customer's and its permitted customers' and users' use of the Internet Data Center Services (collectively, "Customer's Business") does not as of the Installation Date, and will not during the term of this Agreement operate in any manner that would violate any applicable law or regulation. (c) Rules and Regulations. Customer has read the Rules and Regulations and represents and warrants that Customer and Customer's Business are currently in material compliance with the Rules and Regulations, and will remain so at all times during the term of this Agreement. (d) 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, Exodus will have the right, upon five (5) days written notice to NonStandard - NetGateway EXODUS COMMUNICATIONS, INC. CONFIDENTIAL AND PROPRIETARY (rev 6/98) Customer and an opportunity to cure such breach during such five (5) day period, , to suspend any related Internet Data Center Services if deemed reasonably necessary by Exodus to prevent any harm to Exodus and its business. 5.2 Warranties and Disclaimers by Exodus. 5.2(a) Service Level Warranty. In the event Customer experiences any of the following and Exodus determines in its reasonable judgment that such inability was caused by Exodus' failure to provide Internet Data Center Services for reasons within Exodus' reasonable control and not as a result of any actions or inactions of Customer or any third parties (including Customer Equipment and third party equipment), Exodus will, upon Customer's request in accordance with paragraph (iii) below, credit Customer's account as described below: (i) Inability to Access the Internet (Downtime). If Customer is unable to transmit and receive information from Exodus' Internet Data Centers (i.e., Exodus' LAN and WAN) to other portions of the Internet because Exodus failed to provide the Internet Data Center Services for more than fifteen (15) consecutive minutes, Exodus will credit Customer's account the pro-rata connectivity charges (i.e., all bandwidth related charges) for one (1) day of service, up to an aggregate maximum credit of connectivity charges for seven (7) days of service in any one calendar (1) month. Exodus' scheduled maintenance of the Internet Data Centers and Internet Data Center Services, as described in the Rules and Regulations, shall not be deemed to be a failure of Exodus to provide Internet Data Center Services. For purposes of the foregoing, "unable to transmit and receive" shall mean sustained packet loss in excess of 50% based on Exodus' measurements. (ii) Packet Loss and Latency. Exodus does not proactively monitor the packet loss or transmission latency of specific customers. Exodus does, however, proactively monitor the aggregate packet loss and transmission latency within its LAN and WAN. In the event that Exodus discovers (either from its own efforts or after being notified by Customer) that Customer is experiencing packet loss in excess of one percent (1%) ("Excess Packet Loss") or transmission latency in excess of 120 milliseconds round trip time (based on Exodus' measurements) between any two Internet Data Centers within Exodus' U.S. network (collectively, "Excess Latency", and with Excess Packet Loss "Excess Packet Loss/Latency"), and Customer notifies Exodus (or confirms that Exodus has notified Customer), Exodus will take all actions necessary to determine the source of the Excess Packet Loss/Latency. (A) Time to Discover Source of Excess Packet Loss/Latency; Notification of Customer. Within two (2) hours of discovering the existence of Excess Packet Loss/Latency, Exodus will determine whether the source of the Excess Packet Loss/Latency is limited to the Customer Equipment and the Exodus equipment connecting the Customer Equipment to Exodus' LAN ("Customer Specific Packet Loss/Latency"). If the Excess Packet Loss/Latency is not a Customer Specific Packet Loss/Latency, Exodus will determine the source of the Excess Packet Loss/Latency within two (2) hours after determining that it is not a Customer Specific Packet Loss/Latency. In any event, Exodus will notify Customer of the source of the Excess Packet Loss/Latency within sixty (60) minutes after identifying the source. (B) Remedy of Excess Packet Loss/Latency. If the Excess Packet Loss/Latency remedy is within the sole control of Exodus, Exodus will remedy the Excess Packet Loss/Latency within two (2) hours of determining the source of the Excess Packet Loss/Latency. If the Excess Packet Loss/Latency is caused from outside of the Exodus LAN or WAN, Exodus will notify Customer and will use commercially reasonable efforts to notify the party(ies) responsible for the source and cooperate with it(them) to resolve the problem as soon as possible. (C) Failure to Determine Source and/or Resolve Problem. In the event that Exodus is unable to determine the source of and remedy the Excess Packet Loss/Latency within the time periods described above (where Exodus was solely in control of the source), Exodus will credit Customer's account the pro-rata connectivity charges for one (1) day of service for every two (2) hours after the time periods described above that it takes Exodus to resolve the problem, up to an aggregate maximum credit of connectivity charges for seven (7) days of service in any one (1) month. (iii) Customer Must Request Credit: To receive any of the credits described in this section 5.2(a), Customer must notify Exodus within seven (7) business days from the time Customer becomes eligible to receive a credit. Failure to comply with this requirement will forfeit Customer's right to receive a credit. (iv) Remedies Shall Not Be Cumulative; Maximum Credit: In the event that Customer is entitled to multiple credits hereunder arising from the same event, such credits shall not be cumulative and Customer shall be entitled to receive only the maximum single credit available for such event. In no event will Exodus be required to credit Customer in any one (1) calendar month connectivity charges in excess of seven (7) days of service. A credit shall be applied only to the month in which there was the incident that resulted in the credit. Customer shall not be eligible to receive any credits for periods in which Customer received any Internet Data Center Services free of charge. (v) Termination Option for Chronic Problems: If, in any single calendar month, Customer would be able to receive credits totaling fourteen (14) or more days (but for the limitation in paragraph (iv) above) resulting from two (2) or more events during such calendar month or, if any single event entitling customer to credits under paragraph 5.2(a)(i) exits for a period of seven (7) consecutive hours, then, Customer may immediately terminate this Agreement for cause and without penalty upon written notice to Exodus. THIS WARRANTY DOES NOT APPLY TO ANY INTERNET DATA CENTER SERVICES THAT EXPRESSLY EXCLUDE THIS WARRANTY (AS DESCRIBED IN THE SPECIFICATION SHETS FOR SUCH PRODUCTS). THIS SECTION 5.2(a) STATES CUSTOMER'S SOLE AND EXCLUSIVE REMEDY FOR ANY FAILURE BY EXODUS TO PROVIDE INTERNET DATA CENTER SERVICES. (b) No Other Warranty. EXCEPT FOR THE EXPRESS WARRANTY SET OUT IN SUBSECTION (a) ABOVE, THE INTERNET DATA CENTER SERVICES ARE PROVIDED ON AN "AS IS" BASIS, AND CUSTOMER'S USE OF THE INTERNET DATA CENTER SERVICES IS AT ITS OWN RISK, OTHER THAN AS SET FORTH IN (A) ABOVE. EXODUS 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. EXODUS DOES NOT WARRANT THAT THE INTERNET DATA CENTER SERVICES WILL BE UNINTERRUPTED, ERROR-FREE, OR COMPLETELY SECURE. (c) Disclaimer of Actions Caused by and/or Under the Control of Third Parties. EXODUS DOES NOT AND CANNOT CONTROL THE FLOW OF DATA TO OR FROM EXODUS' INTERNET DATA 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 EXODUS' CUSTOMERS' CONNECTIONS TO THE INTERNET (OR PORTIONS THEREOF) MAY BE IMPAIRED OR DISRUPTED. ALTHOUGH EXODUS WILL USE COMMERCIALLY REASONABLE EFFORTS TO TAKE APPROPRIATE ACTIONS TO REMEDY AND AVOID SUCH EVENTS, EXODUS CANNOT GUARANTEE THAT THEY WILL NOT OCCUR. ACCORDINGLY, EXODUS DISCLAIMS ANY AND ALL LIABILITY RESULTING FROM OR RELATED TO SUCH EVENTS. (d) DURING THE TERM OF THIS AGREEMENT, EXODUS SHALL REMAIN IN MATERIAL COMPLIANCE WITH THE RULES AND REGULATIONS. 6. LIMITATIONS OF LIABILITY. 6.1 Personal Injury. EACH REPRESENTATIVE AND ANY OTHER PERSONS VISITING THE INTERNET DATA CENTERS DOES SO AT ITS OWN RISK AND EXODUS ASSUMES NO LIABILITY WHATSOEVER FOR ANY HARM TO SUCH PERSONS RESULTING FROM ANY CAUSE OTHER THAN EXODUS' NEGLIGENCE OR WILLFUL MISCONDUCT RESULTING IN PERSONAL INJURY TO SUCH PERSONS DURING SUCH A VISIT. 6.2 Damage to Customer Equipment or Business. EXODUS ASSUMES NO LIABILITY FOR ANY DAMAGE TO, OR LOSS RELATING TO, CUSTOMER'S BUSINESS RESULTING FROM ANY CAUSE WHATSOEVER. CERTAIN CUSTOMER EQUIPMENT, INCLUDING BUT NOT LIMITED TO CUSTOMER EQUIPMENT LOCATED ON CYBERRACKS, MAY BE DIRECTLY ACCESSABLE BY OTHER CUSTOMERS. EXODUS ASSUMES NO LIABILITY FOR ANY DAMAGE TO, OR LOSS OF, ANY CUSTOMER EQUIPMENT RESULTING FROM ANY CAUSE OTHER THAN EXODUS' NEGLIGENCE OR WILLFUL MISCONDUCT. TO THE EXTENT EXODUS IS LIABLE FOR ANY DAMAGE TO, OR LOSS OF, THE CUSTOMER EQUIPMENT FOR ANY REASON, SUCH LIABILITY WILL BE LIMITED SOLELY TO THE REPLACEMENT VALUE OF THE CUSTOMER EQUIPMENT. 6.3 Exclusions. EXCEPT AS SPECIFIED IN SECTIONS 6.1 AND 6.2, IN NO EVENT WILL EXODUS BE LIABLE TO CUSTOMER, ANY REPRESENTATIVE, OR ANY THIRD PARTY FOR ANY CLAIMS ARISING OUT OF OR RELATED TO THIS AGREEMENT, CUSTOMER EQUIPMENT, CUSTOMER'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 OF ANY CUSTOMER EQUIPMENT OR CUSTOMER'S BUSINESS, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE. 6.4 Maximum Liability. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, EXODUS'S MAXIMUM AGGREGATE LIABILITY TO CUSTOMER RELATED TO OR IN CONNECTION WITH THIS AGREEMENT WILL BE LIMITED TO THE TOTAL AMOUNT PAID BY CUSTOMER TO EXODUS HEREUNDER FOR THE PRIOR TWELVE (12) MONTH PERIOD. 6.5 Customer's Insurance. Customer agrees that it will not pursue any claims against Exodus for any liability Exodus may have under or relating to this Agreement until Customer first makes claims against Customer's insurance provider(s) and such insurance provider(s) finally resolve(s) such claims. 6.6 Basis of the Bargain; Failure of Essential Purpose. Customer acknowledges that Exodus 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 Exodus' Indemnification of Customer. Exodus will indemnify, defend and hold Customer 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 Customer alleging (i) the infringement of any third party registered U.S. copyright or issued U.S. patent resulting from the provision of Internet Data Center Services pursuant to this Agreement (but excluding any infringement contributorily caused by Customer's Business or Customer Equipment) and (ii) personal injury to Customer's Representatives from Exodus's negligence or willful misconduct. 7.2 Customer's Indemnification of Exodus. Customer will indemnify, defend and hold Exodus, its affiliates and customers harmless from and against any and all Losses resulting from or arising out of any Action brought against Exodus, its affiliates or customers alleging: (a) with respect to the Customer's Business: (i) infringement or misappropriation of any intellectual property rights; (ii) defamation, libel, slander, obscenity, pornography, or violation of the rights of privacy or publicity; or (iii) spamming, or any other offensive, harassing or illegal conduct or violation of the Rules and Regulations or (b) any damage or destruction to the Customer Area, the Internet Data Centers or the equipment of Exodus or any other customer by Customer or Representative(s) or Customer's designees. 7.3 Notice. Each party will provide the other party prompt written notice upon of the NonStandard - NetGateway EXODUS COMMUNICATIONS, INC. CONFIDENTIAL AND PROPRIETARY (rev 6/98) existence of any such event of which it becomes aware, and an opportunity to participate in the defense thereof. 8. TERM AND TERMINATION. 8.1 Term. This Agreement will be effective for a period of one (1) year from the Installation Date, unless earlier terminated according to the provisions of this Section 8. The Agreement will automatically renew for additional terms of one (1) year each. 8.2 Termination. (a) For Convenience. (i) By Customer During First -Sixty Days. Customer may terminate this Agreement for convenience by providing written notice to Exodus at any time during the -sixty (-60) day period beginning on the Installation Date. (ii) By Either Party. Either party may terminate this Agreement for convenience at any time effective after the first (1st) anniversary of the Installation Date by providing sixty (60) days' prior written notice to the other party at any time thereafter. (b) For Cause. 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 Exodus; (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. 8.3 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. 8.4 Effect of Termination. Upon the effective date of expiration or termination of this Agreement: (a) Exodus will immediately cease providing the Internet Data Center Services; (b) any and all payment obligations of Customer under this Agreement will become due immediately; (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; and (d) Customer will remove from the Internet Data Centers all Customer Equipment and any of its other property within the Internet Data Centers within ten (10) days of such expiration or termination and return the Customer Area to Exodus in the same condition as it was on the Installation Date, normal wear and tear excepted. Exodus will cooperate fully with customer's removal of its equipment. If Customer does not remove such property within such five-day period, Exodus will have the option to (i) move any and all such property to secure storage and charge Customer for the cost of such removal and storage. 8.5 Customer Equipment as Security. In the event that Customer fails to pay Exodus all undisputed amounts owed Exodus under this Agreement when due, Customer Agrees that upon written notice, Exodus may take possession of any Customer Equipment and store it, at Customer's expense, until taken in full or partial satisfaction of any lien or judgment, all without being liable to prosecution or for damages. 8.6 Survival. The following provisions will survive any expiration or termination of the Agreement: Sections 2, 3, 4, 5, 6, 7, 8 and 9. 9. MISCELLANEOUS PROVISIONS. 9.1 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. 9.2 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. Customer acknowledges and agrees that (i) it has been granted only a license to occupy the Customer Space and use the Internet Data Centers and any equipment provided by Exodus in accordance with this Agreement, (ii) Customer has not been granted any real property interest in the Customer Space or Internet Data Centers, and (iii) Customer has no rights as a tenant or otherwise under any real property or landlord/tenant laws, regulations, or ordinances. For good cause, including the exercise of any rights under Section 8.5 above, Exodus may suspend the right of any Representative or other person to visit the Internet Data Centers. 9.3 Marketing. Customer agrees that Exodus may refer to Customer by trade name and trademark, and may briefly describe Customer's Business, in Exodus' marketing materials and web site. In the event that Customer objects to such use of Customer's tradenames and trademarks, Exodus will immediately terminate such use. Customer hereby grants Exodus a license to use any Customer trade names and trademarks solely in connection with the rights granted to Exodus pursuant to this Section 9.3. 9.4 Government Regulations. Customer 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 Customer operates or does business. 9.5 Non-Solicitation. During the period beginning on the Installation Data and ending on the first anniversary of the termination or expiration of this Agreement in accordance with its terms, Customer 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 Exodus during such period. 9.6 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 (except 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 Santa Clara 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 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. 9.7 Assignment; Notices. Customer may not assign its rights or delegate its duties under this Agreement either in whole or in part without the prior written consent of Exodus, except that Customer 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. Exodus 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. 9.8 Relationship of Parties. Exodus and Customer are independent contractors and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise or agency between Exodus and Customer. Neither Exodus nor Customer 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. 9.9 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. Customer's and Exodus' 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. CUSTOMER EXODUS COMMUNICATIONS, INC. Signature: ____________________________ Signature: __________________________ Print Name: ___________________________ Print Name: _________________________ Title: ________________________________ Title: ______________________________ NonStandard - NetGateway EXODUS COMMUNICATIONS, INC. CONFIDENTIAL AND PROPRIETARY (rev 6/98) EX-10.10 14 FORM OF SECURED CONVERT DEBENTURE 12/31/99 Exhibit 10.10 THE SECURITIES REPRESENTED BY THIS DEBENTURE AND THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, WHETHER OR NOT FOR CONSIDERATION, IN THE ABSENCE OF (1) AN EFFECTIVE REGISTRATION STATEMENT AND QUALIFICATION IN EFFECT WITH RESPECT TO THIS NOTE UNDER THE SECURITIES ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS OR (2) AN EXEMPTION FROM SUCH REGISTRATION AND QUALIFICATION. No. ____ U.S. $________ Netgateway, Inc. SECURED CONVERTIBLE DEBENTURE DUE DECEMBER 31, 1999 THIS DEBENTURE is one of a duly authorized issue of Debentures of Netgateway, Inc. , a Nevada corporation having a principal place of business at 300 Oceangate, 5th Floor, Long Beach, California (the "Company"), designated as its Secured Convertible Debentures, Due December 31, 1999 (the "Debentures"), in an aggregate principal amount of up to U.S. $1,000,000. FOR VALUE RECEIVED, the Company promises to pay to__________________, or registered assigns (the "Holder"), the principal sum of ______________ Dollars (U.S. $______), on or prior to December 31, 1999 (the "Maturity Date") and to pay interest to the Holder on the principal sum, at the rate per annum equal to the Treasury Rate (as defined below) plus four percent (4.0%), payable quarterly, in arrears. Interest shall accrue daily commencing on the Original Issue Date (as defined in Section 6) until payment in full of the principal sum, together with all accrued and unpaid interest, has been made or duly provided for. Interest shall be calculated on the basis of a 360-day year. Interest due and payable hereunder will be paid on each December 31, March 31, June 30 and September 30 (each, an "Interest Due Date"), and at the Maturity Date, to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register") on the first business day prior to the Interest Due Date or the Maturity Date, as the case may be; provided, however, that the Company's obligation to a transferee of this Debenture arises only if such transfer, sale or other disposition is made in accordance with the terms and conditions. The principal of, and interest on, this Debenture are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, at the address of the Holder last appearing on the Debenture Register. A transfer of the right to receive principal and interest under this Debenture shall be transferable only through an appropriate entry in the Debenture Register as provided herein. This Debenture is subject to the following additional provisions: Section 1. Amounts. The Debentures are issuable in denominations of Ten Thousand Dollars (U.S.$10,000) and integral multiples of Ten Thousand Dollars (U.S.$10,000) in excess thereof. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same but shall not be issuable in denominations of less than integral multiplies of Ten Thousand Dollars (U.S.$10,000). No services charge will be made for such registration of transfer or exchange. Section 2. Taxes. In the event any interest or principal due hereunder is subject to any withholding tax under the income tax or other applicable laws of the United States, the Company will pay to the Holder, in addition to the payments otherwise due hereunder, such additional amount as is necessary to provide that the net amount actually received by the Holder (free and clear of any such withholding tax, whether assessed against the Company or the Holder) will equal the full amount the Holder would have received had such withholding tax not been assessed. Section 3. Securities Act. This Debenture has been issued subject to certain investment representations of the original Holder set forth in a Subscription Agreement and may be transferred or exchanged only in compliance with the Securities Act of 1933, as amended (the "Act"), including Regulation D promulgated thereunder. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 4. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (a) any default in the payment of the principal of or interest on this Debenture as and when the same shall become due and payable either at the Maturity Date, by acceleration or otherwise; (b) the Company shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of, this Debenture, and such failure or breach shall not have been remedied within 30 days after the date on which notice of such failure or breach shall have been given; (c) the Company or any of its subsidiaries shall commence a voluntary case under the United States Bankruptcy Code as now or hereafter in effect or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Company under the Bankruptcy Code and the petition is not controverted within 30 days, or is not dismissed within 60 days, after commencement of the case; or a "custodian" (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or any substantial part of the property of the Company or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or there is commenced against the Company any such proceeding which remains undismissed for a period of 60 days; or the Company is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company makes a general assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or the Company shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company for the purpose of effecting any of the foregoing; or (d) the Company shall default in any of its obligations under any mortgage, indenture or instrument, whether such indebtedness now exists or shall hereafter be created and such default shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable. If any Event of Default occurs and is continuing, and in every such case, then so long as such Event of Default shall then be continuing the Holder may, by notice to the Company, declare the full principal amount of this Debenture, together with all accrued but unpaid interest to the date of acceleration, to be, whereupon the same shall become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are waived by the Company, notwithstanding anything herein contained to the contrary, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. Section 5. Conversion. (a) This Debenture shall be convertible into shares of Common Stock at the Conversion Ratio, at the option of the Holder in whole or in part at any time after the expiration of 60 days after the Original Issue Date. Any conversion under this Section 5(a) shall be of a minimum principal amount of US$10,000 of Debentures. The Holder shall effect conversions by surrendering the Debentures (or such portions thereof) to be converted to the Company, together with the form of conversion notice attached hereto as Exhibit A (the "Conversion Notice") in the manner set forth in Section 5(j). Each Conversion Notice shall specify the principal amount of Debentures to be converted and the date on which such conversion is to be effected (the "Conversion Date"). Subject to Section 5(c), each Conversion Notice, once given, shall be irrevocable. If the Holder is converting less than all of the principal amount represented by the Debenture(s) tendered by the Holder with the Conversion Notice, the Company shall promptly deliver to the Holder a new Debenture for such principal amount as has not been converted. (b) Not later than ten Business Days after the Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates containing the restrictive legends and trading restrictions required by law, representing the number of shares of Common Stock being acquired upon the conversion of Debentures and (ii) Debentures in principal amount equal to the principal amount of Debentures not converted; provided, however that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any Debentures, until Debentures are either delivered for conversion to the Company or any transfer agent for the Debentures or Common Stock, or the Holder notifies the Company that such Debentures have been lost, stolen or destroyed and provides a bond (or other adequate security reasonably acceptable to the Company) satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. If such certificate or certificates are not delivered by the date required under this Section 5(c), the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the Debentures tendered for conversion. In addition, the Company shall grant to any Holder receiving such Common Stock customary "piggy-back" registration rights. (c) (i) The conversion price ("Conversion Price") for each Debenture in effect on any Conversion Date shall be $2.50. (ii) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then each holder of Debentures then outstanding shall have the right thereafter to convert such Debentures only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property as the shares of the Common Stock into which such Debentures could have been converted immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange would have been entitled. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 5(c) upon any conversion following such consolidation, merger, sale, transfer or share exchange. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. (iii) If: (A) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company (other than a subdivision or combination of the outstanding shares of Common Stock), any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Debentures, and shall cause to be mailed to the Holder and each other holder of Debentures at their last addresses as it shall appear upon the Debenture Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. (d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Debentures as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of Debentures, such number of shares of Common Stock as shall be issuable upon the conversion of the aggregate principal amount of all outstanding Debentures. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid and nonassessable. (e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Conversion Price at such time. If the Company elects not to, or is unable to, make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) The issuance of certificates for shares of Common Stock on conversion of Debentures shall be made without charge to the Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) Debentures converted into Common Stock shall be canceled. (h) Each Conversion Notice shall be given by facsimile and by mail, postage prepaid, addressed to the Chief Financial Officer of the Company at the facsimile telephone number and address of the principal place of business of the Company Any such notice shall be deemed given and effective upon the earliest to occur of (i) receipt of such facsimile at the facsimile telephone number specified in this Section 5(h), (ii) five days after deposit in the United States mails or (iii) upon actual receipt by the party to whom such notice is required to be given. (i) If (but without any obligation to do so) the Company proposes to register any of its Common Stock under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company employee benefits plan, or a registration relating to corporate reorganizations or other transactions under Rule 145 of the Act) the Company shall, at such time, promptly give each holder of Debentures that has converted such Debentures into Common Stock (a "Holder") written notice of such registration. Upon the written request of each Holder given within ten (10) days after mailing of such notice by the Company in accordance with Section 5(h) hereof, the Company shall, subject to the provisions of Section 5(k) hereof, cause to be registered under the Act all of the Common Stock issued to such Holder upon conversion of any Debenture (the "Registrable Securities") that each such Holder has requested to be registered. (j) The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 5(i) hereof for each Holder, including (without limitation) all registration, filing and qualification fees, printers and accounting fees relating or apportionable thereto, but excluding underwriting discounts and commissions relating to Registrable Securities and fees and disbursements of counsel for any or the Holders. (k) In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 5(i) hereof to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling Holders according to the total amount of securities entitled to be included therein owned by each selling Holder or in such other proportions as shall mutually be agreed to by such selling Holders) but in no event shall the amount of securities of the selling Holders included in the offering be reduced below twenty percent (20%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities, in which case the selling Holders may be excluded if the underwriters make the determination described above and no other shareholder's securities are included. For purposes of the preceding parenthetical concerning, apportionment, for any selling Holder which is a Holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons, shall be deemed to be a single "Selling Holder," any pro rata reduction with respect to such "Selling Holder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "Selling Holder," as defined in this sentence. (l) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of the rights granted any Holder under this Section 5. (m) In the event any Registrable Securities are included in a registration statement under this Section 5: (i) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages or liabilities, joint or several) to which they may become subject under the Act, or the 1934 Act, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, or any rule or regulation promulgated under the Act, or the 1934 Act; and the Company will pay to each such Holder, underwriter or controlling person any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 5(m)(i) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (ii) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, or the 1934 Act, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 5(m)(ii), in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 5(m)(ii) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability (action if such settlement is effected without the consent of the Holder, which consent shall not unreasonably withheld); provided, that, in no event shall any indemnity under this subsection 5(m)(ii) exceed the gross proceeds from the offering received by such Holder. (iii) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 5(m), deliver to the indemnifying party a written notice of the commencement thereof, the indemnifying party shall have the right to participate in and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense therewith counsel mutually satisfactory to the parties; provided, however, that any indemnified parties (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 5(m), but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to indemnified party otherwise than under this Section 5(m). (iv) The obligations of the Company and Holders under this Section 5(m) shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 5, and otherwise. Section 6. Redemption. (a) The Company may prior to Maturity, at its option, redeem all, or from time to time any part, of the Debenture by payment of one hundred one percent (101%) of the outstanding principal thereof, together with accrued interest to the Redemption Date (the "Redemption Price"). Each redemption notice ("Redemption Notice") shall be given by facsimile and by mail, postage prepaid, addressed to each holder of Debentures at the facsimile telephone number and address of such holder appearing on the books of the Company or provided to the Company by such holder for the purpose of such Redemption Notice, or if no such facsimile telephone number or address appears or is so provided, at the principal place of business of the holder. (b) In case of any redemption at the election of the Company, the Company shall, at least 30 days prior to the Redemption Date fixed by the Company notify the Holder of such Redemption Date and of the principal amount to be redeemed. Each Redemption Notice shall state: (1) the Redemption Date, (2) the Redemption Price, (3) that on the Redemption Date the Redemption Price will become due and payable upon the Debenture, and that interest thereon shall cease to accrue on said date, (4) the place where such Debenture is to be surrendered for payment of the Redemption Price, which shall be the office or agency of the Company, (5) the current Conversion Price of the Debenture, the place or places where such Debentures may be surrendered for conversion, and shall specify the right to convert the Debenture or portions thereof to be redeemed and that it will terminate on the Redemption Date, (c) On the Redemption Date, the Company shall pay the Redemption Price to the Holder. (d) A Redemption Notice having been given as aforesaid, the Debenture so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified and on such date (unless the Company shall default in the payment of the Redemption Price) such Debenture shall cease to bear interest. Upon surrender of such Debenture for redemption in accordance with said notice, such Debenture shall be paid by the Company at the Redemption Price. If any Debenture call for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Debenture. (e) If the Debenture is to be redeemed only in part, it shall be surrendered at the office of the Company and the Company shall execute and deliver to the Holder without service charge, a new Debenture or Debentures, of any authorized denomination as requested by the Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Debenture so surrendered. (f) Nothing in this Section 6 shall impair the Holder's right to convert this Debenture pursuant to Section 5 prior to the Redemption Date. Section 7. Definitions. For the purposes hereof, the following terms shall have the following meanings: "Business Day" means any day of the year on which commercial banks are not required or authorized to be closed in Los Angeles, California. "Common Stock" means shares now or hereafter authorized of the class of Common Stock, $.001 par value, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "Conversion Ratio" means, at any time, a fraction, of which the numerator is the principal amount represented by any Debenture plus accrued but unpaid interest, and of which the denominator is the Conversion Price at such time. "Original Issue Date" shall mean the date of the first issuance of this Debenture regardless of the number transfers hereof. "Person" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Redemption Date" means the date fixed by the Company for redemption of the Debenture. "Treasury Rate" shall mean the rate of interest payable on a 90-day United States Treasury Bill from time to time Section 8. Ranking. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct obligation of the Company. This Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set forth herein Section 9. No Rights. This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. Section 10. Lost Debenture. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. Section 11. Governing Law. This Debenture shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of laws thereof. Section 12. Notices. All notices or other communications hereunder shall be given, and shall be deemed duly given and received, if given, in the manner set forth in Section 5(h) and 6(a). Section 13. Waiver. Any waiver by the Company or the Holder a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. Section 14. Severability. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. Section 15. Business Days. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next calendar month, the preceding Business Day in the appropriate calendar month). Section 16. Security. This Debenture is secured by, and entitled to the benefits provided in, that certain Security Agreement entered into by the Company for the benefit of the Holder and each other holder or Debentures. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized as of the date first above indicated. Netgateway, Inc. Attest: ________________________ By: __________________________________ Name: Donald M. Corliss, Jr. Title: President EXHIBIT A NOTICE OF CONVERSION AT THE ELECTION OF HOLDER (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby irrevocably elects to convert the above Debenture No. ___ into shares of Common Stock, par value U.S.$.001 per share (the "Common Stock"), of Netgateway, Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the Holder for any conversion, except for such transfer taxes, if any. Conversion calculations: Date to Effect Conversion __________________________________________________ Principal Amount of Debentures to be Converted Applicable Conversion Price Signature __________________________________________________ Name: __________________________________________________ Address: EX-10.11 15 AGREE & PLAN OF REORGANIZATION 6/02/98 Exhibit 10.11 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION is made and entered into effective as of the 2nd day of June, 1998, by and among NETGATEWAY, a Nevada corporation ("NetGateway"), INFOBAHN TECHNOLOGIES, LLC, a California limited liability company d/b/a Digital Genesis ("Digital Genesis"), VIDEO CALLING CARD, INC., a Nevada corporation ("Video"), the NETGATEWAY SHAREHOLDERS and the VIDEO MAJORITY SHAREHOLDER. Certain capitalized terms herein shall have the meanings given to such terms in Article I. Recitals This Agreement provides for the acquisition by Video of all of the issued and outstanding capital stock of NetGateway and all of the assets of Digital Genesis in exchange for common voting stock of Video. All transactions set forth herein are intended to qualify as a tax-free transaction pursuant to Section 351(a) of the Internal Revenue Code of 1986, as amended. This Agreement has been adopted and approved by the respective boards of directors of NetGateway and Video and by the members of Digital Genesis. Agreement NOW, THEREFORE, based upon the recitals above and for and in consideration of the mutual covenants and agreements hereinafter set forth and the mutual benefits to the parties to be derived here from, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement: Adverse Consequences means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, reasonable amounts paid in settlement, liabilities, obligations, taxes, liens, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses. Affiliate has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. Agreement means this Agreement and Plan of Reorganization dated effective June 2, 1998. Business Party means any one or more of NetGateway, Digital Genesis or Video, as the context indicates. Closing means the consummation of the transactions contemplated hereby, which shall occur on June 2, 1998, or at such other time and date as the parties may designate, but in no event later than two business days after all of the conditions set forth in Articles X and XI. Code means the Internal Revenue Code of 1986, as amended. Digital Genesis is Infobahn Technologies, LLC, a California limited liability company d/b/a/ Digital Genesis, and a Party to this Agreement. Digital Genesis means the disclosure schedule prepared by Digital Disclosure Schedule Genesis in accordance with the requirements of Section 12.11. Digital Genesis Assets means all of the assets of Digital Genesis as of the date hereof, including without limitation the assets set forth on Schedule A attached hereto and made a part of this Agreement by this reference. Exchanged Video Shares means the common stock, par value $0.001, of Video to be issued to the NetGateway Shareholders, and to Digital Genesis. Indemnified Party has the meaning set forth in Section 8.05. Indemnifying Party has the meaning set forth in Section 8.05. Indemnification Notice has the meaning set forth in Section 8.05. GAAP means generally accepted accounting principles in the United States as in effect on the date hereof. Knowledge means actual knowledge after reasonable investigation. Material means, when used as an adjective in conjunction with an event, condition, circumstance, effect, or other item, that there is a substantial likelihood that a reasonable person would attach importance to the event, condition, circumstance, effect, or item in evaluating the Party to which it relates and the transactions herein contemplated. NetGateway is NetGateway, a Nevada corporation and a Party to this Agreement. NetGateway Disclosure Schedule means the disclosure schedule prepared by NetGateway in accordance with the requirements of Section 12.11. NetGateway means Keith D. Freadhoff, Donald M. Corliss, Jr., Robert Shareholders D. Geringer, Anna T. Brannon, T. Jason Mayo, Robert C. Frojen, Eric DeCastro, Mark Gallegly, Eric Richardson, Steps, Inc. David Basset-Parkins, Vision Holdings (a Cayman corporation), Mike Khalad, and Hahn Ngo. NetGateway Shares means all of the issued and outstanding capital stock of NetGateway. Ordinary Course of means the ordinary course of business consistent with Business past custom and practice (including with respect to quantity and frequency). Party or Parties means any one or more of NetGateway, Digital Genesis, Search Video and the NetGateway Shareholders, as the context indicates. Person means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). Reorganization means the transactions contemplated by this Agreement taken as a whole. Retained Liabilities shall have the meaning set forth in Section 7.02. SEC means the Securities and Exchange Commission. Securities Act means the Securities Act of 1933, as amended. Securities Exchange means the Securities Exchange Act of 1934, as amended. Act Security Interest means any mortgage, pledge, lien, encumbrance, charge, or other security interest, other than: (a) mechanic's, materialmen's, and similar liens; (b) liens for taxes not yet due and payable or for taxes that the taxpayer is contesting in good faith through appropriate proceedings; (c) purchase money liens and liens securing rental payments under capital lease arrangements; and (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. Stockholder Approval means the required affirmative vote of the holders of capital stock of a corporation or members of a limited liability company to approve the Reorganization or any other matter contemplated by this Agreement which requires approval of the stockholders of the applicable corporation or members of the applicable limited liability company. Subsidiary or means any corporation with respect to which a specified Subsidiaries Person (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. Tax or Taxes means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Section 59A of the Code), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. Third Party Claim has the meaning set forth in Section 8.05. Tax Return means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. Video Shares means common stock of Video, $0.001 par value per share. Video Majority means Steve Utley. Shareholder Video Disclosure means the disclosure schedule prepared by Video in Schedule accordance with the requirements of Section 12.11. ARTICLE II REPRESENTATIONS AND WARRANTIES OF VIDEO As an inducement to, and to obtain the reliance of, NetGateway, Digital Genesis and the NetGateway Shareholders, Video and the Video Majority Shareholder, jointly and severally, represent and warrant to NetGateway, Digital Genesis and the NetGateway Shareholders as follows: Section 2.01 Organization. Video is a corporation duly organized, validly existing, and in good standing under the laws of the state of Nevada. Video has the corporate power and is duly authorized, qualified, franchised, and licensed under all applicable laws, regulations, ordinances, and orders of public authorities to own all of its properties and assets and to carry on its business in all material respects as it is now being conducted, including qualification to do business as a foreign corporation in the states in which the character and location of the assets owned by it or the nature of the business transacted by it requires qualification, except in such jurisdictions, if any, where the failure to be so qualified would not, either individually or in the aggregate, have a material adverse effect on the business, properties, or assets of Video. Section 2.02 Articles of Incorporation and Bylaws; Records. Video has delivered or otherwise made available to the other Parties accurate and complete copies of: (a) Video's articles of incorporation and bylaws as currently in effect, including all amendments thereto; (b) the stock records of Video and (c) the minutes and other records of the meetings and other proceedings (including any actions taken by written consent or otherwise without a meeting) of the shareholders of Video, the Board of Directors of Video and all committees of the Board of Directors of Video. Video is not in violation of any of the provisions of its articles of incorporation or bylaws The books of account, stock records, minute books and other records of Video are accurate and complete in all material respects, and have been maintained in accordance with prudent business practices. Section 2.03 Non-contravention. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement in accordance with the terms hereof will not: (a) violate any provision of the articles of incorporation, charter, or bylaws of Video; (b) result in the breach of, constitute a default under, result in the acceleration of, create in any Person the right to accelerate, terminate, modify, cancel, or require any notice under, any material agreement, contract, lease, license, instrument, or other arrangement to which Video is a party or by which it is bound or to which any of its assets is subject; or, (c) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Video is subject. Section 2.04 Authorization of Transaction. Video has full power and authority, and has taken all action required by law, its articles of incorporation and bylaws, and otherwise to execute and deliver this Agreement and to perform its obligations hereunder. Without limiting the generality of the foregoing, the Board of Directors of Video has duly authorized the execution, delivery, and performance of this Agreement by Video. This Agreement represents the valid and binding obligation of Video enforceable in accordance with its terms, except as limited by bankruptcy and insolvency laws and by other laws affecting the rights of creditors generally. Section 2.05 Subsidiaries. Video has no Subsidiaries. Section 2.06 Capitalization. The authorized capitalization of Video consists of 25,000,000 shares of common stock, $0.001 par value per share, of which 900,000 shares are currently issued and outstanding. All issued and outstanding shares are legally issued, fully paid, and non-assessable and not issued in violation of the pre-emptive or other rights of any Person. There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to Video. There are no existing options, warrants, calls, convertible securities, or commitments of any character relating to the authorized and unissued Video common stock. All outstanding shares of Video's capital stock have been issued in compliance with applicable federal and state securities laws and other applicable laws and all requirements set forth in any contract to which Video is or was a party. Except as contemplated in Section 7.01, Video has never repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities. Section 2.07 Financial Statements. (a) Video has delivered to the other Parties hereto the audited financial statements of Video as of December 31, 1995, 1996 and 1997. (b) All such financial statements present fairly the financial position of the Company as of the respective dates thereof and the results of operations and cash flows of the Company for the periods covered thereby, and have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered, present fairly as of their respective dates the financial condition of Video and the results of operations of Video, are correct and complete, and are consistent with the books and records of Video (which books and records are correct and complete). (c) Video did not have as of the date of its most recent balance sheet any liabilities or obligations (whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, and due or to become due), including any liability for Taxes, except for (i) liabilities set forth on the most recent balance sheet of Video, (ii) expenses incurred in connection with the transactions contemplated by this Agreement, and (iii) liabilities disclosed in this Agreement. Section 2.08 Absence of Certain Changes or Events. Except as described herein or in the Video Disclosure Schedule, since December 31, 1997: (a) There has not been any material adverse change in the financial condition of Video. (b) Video has not (i) amended its articles of incorporation, charter, or bylaws; (ii) declared or made, or agreed to declare or make, any payment of dividends or distributions of any assets of any kind whatsoever to stockholders, or purchased or redeemed, or agreed to purchase or redeem, any of its capital stock; (iii) waived any rights of value which in the aggregate are extraordinary or material considering its business; (iv) made any material change in its method of management, operation, or accounting; (v) entered into any other material transaction; (vi) made any accrual or arrangement for payment of bonuses or special compensation of any kind or any severance or termination pay to any Person; or (vii) made any increase in any profit sharing, bonus, deferred compensation, insurance, pension, retirement, or other employee benefit plan, payment, or arrangement made to, for, or with its officers, directors, Affiliates, or employees. (c) Video has not (i) granted or agreed to grant any options, warrants, or other rights for its stocks, bonds, or other corporate securities calling for the issuance thereof; or (ii) issued, authorized, delivered, or agreed to issue or deliver any stock, bonds, or other corporate securities including debentures (whether authorized and unissued or held as treasury stock). (d) Video has not declared, accrued, set aside or paid any dividend or made any other distribution in respect to any shares of capital stock and has not repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities (e) Video has not effected or been a party to any acquisition transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction; (f) Video has not incurred or guaranteed any indebtedness for borrowed money in excess of $10,000 individually or in the aggregate; (g) Video has not changed any of its methods of accounting or accounting practices in any respect; (h) Video has not entered into any material transaction or taken any other material action; and (i) Video has not agreed or committed to take any of the actions referred to in clauses "(a)" through "(i)" above. Section 2.09 Tax Matters. (a) Video has filed, or will have filed prior to the Closing, all Tax Returns that it was required to file as of the date of Closing. All such Tax Returns were correct and complete in all respects. All Taxes owed by Video (whether or not shown on any Tax Return) have been paid. Video is not currently the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where Video does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Security Interests on any of the assets of Video that arose in connection with any failure (or alleged failure) to pay any Tax. (b) Video has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other Person. (c) No Video director or officer (or employee responsible for Tax matters) of Video reasonably expects any authority to assess against Video any additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax liability of Video either (i) claimed or raised by an authority in writing or, (ii) as to which any of the directors and officers (and employees responsible for Tax matters) of Video has knowledge based upon personal contact with any agent of such authority. The Video Disclosure Schedule includes a list of all federal, state, local, and foreign income Tax Returns filed with respect to Video for taxable periods ended on or after December 31, 1997, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. Video has delivered to the other Parties hereto correct and complete copies of all federal income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by Video since December 31, 1997. (d) Video has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. (e) The unpaid Taxes of Video (i) did not, as of the most recent balance sheet of Video, exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of said balance sheet, and (ii) do not exceed that reserve as adjusted for the passage of time through the date of Closing in accordance with the past custom and practice of Video in filing its Tax Returns. Section 2.10 Litigation and Proceedings. There are no actions, suits, proceedings, or investigations pending or, to the knowledge of Video, threatened by or against it or affecting its properties, at law or in equity, before any court or other governmental agency or instrumentality, domestic or foreign, or before any arbitrator of any kind. Video has no knowledge of any material default on its part with respect to any judgment, order, writ, injunction, decree, award, or ruling of any court, arbitrator, or governmental agency or instrumentality. Section 2.11 Contracts. (a) Except as included or described in the Video Disclosure Schedule, there are no material contracts, agreements, franchises, license agreements, or other commitments to which Video is a party or by which its properties are bound. (b) Except as included or described in the Video Disclosure Schedule or reflected in the most recent Video balance sheet, Video is not a party to any oral or written: (i) contract for the employment of any officer or employee; (ii) profit sharing, bonus, deferred compensation, stock option, severance pay, pension benefit, or retirement plan, agreement, or arrangement covered by Title IV of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (iii) agreement, contract, or indenture relating to the borrowing of money; (iv) guaranty of any obligation; (v) consulting or other similar contracts; (vi) collective bargaining agreement; (vii) agreement with any present or former officer or director; or (viii) contract, agreement, or other commitment involving payments by it of more than $1,000 in the aggregate. Section 2.12 Material Contract Defaults. Video is not in default in any respect under the terms of any outstanding contract, agreement, lease, or other commitment, and there is no event of default or other event which, with notice or lapse of time or both, would constitute a default in any material respect under any such contract, agreement, lease, or other commitment in respect of which it has not taken adequate steps to prevent such a default from occurring. Section 2.13 Governmental Authorizations. Video has all licenses, franchises, permits, and other governmental authorizations, whether state or federal that are legally required to enable it to conduct its business in all material respects as conducted on the date hereof. Except for compliance with the Securities Act and the Securities Exchange Act, as hereinafter provided, no authorization, approval, consent, or order of, or registration, declaration, or filing with, any court or other governmental body is required in connection with the execution and delivery by Video of this Agreement and the consummation by Video of the transactions contemplated hereby. Section 2.14 Continuity of Business Enterprise. It is the present intention of Video to continue at least one significant historic business of NetGateway and Digital Genesis or to use at least a significant portion of its respective historic business assets in a business within the meaning of Treasury Regulation Section 1.368-1(d). Section 2.15 Compliance With Laws and Regulations. Video has complied with all applicable statutes and regulations of any country, state, provincial, municipal, or local governmental entity or agency thereof, including the Securities Act and the Securities Exchange Act, except to the extent that noncompliance would not materially and adversely affect its business, operations, properties, assets, or business condition, and except to the extent non-compliance would not result in any material liability. Section 2.16 Information. The information concerning Video set forth in this Agreement and in the Video Disclosure Schedule is complete and accurate in all material respects and does not contain any untrue statement of a material fact or omit to state a material fact required to make the statements made, in light of the circumstances under which they are made, not misleading. Section 2.17 Title to Assets. Video owns, and has good and valid title to, all assets purported to be owned by it, including all of the assets reflected in the financial statements and all other assets reflected in Video's books and records as being owned by Video. All of said assets are owned by Video free and clear of any liens or other encumbrances. Section 2.18 No Undisclosed Liabilities. Except as set forth in the financial statements, Video has no accrued, contingent or other liabilities of any nature, either matured or unmatured. Section 2.19 Employee and Labor Matters; Benefit Plans. (a) Video has no employees and is not a party to any collective bargaining contract or other contract with a labor union involving any of its employees. (b) Video does not maintain, sponsor or contribute to, and, has not at any time in the past maintained, sponsored or contributed to, any employee pension benefit plan (as defined in Section 3(2) of ERISA, whether or not excluded from coverage under specific Titles or Merger Subtitles of ERISA) for the benefit of employees or former employees of Video. (c) Video does not maintain, sponsor or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA, whether or not excluded from coverage under specific Titles or Merger Subtitles of ERISA) for the benefit of employees or former employees of Video Section 2.20 Insurance. The business and properties of Video are insured for the benefit of Video in commercially reasonable amounts against risks usually insured against by persons operating businesses similar to those of Video in the localities where such properties are located. All such policies have been delivered by Video to the other Parties. Section 2.21 Nevada Merger Statues. The consummation of the transaction contemplated hereby shall not subject Video or any other party hereto to Nevada Revised Statutes Sections 78-378 - 78-3793 (acquisition of Controlling Interest), or Nevada Revised Statues Sections 78-411 - 78-444 (interested Stockholder Combinations). Section 2.22 No Registration. Based on the information provided, the consummation of the transactions contemplated hereby do not require registration under and are in full compliance with the Securities Act and the Securities Exchange Act; provided, however, that the Video Majority Shareholder shall not be deemed to have made the representation and warranty set forth in this Section 2.22. Section 2.23. No Adverse Knowledge. Video is not aware of any reason that this transaction will not qualify under Section 351 of the Internal Revenue Code of 1986, as amended. ARTICLE III REPRESENTATIONS AND WARRANTIES OF NETGATEWAY As an inducement to, and to obtain the reliance of Video, NetGateway represents and warrants to Video as follows: Section 3.01 Organization. NetGateway is a corporation duly organized, validly existing, and in good standing under the laws of the state of Nevada. NetGateway has the corporate power and is duly authorized, qualified, franchised, and licensed under all applicable laws, regulations, ordinances, and orders of public authorities to own all of its properties and assets and to carry on its business in all material respects as it is now being conducted, including qualification to do business as a foreign corporation in the states in which the character and location of the assets owned by it or the nature of the business transacted by it requires qualification, except in such jurisdictions, if any, where the failure to be so qualified would not, either individually or in the aggregate, have a material adverse effect on the business, properties, or assets of NetGateway. NetGateway has previously delivered complete and correct copies of the articles of incorporation, as amended, and bylaws of NetGateway. Section 3.02 Non-contravention. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement in accordance with the terms hereof will not: (a) violate any provision of the articles of incorporation, charter, or bylaws of NetGateway; (b) result in the breach of, constitute a default under, result in the acceleration of, create in any Person the right to accelerate, terminate, modify, cancel, or require any notice under, any material agreement, contract, lease, license, instrument, or other arrangement to which NetGateway is a party or by which it is bound or to which any of its assets is subject; or, (c) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which NetGateway is subject. Section 3.03 Authorization of Transaction. NetGateway has full power and authority, and has taken all action required by law, its articles of incorporation and bylaws, and otherwise to execute and deliver this Agreement and to perform its obligations hereunder. Without limiting the generality of the foregoing, the Board of Directors of NetGateway has duly authorized the execution, delivery, and performance of this Agreement by NetGateway. This Agreement represents the valid and binding obligation of NetGateway enforceable in accordance with its terms, except as limited by bankruptcy and insolvency laws and by other laws affecting the rights of creditors generally. Section 3.04 Subsidiaries. NetGateway has no Subsidiaries. Section 3.05 Capitalization. The authorized capitalization of NetGateway consists of 1,000,000 shares of stock, no par value, of which 590,000 shares are currently issued and outstanding. All issued and outstanding shares are legally issued, fully paid, and non-assessable and not issued in violation of the pre-emptive or other rights of any Person. Except as set forth in the NetGateway Disclosure Schedule, there are no existing options, warrants, calls, or commitments of any character relating to the authorized and unissued NetGateway stock. Section 3.06 Title. Each of the NetGateway Shareholders has full right and title to the number of the NetGateway Shares set forth opposite his or her name in Part 3.06 of the NetGateway Disclosure Schedule; such NetGateway Shares constitute all of the NetGateway Shares which are owned, directly or indirectly, by the NetGateway Shareholders; and at the time of transfer thereof to Video, all of NetGateway Shares to be transferred by the NetGateway Shareholders will be free of all liens, claims or encumbrances of any kind. Section 3.07 Compliance With Laws and Regulations. NetGateway has complied with all applicable statutes and regulations of any country, state, provincial, municipal, or local governmental entity or agency thereof, except to the extent that noncompliance would not materially and adversely affect its business, operations, properties, assets, or business condition, and except to the extent non-compliance would not result in any material liability. Section 3.08 Insurance. All the insurable properties of NetGateway are or will be insured in accordance with industry standards against all risks customarily insured against by persons operating similar properties in localities where such properties are located and under valid and enforceable policies by insurers of recognized responsibility. Section 3.09 Articles of Incorporation and Bylaws; Records. NetGateway has delivered or otherwise made available to the other Parties accurate and complete copies of: (a) NetGateway's articles of incorporation and bylaws as currently in effect, including all amendments thereto; (b) the stock records of NetGateway and (c) the minutes and other records of the meetings and other proceedings (including any actions taken by written consent or otherwise without a meeting) of the shareholders of NetGateway, the Board of Directors of NetGateway and all committees of the Board of Directors of NetGateway. NetGateway is not in violation of any of the provisions of its articles of incorporation or bylaws The books of account, stock records, minute books and other records of NetGateway are accurate and complete in all material respects, and have been maintained in accordance with prudent business practices. Section 3.10 Absence of Certain Changes or Events. Except as described herein or in the NetGateway Schedules: (a) There has not been (i) any material adverse change in the business, operations, properties, assets, or condition of NetGateway; or (ii) any damage, destruction, or loss to NetGateway (whether or not covered by insurance) materially and adversely affecting its business, operations, properties, assets, or financial condition. (b) NetGateway has not (i) amended its articles of incorporation, charter, or bylaws; (ii) declared or made, or agreed to declare or make, any payment of dividends or distributions of any assets of any kind whatsoever to stockholders, or purchased or redeemed, or agreed to purchase or redeem, any of its capital stock; (iii) waived any rights of value which in the aggregate are extraordinary or material considering its business; (iv) made any material change in its method of management, operation, or accounting; (v) entered into any other material transaction; (vi) made any accrual or arrangement for payment of bonuses or special compensation of any kind or any severance or termination pay to any Person; or (vii) made any increase in any profit sharing, bonus, deferred compensation, insurance, pension, retirement, or other employee benefit plan, payment, or arrangement made to, for, or with its officers, directors, Affiliates, or employees, except in the Ordinary Course of Business. (c) NetGateway has not (i) granted or agreed to grant any options, warrants, or other rights for its stocks, bonds, or other corporate securities calling for the issuance thereof; (ii) borrowed or agreed to borrow any funds or incurred, or become subject to, any material obligation or liability (absolute or contingent), except liabilities incurred in the Ordinary Course of Business; (iii) paid any material obligation or liability (absolute or contingent), and current liabilities incurred since that date in the Ordinary Course of Business; (iv) except in the Ordinary Course of Business, sold or transferred, or agreed to sell or transfer, any of its assets, properties, or rights (except assets, properties, or rights not used or useful in its business which, in the aggregate, have a value of less than $10,000), or canceled, or agreed to cancel, any debts or claims (except debts or claims which, in the aggregate, are of a value of less than $10,000); or (v) made or permitted any amendment or termination of any contract, agreement, or license to which it is a party if such amendment or termination is material, considering its business. (d) To the knowledge of NetGateway, has not become subject to any law or regulation which materially and adversely effects, or in the future may adversely effect its business as conducted on the date hereof. Section 3.11 Title and Related Matters. NetGateway has good and marketable title to all of its properties, interests in properties, and assets, real and personal, (except properties, interests in properties, and assets sold or otherwise disposed of in the Ordinary Course of Business or as provided in this Agreement or the NetGateway Schedules), free and clear of all Security Interests, except as disclosed in the NetGateway Schedules. Except as set forth in the NetGateway Schedules, NetGateway owns free and clear of any Security Interests any and all trademarks, service marks, trade names, copyrights, procedures, techniques, marketing plans, business plans, methods of management, intellectual property, and other information utilized in connection with its business and necessary to conduct its business in an efficient manner. Except as set forth in the NetGateway Schedules, no Person has any right to, and NetGateway has not received any notice of, infringement of, or conflict with, asserted rights of others with respect to any marketing rights, trade secrets, know-how, proprietary techniques, trademarks, service marks, trade names, copyrights, or intellectual property, which, if the subject of an unfavorable decision, ruling, or finding, would have a materially adverse effect on its business, operations, financial condition, income, or business, or any material portion of its properties, assets, or rights. Section 3.12 Tax Matters. (a) NetGateway has filed, or will have filed prior to the Closing, all Tax Returns that it was required to file as of the date of Closing. All such Tax Returns were correct and complete in all material respects. All Taxes owed by any of NetGateway (whether or not shown on any Tax Return) have been paid. NetGateway is not currently the beneficiary of any extension of time within which to file any Tax Return, except as disclosed in the NetGateway Schedules. No claim has ever been made by an authority in a jurisdiction where NetGateway does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Security Interests on any of the assets of NetGateway that arose in connection with any failure (or alleged failure) to pay any Tax. (b) NetGateway has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other Person. (c) No NetGateway director or officer (or employee responsible for Tax matters) of NetGateway reasonably expects any authority to assess against NetGateway any additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax liability of NetGateway either (i) claimed or raised by an authority in writing or, (ii) as to which any of the NetGateway directors and officers (and employees responsible for Tax matters) of NetGateway has knowledge based upon personal contact with any agent of such authority. (d) NetGateway has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. Section 3.13 Litigation and Proceedings. Except as set forth in the NetGateway Schedules, there are no actions, suits, proceedings, or investigations pending or, to the Knowledge of NetGateway, threatened by or against NetGateway or affecting its properties, at law or in equity, before any court or other governmental agency or instrumentality, domestic or foreign, or before any arbitrator of any kind. To the Knowledge of NetGateway, there is no material default on the part of NetGateway with respect to any judgment, order, writ, injunction, decree, award, or ruling of any court, arbitrator, or governmental agency or instrumentality. Section 3.14 Contracts. (a) Except as included or described herein or in the NetGateway Schedules or contracts incurred in the Ordinary Course of Business, there are no material contracts, agreements, franchises, license agreements, or other commitments to which NetGateway is a party or by which its properties are bound. (b) All contracts, agreements, franchises, license agreements, and other commitments to which NetGateway is a party or by which its properties are bound and which are material to its operations are, to the knowledge of NetGateway, valid and enforceable by NetGateway in all respects, except as limited by bankruptcy and insolvency laws and by other laws affecting the rights of creditors generally. (c) Except as included or described in the NetGateway Schedules, NetGateway is not a party to any oral or written: (i) contract for the employment of any officer or employee which is not terminable on 30 days or less notice; (ii) profit sharing, bonus, deferred compensation, stock option, severance pay, pension benefit or retirement plan, agreement, or arrangement; (iii) agreement, contract, or indenture relating to the borrowing of money; (iv) guaranty of any obligation, other than one on which it is a primary obligor, for the borrowing of money or otherwise, excluding endorsements made for collection and other guaranties of obligations which, in the aggregate, do not exceed $10,000; (v) consulting or other similar contracts with an unexpired term of more than one year or providing for payments in excess of $5,000 in the aggregate; (vi) collective bargaining agreement; (vii) agreement with any present or former officer or director; or (viii) contract, agreement, or other commitment involving payments by it of more than $5,000 in the aggregate. Section 3.15 Material Contract Defaults. Except as disclosed in the NetGateway Schedules, to its knowledge, NetGateway is not in default in any material respect under the terms of any outstanding contract, agreement, Lease, or other commitment which is material to its business, operations, properties, assets, or business condition, and there is no event of default or other event which, with notice or lapse of time or both, would constitute a default in any material respect under any such contract, agreement, Lease, or other commitment in respect of which it has not taken adequate steps to prevent such a default from occurring. Section 3.16 Governmental Authorizations. Except as set forth in the NetGateway Schedules, NetGateway has all licenses, franchises, permits, and other governmental authorizations, whether state or federal that are legally required to enable it to conduct its business in all material respects as conducted on the date hereof. Except for compliance with the Securities Act and the Corporation Act, as hereinafter provided, no authorization, approval, consent, or order of, or registration, declaration, or filing with, any court or other governmental body is required in connection with the execution and delivery by NetGateway of this Agreement and the consummation by NetGateway of the transactions contemplated hereby. Section 3.17 Information. The information concerning NetGateway set forth in this Agreement and in the NetGateway Schedules is complete and accurate in all material respects and does not contain any untrue statement of a material fact or omit to state a material fact required to make the statements made, in light of the circumstances under which they are made, not misleading. Section 3.18 Assets and Liabilities. Notwithstanding the foregoing, as of the date hereof, NetGateway does not own any significant assets or have any significant liabilities, except as set forth in the NetGateway Schedules or as otherwise disclosed in writing by NetGateway. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF NETGATEWAY SHAREHOLDERS Section 4.01 Representations and Warranties of NetGateway Shareholders. Each NetGateway Shareholder with respect to himself only represents and warrants that he has full right and title to the number of the NetGateway Shares set forth opposite his name on Part 3.06 of the NetGateway Disclosure Schedule and at the time of transfer thereof to Video, all of such NetGateway Shares will be free of all security interests. ARTICLE V REPRESENTATIONS AND WARRANTIES OF DIGITAL GENESIS As an inducement to, and to obtain the reliance of Video and NetGateway, Digital Genesis represents and warrants to Video and NetGateway as follows: Section 5.01 Organization. Digital Genesis is a limited liability company duly organized, validly existing, and in good standing under the laws of the state of California. Digital Genesis has the power and is duly authorized, qualified, franchised, and licensed under all applicable laws, regulations, ordinances, and orders of public authorities to own all of its properties and assets and to carry on its business in all material respects as it is now being conducted, including qualification to do business in the states in which the character and location of the assets owned by it or the nature of the business transacted by it requires qualification, except in such jurisdictions, if any, where the failure to be so qualified would not, either individually or in the aggregate, have a material adverse effect on the business, properties, or assets of Digital Genesis. Digital Genesis has previously provided complete and correct copies of its articles of organization, as amended, and the Operating Agreement of Digital Genesis as in effect on the date hereof. Section 5.02 Non-contravention. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement in accordance with the terms hereof will not: (a) violate any provision of the articles of organization, charter, or the operating agreement of Digital Genesis; result in the breach of, constitute a default under, result in the acceleration of, create in any Person the right to accelerate, terminate, modify, cancel, or require any notice under; (b) any material agreement, contract, lease, license, instrument, or other arrangement to which Digital Genesis is a party or by which it is bound or to which any of its assets is subject; or, (c) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Digital Genesis is subject. Section 5.03 Authorization of Transaction. Digital Genesis has full power and authority, and has taken all action required by law, its articles of organization and operating agreement, and otherwise to execute and deliver this Agreement and to perform its obligations hereunder. Without limiting the generality of the foregoing, the members of Digital Genesis have duly authorized the execution, delivery, and performance of this Agreement by Digital Genesis. This Agreement represents the valid and binding obligation of Digital Genesis enforceable in accordance with its terms, except as limited by bankruptcy and insolvency laws and by other laws affecting the rights of creditors generally. Section 5.04 Subsidiaries. Digital Genesis has no Subsidiaries. Section 5.05 Title. Digital Genesis has full right and title to the Digital Genesis Assets, and at the time of transfer thereof to Video, all of the Digital Genesis Assets will be free of all Security Interests except as reflected in Part 5.05 of the Digital Genesis Disclosure Schedule, and will be fully transferable to Video. Section 5.06 Financial Statements. (a) Digital Genesis has provided to the other Parties unaudited financial statements of Digital Genesis for the twelve-month period ended April 30, 1998. (b) All such financial statements have been kept on an accrual basis in accordance with GAAP, on a consistent basis throughout the periods covered, present fairly as of their respective dates the financial condition of Digital Genesis and its results of operations, and are consistent with the books and records of Digital Genesis. (c) Digital Genesis did not have as of the date of its most recent balance sheet any material liabilities or obligations (whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, and due or to become due), including any liability for Taxes, except for (i) liabilities set forth on its most recent balance sheet, and (ii) liabilities disclosed in this Agreement. (d) All accounts receivable of Digital Genesis are reflected properly on its books and records and, to the knowledge of Digital Genesis, are valid receivables subject to no material setoffs or counterclaims, are current and collectible, and will be collected in accordance with their terms at their recorded amounts, subject only to the reserve for bad debts, if any, set forth on the balance sheet of Digital Genesis at April 30, 1998, as adjusted for the passage of time through the date of this Agreement in accordance with the past custom and practice of Digital Genesis. Section 5.07 Absence of Certain Changes or Events. Except as described herein, since April 30, 1998, the date of the most recent balance sheet of Digital Genesis: (a) There has not been (i) any material adverse change in the business, operations, properties, assets, or condition of Digital Genesis; or (ii) any damage, destruction, or loss to Digital Genesis (whether or not covered by insurance) materially and adversely affecting its business, operations, properties, assets, or financial condition. (b) Digital Genesis has not (i) amended its articles of organization, charter, or operating agreement; (ii) declared or made, or agreed to declare or make, any payment or distributions of any assets of any kind whatsoever to members, or purchased or redeemed, or agreed to purchase or redeem, any membership interest; (iii) waived any rights of value which in the aggregate are extraordinary or material considering its business; (iv) made any material change in its method of management, operation, or accounting; (v) entered into any other material transaction; (vi) made any accrual or arrangement for payment of bonuses or special compensation of any kind or any severance or termination pay to any Person; or (vii) made any increase in any profit sharing, bonus, deferred compensation, insurance, pension, retirement, or other employee benefit plan, payment, or arrangement made to, for, or with its officers, members, managers, Affiliates, or employees. (c) Digital Genesis has not (i) borrowed or agreed to borrow any funds or incurred, or become subject to, any material obligation or liability (absolute or contingent), except liabilities incurred in the Ordinary Course of Business; (ii) paid any material obligation or liability (absolute or contingent) other than current liabilities reflected in or shown on the April 30, 1998 balance sheet of Digital Genesis, and current liabilities incurred since that date in the Ordinary Course of Business; (iii) except in the ordinary course of business, sold or transferred, or agreed to sell or transfer, any of its assets, properties, or rights (except assets, properties, or rights not used or useful in its business which, in the aggregate, have a value of less than $5,000), or canceled, or agreed to cancel, any debts or claims in excess of reserves reflected on its balance sheet at April 30, 1998 (except debts or claims which, in the aggregate, are of a value of less than $5,000); or (iv) made or permitted any amendment or termination of any contract, agreement, or license to which it is a party if such amendment or termination is material, considering its business. (d) To the knowledge of Digital Genesis, has not become subject to any law or regulation which materially and adversely effects, or in the future may adversely effect its business as conducted on the date hereof. Section 5.08 Title and Related Matters. Digital Genesis has good and marketable title to all of its properties, interests in properties, and assets, real and personal, which are reflected in its April 30, 1998 balance sheet or acquired after that date (except properties, interests in properties, and assets sold or otherwise disposed of since such date in the Ordinary Course of Business or as provided in this Agreement or the Digital Genesis Schedules), free and clear of all Security Interests, except as disclosed in the Digital Genesis Schedules. Except as set forth in Part 5.08 of the Digital Genesis Disclosure Schedule, Digital Genesis owns free and clear of any Security Interests any and all trademarks, service marks, trade names, copyrights, procedures, techniques, marketing plans, business plans, methods of management, intellectual property, and other information utilized in connection with its business and necessary to conduct its business in an efficient manner. Except as set forth in the Digital Genesis Schedules, no Person has any right to, and Digital Genesis has not received any notice of, infringement of, or conflict with, asserted rights of others with respect to any marketing rights, trade secrets, know-how, proprietary techniques, trademarks, service marks, trade names, copyrights, or intellectual property, which, if the subject of an unfavorable decision, ruling, or finding, would have a materially adverse effect on its business, operations, financial condition, income, or business, or any material portion of its properties, assets, or rights. Notwithstanding the foregoing, no trademarks and service marks, including "Digital Genesis" are registered on either a federal or state level, no trademark searches have been performed, and there is no assurance that any of the marks are capable of being registered. Section 5.09 Tax Matters. (a) Digital Genesis has filed, or will have filed prior to the Closing, all Tax Returns that it was required to file as of the date of Closing. All such Tax Returns were correct and complete in all material respects. All Taxes owed by any of Digital Genesis (whether or not shown on any Tax Return) have been paid. Digital Genesis is not currently the beneficiary of any extension of time within which to file any Tax Return, except as disclosed in the Digital Genesis Schedules. No claim has ever been made by an authority in a jurisdiction where Digital Genesis does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Security Interests on any of the assets of Digital Genesis that arose in connection with any failure (or alleged failure) to pay any Tax. (b) Digital Genesis has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other Person. (c) No Digital Genesis manager, member or officer (or employee responsible for Tax matters) of Digital Genesis reasonably expects any authority to assess against Digital Genesis any additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax liability of Digital Genesis either (i) claimed or raised by an authority in writing or, (ii) as to which any of the Digital Genesis managers, members and officers (and employees responsible for Tax matters) of Digital Genesis have knowledge. (d) Digital Genesis has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. (e) The unpaid Taxes of Digital Genesis (i) did not, as of the most recent balance sheet of Digital Genesis, exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of said balance sheet, and (ii) do not exceed that reserve as adjusted for the passage of time through the date of Closing in accordance with the past custom and practice of Digital Genesis in filing its Tax Returns. Section 5.10 Litigation and Proceedings. Except as set forth in the Digital Genesis Disclosure Schedule, there are no actions, suits, proceedings, or investigations pending or, to the knowledge of Digital Genesis, threatened by or against Digital Genesis or affecting its properties, at law or in equity, before any court or other governmental agency or instrumentality, domestic or foreign, or before any arbitrator of any kind. To the knowledge of Digital Genesis, there is no material default on the part of Digital Genesis with respect to any judgment, order, writ, injunction, decree, award, or ruling of any court, arbitrator, or governmental agency or instrumentality. Section 5.11 Contracts. (a) Except as included or described herein or in Part 5.11 of the Digital Genesis Disclosure Schedule, there are no material contracts, agreements, franchises, license agreements, or other commitments to which Digital Genesis is a party or by which its properties are bound. (b) All contracts, agreements, franchises, license agreements, and other commitments to which Digital Genesis is a party or by which its properties are bound and which are material to its operations are, to the knowledge of Digital Genesis, valid and enforceable by Digital Genesis in all respects, except as limited by bankruptcy and insolvency laws and by other laws affecting the rights of creditors generally. (c) Except as included or described in the Digital Genesis Disclosure Schedule or reflected in the April 30, 1998, balance sheet, Digital Genesis is not a party to any oral or written: (i) contract for the employment of any officer or employee which is not terminable on 30 days or less notice; (ii) profit sharing, bonus, deferred compensation, stock option, severance pay, pension benefit or retirement plan, agreement, or arrangement; (iii) agreement, contract, or indenture relating to the borrowing of money; (iv) guaranty of any obligation, other than one on which it is a primary obligor, for the borrowing of money or otherwise, excluding endorsements made for collection and other guaranties of obligations which, in the aggregate, do not exceed $10,000; (v) consulting or other similar contracts with an unexpired term of more than one year or providing for payments in excess of $5,000 in the aggregate; (vi) collective bargaining agreement; (vii) agreement with any present or former officer or director; or (viii) contract, agreement, or other commitment involving payments by it of more than $5,000 in the aggregate. Section 5.12 Material Contract Defaults. Except as disclosed in Part 5.12 of the Digital Genesis Disclosure Schedule, to its knowledge, Digital Genesis is not in default in any material respect under the terms of any outstanding contract, agreement, lease, or other commitment which is material to its business, operations, properties, assets, or business condition, and there is no event of default or other event which, with notice or lapse of time or both, would constitute a default in any material respect under any such contract, agreement, lease, or other commitment in respect of which it has not taken adequate Digital Genesis to prevent such a default from occurring. Section 5.13 Governmental Authorizations. Except as set forth in Part 5.13 of the Digital Genesis Disclosure Schedule, Digital Genesis has all licenses, franchises, permits, and other governmental authorizations, whether state or federal that are legally required to enable it to conduct its business in all material respects as conducted on the date hereof. Except for compliance with the Securities Act and the Limited Liability Company Act, as hereinafter provided, no authorization, approval, consent, or order of, or registration, declaration, or filing with, any court or other governmental body is required in connection with the execution and delivery by Digital Genesis of this Agreement and the consummation by Digital Genesis of the transactions contemplated hereby. Section 5.14 Compliance With Laws and Regulations. Digital Genesis has complied with all applicable statutes and regulations of any country, state, provincial, municipal, or local governmental entity or agency thereof, except to the extent that noncompliance would not materially and adversely affect its business, operations, properties, assets, or business condition, and except to the extent non-compliance would not result in any material liability. Section 5.15 Insurance. All the insurable properties of Digital Genesis are insured in accordance with industry standards against all risks customarily insured against by persons operating similar properties in localities where such properties are located and under valid and enforceable policies by insurers of recognized responsibility. Notwithstanding the foregoing, Digital Genesis has not increased its insurance since its last renewal to reflect additional equipment acquired, and all of the property of Digital Genesis may not be covered under its existing policy. Section 5.16 Information. The information concerning Digital Genesis set forth in this Agreement and in the Digital Genesis Disclosure Schedule is complete and accurate in all material respects and does not contain any untrue statement of a material fact or omit to state a material fact required to make the statements made, in light of the circumstances under which they are made, not misleading. Section 5.17 Assets. The Digital Genesis Assets constitute all of the assets that Digital Genesis has used to conduct its business operations. ARTICLE VI DIGITAL GENESIS ASSETS Section 6.01 Acquisition of Assets from Digital Genesis. Subject to the terms and conditions of this Agreement, and in reliance on the representations, warranties and agreements set forth herein, on the Closing Digital Genesis shall sell, convey, transfer, assign and put Video into possession of, and Video shall purchase from Digital Genesis, effective as of the Closing, all of Digital Genesis' right, title and interest in and to all of the Digital Genesis Assets as of the date hereof, including without limitation all assets used in connection with the operation of its business as listed on Schedule A attached hereto including without limitation: (a) the office furniture, equipment, computers and fixtures of Digital Genesis; (b) all computer software, programs and databases owned by Digital Genesis and any transferable computer software licensed by Digital Genesis from others; (c) all office supplies owned by Digital Genesis; (d) all client agreements and arrangements of Digital Genesis; (e) the equipment leases and other agreements, contracts and instruments of Digital Genesis; (f) all rights of Digital Genesis with respect to any of the temporary, permanent, leased or payrolled personnel; (g) all prepayments and deposits of Digital Genesis, including without limitation, security deposits under leases; (h) the name "Digital Genesis", all assumed names, logos, trademarks, service marks, domain names, trade names and copyrights and registrations and applications for registration of any of them, and any other intellectual property rights of Digital Genesis; (i) originals or true copies of all books and records of Digital Genesis pertaining to the assets referred to on Schedule A and in subparagraphs (a) through (h) above, as appropriate, including customer lists and credit files, and all those pertaining to the employees of Digital Genesis; (j) all permits, licenses, approvals and other governmental authorizations relating to the Digital Genesis and its business which are transferable to Video; and (k) any other assets that are used by Digital Genesis in connection with the operation of its business and that are not referred to in this Section 6.01 or on Schedule A, without limitation, telephone and facsimile numbers, internet and e-mail addresses, and the good will related to the business of Digital Genesis. ARTICLE VII PLAN OF REORGANIZATION Section 7.01 Redemption of Video Shares. Prior to and as a condition to the Closing, Video shall redeem and cancel 450,000 restricted Video Shares. After giving effect to the redemption, Video shall have issued and outstanding 150,000 restricted Video Shares and 300,000 freely tradeable Video Shares. Section 7.02 Closing; Reorganization. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing: (a) (i) Digital Genesis will sell, transfer, convey, assign and deliver to Video, clear of all Security Interests, except as disclosed in Part 5.05 and Part 5.08 of the Digital Genesis Disclosure Schedule, all of Digital Genesis's right, title and interest in, to and under the Digital Genesis Assets and (ii) Video will issue to Digital Genesis 400,000 duly authorized, validly issued, fully paid and non-assessable Video Shares. At or subsequent to the Closing, Digital Genesis agrees to execute and deliver such bills of sale, assignments and other documents as are reasonably requested by Video to ensure the transfer of the Acquired Assets as contemplated hereby. Video shall not assume by virtue of this Agreement or the transactions contemplated hereby, and shall have no liability for, any liabilities of Digital Genesis whatsoever of any kind, character or description whatsoever (the "Retained Liabilities"). Digital Genesis shall discharge in a timely manner or shall make adequate provision for all of the Retained Liabilities, provided that Digital Genesis shall have the ability to contest, in good faith, any such claim of liability asserted in respect thereof by any Person other than Video and its Affiliates. (b) Each NetGateway Share issued and outstanding immediately prior to the Closing shall be exchanged for ten (10) duly authorized, validly issued, fully paid and nonassessable Video Shares. (c) Upon consummation of the transactions contemplated herein at the Closing, NetGateway shall become a wholly-owned subsidiary of Video. 7.03 Directors and Officers. Unless otherwise agreed to in writing by the Parties hereto prior to the Closing, the directors and officers of Video immediately after the Closing shall be the individuals identified on Schedule B. 7.04 Exchange of Certificates. At the Closing, the NetGateway Shareholders shall deliver to Video their respective and valid certificates representing all of their NetGateway Shares and Video shall issue and deliver to the NetGateway Shareholders in exchange therefor a certificate registered in the name of such holder representing the number of Video Shares that such holder has the right to receive pursuant to Section 7.02(b). Until surrendered as contemplated by this Section, each certificate for NetGateway Shares shall be deemed, from and after the Closing, to represent only the right to receive Video Shares hereunder. If any certificate for NetGateway Shares shall have been lost, stolen or destroyed, Video may, in its discretion and as a condition precedent to the issuance of any certificate representing Video Shares, require the owner of such lost, stolen or destroyed certificate to provide an appropriate affidavit of loss and indemnity agreement against any claim that may be made against Video with respect to such certificate. At the Closing, Video shall issue and deliver a certificate to Digital Genesis registered in its name representing the right to receive Video Shares pursuant to Section 7.02(a). ARTICLE VIII SPECIAL COVENANTS Section 8.01 Stockholder Approval. Promptly following the execution of this Agreement, Video shall take all steps required to obtain Stockholder Approval of this Agreement and all transactions contemplated hereby. The execution of this Agreement by the NetGateway Shareholders, by the members of Digital Genesis shall constitute Stockholder Approval for NetGateway and for Digital Genesis of this Agreement and all transactions contemplated hereby. Section 8.02 Access to Properties and Records. Video, NetGateway and Digital Genesis will each afford to the officers and authorized representatives of the other(s) full access to its properties, books, and records in order that each may have full opportunity to make such reasonable investigation as it shall desire to make of the affairs of the other, and each will furnish the other with such additional financial and operating data and other information as to its business and properties as the other shall from time to time reasonably request. Section 8.03 Actions Prior to Closing. (a) From and after the date of this Agreement until the date of Closing and except as set forth in the Video Disclosure Schedule, the NetGateway Disclosure Schedule, or the Digital Genesis Disclosure Schedule, or as permitted or contemplated by this Agreement, the Parties hereto will each: (i) carry on its business in substantially the same manner as it has heretofore; (ii) maintain and keep its properties in states of good repair and condition as at present, except for depreciation due to ordinary wear and tear and damage due to casualty; (iii) maintain in full force and effect insurance comparable in amount and in scope of coverage to that now maintained by it; (iv) perform in all material respects all of its obligation under material contracts, leases, and instruments relating to or affecting its assets, properties, and business; (v) use its best efforts to maintain and preserve its business organization intact, to retain its key employees, and to maintain its relationship with its material suppliers and customers; and (vi) fully comply with and perform in all material respects all obligations and duties imposed on it by all federal and state laws and all rules, regulations, and orders imposed by federal or state governmental authorities. (b) From and after the date of this Agreement until the date of Closing, none of the Parties hereto will: (i) make any change in its articles of incorporation, bylaws, articles of organization, or operating agreement as the case may be; (ii) take any action described in Section 2.08 in the case of Video or Section 5.07 in the case of Digital Genesis (all except as permitted therein or as disclosed in Video Disclosure Schedule or Digital Genesis Disclosure Schedule); or (iii) enter into or amend any material contract, agreement, or other instrument of any of the types described in such Party's disclosure schedule. Section 8.04 Special Covenants and Representations Regarding Video Shares. The consummation of this Agreement and the transactions herein contemplated, including the issuance of Video Shares to the NetGateway Shareholders and Digital Genesis, constitutes the offer and sale of securities under the Securities Act and applicable state securities statutes. Such transactions shall be consummated in reliance on exemptions from the registration and prospectus delivery requirements of such statutes which depend, inter alia, upon the circumstances under which the NetGateway and and Digital Genesis acquires such securities. In connection with reliance upon exemptions from the registration and prospectus delivery requirements for such transactions, Video shall cause to be delivered to the NetGateway Shareholders and to Digital Genesis prior to the Closing disclosure documentation in form and substance satisfactory to Video regarding the terms of the Reorganization, the Parties, to ensure compliance with the applicable provisions of the Securities Act and applicable state law. Section 8.05 Indemnification. (a) Video and Video Majority Shareholder hereby agree to indemnify and hold harmless the other Parties and each of their respective officers, directors, managers and members from and after the date of this Agreement against any loss, liability, claim, damage, or expense (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever), to which it or they may become subject arising out of or based on any inaccuracy appearing in or misrepresentation made under Article II of this Agreement or any breach of any covenants set forth in this Agreement. The indemnification provided for in this Section 8.05(a) shall survive the Closing and consummation of the transactions contemplated hereby and termination of this Agreement. (b) NetGateway and Digital Genesis each agree to indemnify the other Parties and each of their respective officers, directors, managers and members as of the date of this Agreement against any loss, liability, claim, damage, or expense (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever), to which it or they may become subject arising out of or based on any inaccuracy appearing in or misrepresentation made under Article III of this Agreement in the case of NetGateway and Article V in the case of Digital Genesis or because of any breach by them of any covenants set forth in this Agreement. The indemnification provided for in this Section 8.05(b) shall survive the Closing and consummation of the transactions contemplated hereby and termination of this Agreement. (c) The NetGateway Shareholders each agree to indemnify the other Parties and each of their respective officers, directors, managers and members as of the date of this Agreement against any loss, liability, claim, damage, or expense (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever), to which it or they may become subject arising out of or based on any inaccuracy appearing in or misrepresentation made under Article IV of this Agreement provided, however, that in no event shall the liability of the NetGateway Shareholders hereunder exceed the dollar value of the Video Shares received by each of them as a result of the transactions contemplated by this Agreement. The indemnification provided for in this Section 8.05(c) shall survive the Closing and consummation of the transactions contemplated hereby and termination of this Agreement. (d) If any party entitled to indemnification under this Section 8.05 (the "Indemnified Party") shall receive notice or otherwise learn of the assertion by any other Person of any claim or of the commencement by any such Person or any action (a "Third Party Claim") with respect to which a party may be obligated to provide indemnification pursuant to this Section 8.05 (the "Indemnifying Party"), such Indemnified Party shall give written notice thereof to the Indemnifying Party within ten (10) business days after becoming aware of such Third Party Claim (the "Indemnification Notice"); provided, however, that the failure of any Indemnified Party to give notice as provided in this Section 8.05 shall not relieve the Indemnifying Party of its obligations under this Section 8.05, as the case may be, except to the extent that the Indemnifying Party actually is prejudiced by such failure to give notice. Such notice shall describe the Third Party Claim in reasonable detail, and shall indicate the amount of the Damages that has been paid or reasonably expects to pay or incur (in accordance with GAAP) by such Indemnified Party. Thereafter, such Indemnified Party shall deliver to the Indemnifying Party within five (5) business days after the Indemnified Party's receipt thereof, copies of all notices and documents received by the Indemnified Party relating to the Third Party Claim (including court papers). (e) If, promptly after receipt by the Indemnifying Party of notice of any Third Party Claim as provided in Section 8.05(d), the Indemnifying Party shall give written notice to the Indemnified Party stating that it intends to assume the defense thereof, at its own cost, then the defense of such Third Party Claim, including selection of counsel reasonably satisfactory to the Indemnified Party, shall be by the Indemnifying Party and the Indemnified Party shall make no payment on such Third Party Claim as long as the Indemnifying Party is conducting a good faith and diligent defense. The Indemnified Party shall make available all information and assistance that the Indemnifying Party may reasonably request and shall cooperate with the Indemnifying Party in such defense. Notwithstanding the foregoing, the Indemnified Party shall at all times have the right to fully participate in such defense at its own expense directly or through counsel. If no such notice to assume the defense against a Third Party Claim is received by the Indemnified Party from the Indemnifying Party, the Indemnified Party shall, at the expense of the Indemnifying Party, undertake the defense of such Third Party Claim, with counsel selected by the Indemnified Party, and shall have the right to compromise or settle the same exercising reasonable judgment. (f) No Third Party Claim made against any Indemnified Party shall be settled without the prior written consent of the Indemnifying Party. Section 8.06 Third Person Consents and Agreements. The Parties agree to cooperate with each other in order to obtain any required third Person consents to this Agreement and the transactions herein contemplated. Section 8.07 Compliance with Section 351. Video agrees and covenants that it will take no action, including but not limited to issuance of additional shares of common stock of Video, which would cause the transactions contemplated by this Agreement to not qualify under Section 351 of the Internal Revenue Code. Section 8.08 Cancellation of Confidentiality Agreement. On the 28th day of May, 1998, NetGateway and Digital Genesis entered into a Confidentiality Agreement (the "Confidentiality Agreement"). It is hereby agreed that upon execution and delivery of this Agreement, the Confidentiality Agreement is canceled and shall be of no further force and effect. Section 8.09 Termination. (a) This Agreement may be terminated by the Board of Directors stockholders or the members of any Business Party at any time prior to the Closing if: (i) there shall be any actual or threatened action or proceeding before any court or any governmental body which shall seek to restrain, prohibit, or invalidate the transactions contemplated by this Agreement and which, in the judgment of such Board of Directors, made in good faith and based on the advice of its legal counsel, makes it inadvisable to proceed with the mergers and reorganization contemplated by this Agreement; (ii) any of the transactions contemplated hereby are disapproved by any regulatory authority whose approval is required to consummate such transactions or in the judgment of such Board of Directors, made in good faith and based on the advice of counsel, there is substantial likelihood that any such approval will not be obtained or will be obtained only on a condition or conditions which would be unduly burdensome, making it inadvisable to proceed with the mergers and reorganization; (iii) there shall have been any change after the date of the latest balance sheet in the assets, properties, business, or financial condition of any Party, which could have a materially adverse affect on the value of the business of any Party, except any changes disclosed in the Schedules of any Party; or (iv) the Parties shall fail to obtain the consents or waivers required of any third Person to consummate the transactions contemplated by this Agreement. In the event of termination pursuant to this Section 8.09(a) no obligation, right, or liability shall arise hereunder, and each Party shall bear all of the expenses incurred by it in connection with the negotiation, drafting, and execution of this Agreement and the transactions herein contemplated; or (b) This Agreement may be terminated at any time prior to the Closing by action of the Board of Directors or members of any Business Party if any Party shall fail to comply in any material respect with any of its covenants or agreements contained in this Agreement or if any of the representations or warranties contained herein shall be inaccurate in any material respect. If this Agreement is terminated pursuant to this Section 8.09(b) this Agreement shall be of no further force or effect, and no obligation, right, or liability shall arise hereunder, and each Party shall bear all of the expenses incurred by it in connection with the negotiation, drafting, and execution of this Agreement and the transactions herein contemplated. ARTICLE IX CLOSING Section 9.01 Closing. The Closing of the transactions contemplated by this Agreement shall take place at the offices of NetGateway, 3780 Kilroy Airport Center, 2nd Floor, Long Beach, CA 90806 on June 2, 1998, or at such other place and on such other date as may be agreed to by the Parties. Section 9.02 Closing Events. At the Closing, each of the respective Parties hereto shall execute, acknowledge, and deliver (or shall cause to be executed, acknowledged, and delivered) any and all certificates, financial statements, schedules, agreements, resolutions, rulings, or other instruments required by this Agreement to be so delivered at or prior to the Closing, together with such other items as may be reasonably requested by the Parties hereto and their respective legal counsel in order to effectuate or evidence the transactions contemplated hereby. Notwithstanding the foregoing, any party shall have ten (10) business days from the date of Closing to supply any document required to be supplied at the Closing. ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF VIDEO The obligations of Video under this Agreement are subject to the satisfaction, at or before the date of Closing, of the following conditions: Section 10.01 Accuracy of Representations. The representations and warranties made by the other Parties in this Agreement were true when made and shall be true as of the date of Closing with the same force and effect as if such representations and warranties were made at and as of the date of Closing (except for changes therein permitted by this Agreement), and the other Parties shall have performed or complied with all covenants and conditions required by this Agreement to be performed or complied with by them prior to or at the Closing. Video shall be furnished with certificates, signed by duly authorized officers of NetGateway and Digital Genesis dated the date of Closing, to the foregoing effect. Section 10.02 Performance of Covenants. Each covenant or obligation that the Company is required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all respects. Section 10.03 No Restraints. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the Merger that makes consummation of the Merger illegal. Section 10.04 Stockholder Approval. The Video Stockholders, the NetGateway Stockholders and the members of, as necessary, Digital Genesis shall have approved, if necessary, this Agreement and the transactions contemplated hereby. Section 10.05 Officer's Certificates. Video shall have been furnished with certificates dated the date of Closing signed by duly authorized officers of NetGateway and Digital Genesis to the effect that no litigation, proceeding, investigation, or inquiry is pending which might result in an action to enjoin or prevent the consummation of the transactions contemplated by this Agreement. Section 10.06 No Material Adverse Change. Prior to the Closing, there shall not have occurred any material adverse change in the financial condition, business, or operations of NetGateway or Digital Genesis. Section 10.07 Good Standing. Video shall have received certificates of good standing from applicable states certifying that NetGateway and Digital Genesis are in good standing as corporations in such states. Section 10.08 Consents/ Agreements. Video, NetGateway and Digital Genesis shall have obtained any necessary third Person consents and agreements. Section 10.09 Dissenters' Rights. None of the holders of the outstanding securities of the Parties shall be entitled to dissenters' rights under Nevada Revised Statutes Sections 92A-300 - 92A-500. Section 10.10 Articles of Exchange. Articles of Exchange shall have been filed as required under Nevada Revised Statutes Sections 92A-200 and 92A-230. Section 10.11 Other Items. Video shall have received such further documents, certificates, or instruments relating to the transactions contemplated hereby as Video may reasonably request. ARTICLE XI CONDITIONS PRECEDENT TO OBLIGATIONS OF NETGATEWAY AND DIGITAL GENESIS The obligations of NetGateway, NetGateway Shareholders and Digital Genesis and their respective shareholders under this Agreement are subject to the satisfaction, at or before the date of Closing, of the following conditions: Section 11.01 Accuracy of Representations. The representations and warranties made by Video in this Agreement were true when made and shall be true as of the Closing with the same force and effect as if such representations and warranties were made at and as of the date of Closing (except for changes therein permitted by this Agreement), and Video shall have performed and complied with all covenants and conditions required by this Agreement to be performed or complied with by Video prior to or at the Closing. NetGateway and Digital Genesis shall have been furnished with a certificate, signed by a duly authorized officer of Video and dated the date of Closing to the foregoing effect. Section 11.02 Performance of Covenants. Each covenant or obligation that the Company is required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all respects. Section 11.03 No Restraints. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the Merger that makes consummation of the Merger illegal. Section 11.04 Stockholder Approval. The Video Stockholders, the NetGateway Stockholders and the members of, as necessary, Digital Genesis shall have approved, if necessary, this Agreement and the transactions contemplated hereby. Section 11.05 Officer's Certificate. NetGateway and Digital Genesis shall have been furnished with a certificate dated the date of Closing and signed by a duly authorized officer of Video to the effect that no litigation, proceeding, investigation, or inquiry is pending which might result in an action to enjoin or prevent the consummation of the transactions contemplated by this Agreement. Section 11.06 No Material Adverse Change. Prior to the Closing, there shall not have occurred any material adverse change in the financial condition, business, or operations of Video. Section 11.07 Good Standing. NetGateway and Digital Genesis shall have received a certificate of good standing from the state of Nevada with respect to Video certifying that Video is in good standing as a corporation in the state of Nevada. Section 11.08 Consents. Video, NetGateway and Digital Genesis shall have obtained any necessary third person consents and agreements. Section 11.09 Dissenters' Rights. None of the holders of the outstanding securities of the Parties shall be entitled to dissenters' rights under Nevada Revised Statutes Sections 92A-300 - 92A-500. Section 11.10 Articles of Exchange. Articles of Exchange shall have been filed as required under Nevada Revised Statutes 92A-200 and 92A-230. Section 11.11 Other Items. NetGateway and Digital Genesis shall have received such further documents, certificates, or instruments relating to the transactions contemplated hereby as NetGateway and Digital Genesis may reasonably request. ARTICLE XII MISCELLANEOUS Section 12.01 Brokers. The Parties agree that there were no finders or brokers involved in bringing the Parties together or who were instrumental in the negotiation, execution, or consummation of this Agreement. The Parties each agree to indemnify the others against any claim by any Person other than those described above for any commission, brokerage, or finders' fee arising from the transactions contemplated hereby based on any alleged agreement or understanding between the Indemnifying Party and such Person, whether express or implied from the actions of the Indemnifying Party. Section 12.02 Governing Law. This Agreement shall be governed by, enforced, and construed under and in accordance with the laws of the United States of America and, with respect to matters of state law, with the laws of Nevada. Section 12.03 Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if personally delivered to it or sent by registered mail or certified mail, postage prepaid, or by prepaid telegram addressed as follows: If to Video, to: Video Calling Card, Inc. Attn: Steve Utley 766 Keswick Drive Sandy, Utah 94093 If to NetGateway, to: NetGateway Attn: Donald M. Corliss, Jr. 3780 Kilroy Airport Center, 2nd Floor Long Beach, California 90806 If to Digital Genesis to: Infobahn Technologies, LLC Attn: Jeff Crandell 201 Wilshire Boulevard, Suite A-1 Santa Monica, California 90401 or such other addresses as shall be furnished in writing by any Party in the manner for giving notices hereunder, and any such notice or communication shall be deemed to have been given as of the date so delivered, mailed, or telegraphed. Section 12.04 Expenses; Attorneys' Fees. Each party to this Agreement shall bear and pay all fees, costs and expenses (including legal fees and accounting fees) that have been incurred or that are incurred in the future by such party in connection with the transactions contemplated by this Agreement, including all fees, costs and expenses incurred by such party in connection with or by virtue of (a) the investigation and review conducted by such party (or its representatives) with respect to the other party's business (and the furnishing of information to the other party and its representatives in connection with such investigation and review), (b) the negotiation, preparation and review of this Agreement and all agreements, certificates, opinions and other instruments and documents delivered or to be delivered in connection with the transactions contemplated by this Agreement, (c) the preparation and submission of any filing or notice required to be made or given in connection with any of the transactions contemplated by this Agreement, and the obtaining of all consents and governmental authorizations required to be obtained in connection with any of such transactions, and (d) the consummation of the transactions contemplated hereby. In the event that any Party institutes any action or suit to enforce this Agreement or to secure relief from any default hereunder or breach hereof, the non-prevailing Party or Parties shall reimburse the prevailing Party or Parties for all costs, including reasonable attorneys' fees, incurred in connection therewith and in enforcing or collecting any judgment rendered therein. Section 12.05 Further Assurances. Each party hereto shall execute and cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the Closing) for the purpose of carrying out or evidencing any of the transactions contemplated by this Agreement. Section 12.06 Time of Essence. Time is of the essence in this Agreement. Section 12.07 Remedies Cumulative; Specific Performance. The rights and remedies of the parties hereto shall be cumulative (and not alternative). The parties to this Agreement agree that, in the event of any breach or threatened breach by any party to this Agreement of any covenant, obligation or other provision set forth in this Agreement for the benefit of any other party to this Agreement, such other party shall be entitled (in addition to any other remedy that may be available to it) to (a) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision, and (b) an injunction restraining such breach or threatened breach. Section 12.08 Waiver. (a) No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. (b) No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. Section 12.09 Amendments. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of all the parties hereto. Section 12.10 Severability. In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law. Section 12.11 Disclosure Schedules. The disclosure schedules shall be arranged in separate parts corresponding to the numbered and lettered sections contained in Sections 2, 3, 4 or 5, as the case may be, and, unless otherwise specificall provided in such disclosure schedules, the information disclosed in any numbered or lettered part shall be deemed to relate to and to qualify only the particular representation and warranty set forth in the corresponding numbered or lettered section in Section 2, 3, 4 or 5, as the case may be, and shall not be deemed to relate to or to qualify any other representation or warranty. Section 12.12 Construction. (a) For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include the masculine and feminine genders. (b) The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. (c) As used in this Agreement, the words "include" and "including" and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by words "without limitation." (d) Except as otherwise indicated, all references in this Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this Agreement and Exhibits to this Agreement. Section 12.13 Headings. The bold-faced section headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. Section 12.14 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one and the same instrument. Signatures may be exchanged by telecopy, with original signatures to follow. Each of the parties hereto agrees that it will be bound by its own telecopied signature and that it accepts the telecopies signatures of the other parties to this Agreement. The original signature pages shall be forwarded to NetGateway or its counsel and NetGateway and its counsel will provide all of the parties hereto with a copy of the entire Agreement. Section 12.15 Third Party Beneficiaries. This Agreement is solely between the Parties and except as specifically provided no director, officer, stockholder, employee, agent, independent contractor, or any other Person shall be deemed to be a third party beneficiary of this Agreement. Section 12.16 Entire Agreement. This Agreement, including the exhibits and schedules hereto, represents the entire agreement between the Parties relating to the subject matter hereof. This Agreement alone fully and completely expresses the agreement of the Parties. There are no other courses of dealing, understandings, agreements, representations, or warranties, written or oral, except as set forth herein. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their officers hereunto duly authorized, as of the date first above-written. VIDEO CALLING CARD, INC., a Nevada corporation By: /s/ Stephen B. Utley --------------------------------- Name: Stephen B. Utley Title: Secretary NETGATEWAY, a Nevada corporation By: /s/ Keith D. Freedhoff --------------------------------- Name: Keith D. Freedhoff Title: Chariman/CCO INFOBAHN TECHNOLOGIES, LLC, a California limited liability company By: James Miller -------------------------------- Its: CEO NETGATEWAY SHAREHOLDERS: (for purposes of Section 4.01 only) /s/ Keith D. Freedhoff ------------------------------------- Keith D. Freadhoff /s/ Donald M. Corliss, Jr. ------------------------------------- Donald M. Corliss, Jr. /s/ Robert D. Geringer ------------------------------------- Robert D. Geringer /s/ Anna T. Brannon ------------------------------------- Anna T. Brannon /s/ T. Jason Mayo ------------------------------------- T. Jason Mayo ------------------------------------- Frojen Advertising, Inc. By: illegible ---------------------------------- Its: President ---------------------------------- /s/ Eric DeCastro ------------------------------------- Eric DeCastro /s/ Mark Gallegly ------------------------------------- Mark Gallegly /s/ David Bassett-Parkins ------------------------------------- David Bassett-Parkins Vision Holding, a Cayman corporation By: /s/ Michael Howard ------------------------------------- Name: Michael Howard Title: former nomineee as Director Steps, Inc. By: /s/ R. Scott Beebe ------------------------------------- Name: R. Scott Beebe Title: Vice-President ------------------------------------- Mike Khaled /s/ Eric Richardson ------------------------------------- Eric Richardson /s/ Hanh Ngo ------------------------------------- Hanh Ngo VIDEO MAJORITY SHAREHOLDER: (for purposes of Articles II and IX only) /s/ Stephen B. Utley ------------------------------------- STEPHEN B. UTLEY Schedule A Digital Genesis Assets See attached spreadsheet listing Digital Genesis Assets. Schedule B Directors and Officers of Video Directors: Keith D. Freadhoff Donald M. Corliss, Jr. Scott Beebe Officers: Chairman and CEO Keith D. Freadhoff President Donald M. Corliss, Jr. COO and CFO David Bassett-Parkins Secretary Anna T. Brannon VIDEO DISCLOSURE SCHEDULES 2.08 Absence of Certain Changes: None 2.09(c) Tax Matters: None 2.11 Contracts: None NETGATEWAY DISCLOSURE SCHEDULES 3.05 Capitalization: None 3.06 Title: None Keith D. Freadhoff 167,500 Donald M. Corliss, Jr. 15,000 Robert D. Geringer 15,000 Anna T. Brannon 10,000 T. Jason Mayo 10,000 Eric DeCastro 5,000 Mark Gallegly 2,500 Robert C. Frojen 10,000 Mike Khaled 40,000 Eric Richardson 10,000 Steps, Inc. 100,000 Vision Holdings 190,000 David Bassett-Parkins 10,000 Hanh Ngo 5,000 DIGITAL GENESIS DISCLOSURE SCHEDULES 5.05 Title: None 5.08 Title and Related Matters: None 5.10 Litigation and Proceedings: None 5.11 Contracts: None 5.12 Material Contract Defaults: None 5.13 Governmental Authorizations: None EX-10.12 16 SOFTWARE ASSIGN AND GRANT BACK 11/16/99 Exhibit 10.12 SOFTWARE ASSIGNMENT AND GRANT BACK LIMITED LICENSE AGREEMENT between NETGATEWAY and SHOPPING PLANET THIS AGREEMENT (the "Agreement") is made and entered into as of this 16th day of November, 1998 ("Effective Date") by and between NETGATEWAY, a Nevada corporation, with a principal place of business located at 300 Oceangate, Fifth Floor, Long Beach CA 90802 ("NETGATEWAY"), and PINAMAR CORPORATION and UniNet IMAGING, INC., both California corporations (jointly referred to hereinafter as "SHOPPING PLANET"), with a principal place of business located at 11134 Washington Boulevard, Culver City, California 90232, and LUIS MARCELO POLOVO at c/o 11134 Washington Boulevard, Culver City, California 90232, OSVALDO FEDERICO POVOLO at c/o 11134 Washington Boulevard, Culver City, California 90232, NESTOR SAPORITI at c/o 11134 Washington Boulevard, Culver City, California 90232, and ALEXIS FAVIAN QUINTANA at c/o 11134 Washington Boulevard, Culver City, California 90232 (jointly referred to hereafter as the "Principals"). 1. Definitions. 1.1 "Blocking Patent " shall mean all patents and patent rights in all countries of the world, issued or issuing on patent applications which apply to improvements of or to the Technology and with respect to which, without a license, the Technology would infringe a claim. 1.2 "Technology" shall mean that certain small business operating system software, which includes inventory management, purchasing management, order fulfillment, order status, a commission calculator, Web-based order procuring, and payment processing, as well all code and related underlying documentation and programmers notes ("Documentation"). 2. Conveyance of Technology. 2.1 Conveyance. For good consideration as set forth in Paragraph 3 hereof, SHOPPING PLANET and the Principals hereby jointly and severally irrevocably convey to NETGATEWAY all their right, title and interest in and to the Technology, as those rights may lay, including but not limited to the rights of copyright and the following rights: 2.1.1 "Use Rights", meaning the ability to make full use of the presently existing Technology, free from the assertion or legal or equitable claims by others; 2.1.2 "Use Capability", meaning irrevocable custody and possession of the information that is needed as a practical matter to exercise the User Rights; 2.1.3 "Adaptation Rights", meaning the right and ability to adapt and modify the Technology for use in different environments or for different purposes free of claims by others; 2.1.4 "Adaptation Capability", meaning irrevocable custody and possession of the information that is needed as a practical matter to exercise the User Rights; 2.1.5 "Copying and Distribution Rights", meaning the legal right to make and distribute copies of the Technology, free of claims by others; and 2.1.6 "Exclusionary Rights", meaning the right and ability to invoke governmental authority to exclude others from exercising any of the foregoing rights and capabilities. 2.2 License Back. For good consideration as set forth in Article 3 hereof, and on the terms and conditions set forth herein, NETGATEWAY hereby grants to SHOPPING PLANET a nonexclusive, nontransferable license of the Technology for internal business use only by SHOPPING PLANET. SHOPPING PLANET shall not have the right to sublicense this grant to others, and shall not have the right to use the Technology as a basis for developing any other software for license to third parties. The parties hereto specifically acknowledge and understand that this grant back is made to SHOPPING PLANET only and not to any of the Principals. SHOPPING PLANET shall hold the Technology in confidence in a reasonable manner, but in no less protective a manner than it holds its own technology and software. 2.3 Reservation of Rights. Except for the rights expressly granted herein, each party retains all right, title and interest in and to its own other technology, whether preexisting or developed hereafter. 3. Consideration. 3.1 Consideration for Conveyance of Technology. In exchange for the conveyance of the Technology set forth in Section 2.1 above, at Closing (as defined below) Shopping Planet shall receive thirty-five thousand (35,000) shares of 144 restricted common stock of Netgateway, Inc., the parent company of Netgateway (the "Shares"). 3.2 Adjustment. In the event that on the date nine (9) months after the Closing (the "Adjustment Date"), the Shares do not have a total market value of Two Hundred Fifty Thousand Dollars ($250,000.00), without regard to the 144 restrictions and based on the trading average of the Netgateway, Inc. stock over the immediately preceding thirty (30) trading days, then Netgateway will issue additional shares of stock as follows: 3.2.1 On the day after the Adjustment Date, NetGateway shall determine the average daily sales price (the "ADP") of NetGateway common stock over the sixty (60) days immediately preceding the Adjustment Date. In determining the ADP, the actual closing sales price of NetGateway stock (as quoted on the exchange or other market on which NetGateway stock is normally traded) shall be used. Days on which no sales shall have been consummated shall be disregarded. By way of example, if during the Adjustment Period there are 40 trading days and NetGateway stock was traded on 30 of those days, the sum of the sales prices on the 30 days on which a sales transaction actually occurred shall be divided by 30. 3.2.2 Next, the ADP shall be multiplied by thirty-five thousand (35,000) and the resulting number shall be subtrancted from Two Hundred Fifty Thousand Dollars ($250,000) to determine the deficit (the "Deficit"). 3.2.3 The Deficit shall then be divided by the ADP and the resulting number, rounded to the nearest whole number, shall represent the number of additional shares that shall be issued to Shopping Planet. 3.2.4 By way of example only, if it were assumed that the ADP is Six Dollars ($6.00), then the market value of the Stock would be Two Hundred Ten Thousand Dollars ($210,000.00) (35,000 x 6) and the Deficit would be Forty Thousnad Dollars ($40,000.00) (250,000 - 210,000). Under this example, an additional 6,667 shares would be issued to Shopping Planet (40,000/6). 3.2.5 This Adjustment shall only apply in the event that Shopping Planet continues to hold and has continously held all of the Shares throught out the period commencing on the date of Closing and continuing through the Adjustment Date. In addition to the adjustment set forth in this Section 3.2 at the end of nine (9) months, in the event that the Shares have not become tradeable on the market in which the Netgateway stock is commonly traded within twenty-one (21) months from the date of the Closing, then the mechanism for adjustment set forth in this Section 3.2 shall be applied to determine if another adjustment should be made. For purposes of this second adjustment, all of the Shares, including any additional shares issued pursuant to the first Adjustment, shall be counted to determine whether the market value is at least Two Hundred Fifty Thousand Dollars ($250,000.00). 3.3 Commission. At the Closing, NETGATEWAY shall pay to Geveva, as the complete commission due under or relating to this transaction, the sum of Twenty Thousand Dollars ($20,000.00). 3.4 Consideration for the License Back. In exchange for the nonexclusive limited license of the Technology set forth in Section 2.2 above, SHOPPING PLANET shall pay to NETGATEWAY at the Closing a license fee of One Dollar ($1.00) per year, payable five (5) years in advance, and shall prominently on all Web sites using the Technology a "Powered by Netgateway" byline along with the NETGATEWAY logo. Such display shall be subject to the prior and continuing approval of NETGATEWAY and shall be deemed a material part of the consideration for the license back. 4. Improvements. 4.1 Development of Improvements. NETGATEWAY and SHOPPING PLANET shall be free to develop improvements in the Technology, and shall own all right, title, and interest in such improvements, subject to the restriction on usage by SHOPPING PLANET set forth in Paragraph 2.2 hereof. Furthermore, SHOPPING PLANET and the Principals each acknowledge and agree that Marcelo Povolo shall not directly or indirectly make or assist in any improvements of the Technology owned or used by SHOPPING PLANET, provided, however, that SHOPPING PLANET shall be entitled, as part of its license back, to receive any enhancements made by NETGATEWAY to the Technology in the platform in which the Technology is currently used. 4.2 Blocking Patents. To the extent that they presently or hereafter hold any rights in Blocking Patents that have not been conveyed hereunder as part of the Technology, SHOPPING PLANET and the Principals hereby grant to NETGATEWAY a royalty-free, worldwide, non-exclusive, license under any Blocking Patents to use, copy, modify, distribute, and make, have made, use, sell and otherwise transfer any product or process using, incorporating or derived from the Technology. 5. Conditions Precedent. The following are conditions precedent to the terms of Section 3.1 of this Agreement being binding upon NETGATEWAY and to the Closing by NETGATEWAY: 5.1 Execution by Marcelo Povolo of a three year employment agreement in form satisfactory to NETGATEWAY; and 5.2 Successful transfer of the H-1 Visa of Marcelo Povolo to NETGATEWAY. 6. Transfer of Consideration, Escrow and Closing. 6.1 Upon the execution hereof, SHOPPING PLANET will deliver to NETGATEWAY a copy of the source code and a working copy of the Technology along with the Documentation and programmers notes, for installation onto a computer. A representative of NETGATEWAY, in the presence of a representative of SHOPPING PLANET will attempt a compilation of the installed source code into executable code on the NETGATEWAY computer to confirm that such software operates in substantial conformance with the its intended use. Should any failures occur, then SHOPPING PLANET will use its best efforts to determine and correct the errors thereby causing the source code to be fully operational. If NETGATEWAY determines that the Escrowed Materials are not sufficient, NETGATEWAY may terminate this Agreement without liability to SHOPPING PLANET by providing written notice to SHOPPING PLANET and the Shares shall be returned to NETGATEWAY. 6.2 Upon the execution hereof, NETGATEWAY will retain the services of a mutually agreeable independent third party escrow agent ("Escrow Agent") and within five (5) days of the execution hereof, NETGATEWAY shall deposit with the Escrow Agent the Shares set forth in Section 3.1. The Shares will be held by the Escrow Agent until the Condidtions Precedent have been satisfied and then shall deliver such shares to SHOPPING PLANET. Such Escrow shall terminate upon the delivery of the Shares to SHOPPING PLANET or six (6) months after it is established, whichever comes first. In the event that the Conditions Precedent are not satisfied within said six (6) month period, then the Shares shall be returned to the issuer for cancellation and the technology with all its derivatives shall be returned to SHOPPING PLANET. 6.3 The Closing will occur three (3) days after all of the Conditions Precedent have been satisfied. At the Closing, the Escrow Agent will be instructed to deliver the Shares to SHOPPING PLANET and NETGATEWAY will pay to Geneva the Commission. 7. Representations. SHOPPING PLANET hereby represents and warrants that either Pinamar Corporation or UniNet Imaging, Inc. owns the Technology free and clear of any liens, encumbrances or claims and that it has not in any way previously transferred, assigned, licensed, sublicensed, pledged or in any way transferred any of its interest and ownership in the Technology. 8. Confidential Information, 8.1 Definition. Each party agrees that any and all knowledge, know-how and technology which it received from the other party and which is marked as confidential, proprietary, or with similar designation, or it disclosed orally, is confirmed at the time of disclosure as confidential, or that is reduced to written summary within fifteen (15) days after initial disclosure, is confidential information and shall be maintained by the receiving party in confidence ("Confidential Information"), Whether marked or not, the Technology shall be deemed Confidential Information of NETGATEWAY. 8.2 Standard of Care. The receiving party agrees to take all reasonable precautions to safeguard the confidential nature of the other party's confidential information, using at least as great a degree of care as such receiving party uses to safeguard its own confidential information but not less than a reasonable degree of care. Each party agrees not to use or disclose such confidential information except as expressly authorized. 8.3 Limitation on Access. SHOPPING PLANET agrees to permit access to the Technology by only those employees with a need to have access and will cause such employees and/or consultants who are permitted access to sign a confidentiality agreement in a form which includes the degree of care that NETGATEWAY utilizes to protect its own confidential information of similar nature which shall be no less than a reasonable degree of care. 8.4 Neither party shall be liable for disclosure and/or use of any Confidential Information insofar as such is: 8.4.1 in, or becomes part of, the public domain other than through a breach of the Agreement by such party; 8.4.2 already known to such party at or before the time it receives the same from the other party or is disclosed to such party by a third party as a matter of right, 8.4.3 independently developed by such other party without the benefit of such information received from the other party; 8.4.4 disclosed and/or used by such party with the prior written consent of the other party; or 8.4.5 required to be disclosed by any judicial order or decree or by any governmental statute, regulation. 8.5 Irreparable Harm. Each party agrees that the disclosure of any confidential information of the other party may immediately give rise to continuing irreparable injury to the nondisclosing party inadequately compensable at law. Without prejudice to any other remedy available to the non-disclosing party, should such continuing irreparable injury arise, the nondisclosing party shall be entitled to obtain injunctive relief against the disclosing party on such terms as a court of competent jurisdiction shall find just, in addition to any other legal or equitable remedies that may be available. 9. Warranties 9.1 Warranties by SHOPPING PLANET and the Principals. SHOPPING PLANET and each of the Principals, jointly and severally, represent and warrant to NETGATEWAY the following: 9.1.1 that the Technology in all material respects is proprietary solely to SHOPPING PLANET, and that SHOPPING PLANET has not licensed or otherwise granted rights in or to the Technology, or any portion thereof to any third party inconsistent with the rights granted herein; 9.1.2 that all third parties and employees of SHOPPING PLANET that have participated in the creation of the Technology have, for valid consideration already paid, irrevocably assigned and/or agreed in writing that their contribution(s) is/are exclusively owned by SHOPPING PLANET; 9.1.3 that SHOPPING PLANET and the Principals each have the full right, power and authority to enter into this Agreement on the terms set forth herein; 9.1.4 that the Technology was independently developed by SHOPPING PLANET and that neither the Technology nor the rights conveyed and granted hereunder to NETGATEWAY infringe any patent, copyright, or other proprietary right of any other person or entity; 9.1.5 that other than payments due in the ordinary course of business, no third party has any claim to any portion of the Stock other than SHOPPING PLANET and/or the Principals; 9.1.6 that the Documentation contains a complete description of the architecture of the version of the Technology software in sufficient detail for a reasonably skilled programmer to operate and modify the software. 9.2 Warranties by NETGATEWAY. NETGATEWAY represents and warrants to SHOPPING PLANET that NETGATEWAY has the full right, power, and authority to enter into this Agreement. 9.3 SHOPPING PLANET and the Principals agree to jointly and severally defend, or at their option, settle any claims brought by a third party against NETGATEWAY and pay any Judgments, damages, costs or expenses incurred by NETGATEWAY including reasonable attorneys fees, resulting from any claim that, if proved, would constitute a breach of the representations and warranties of SHOPPING PLANET and/or any of the Principals. 9.4 NETGATEWAY agrees to defend, or at their option, settle any claims brought by a third party against SHOPPING PLANET and pay any Judgments, damages, costs or expenses incurred by SHOPPING PLANET including reasonable attorneys fees, resulting from any claim that, if proved, would constitute a breach of the representations and warranties of NETGATEWAY. 10. Term and Termination for Purposes of License Back 10.1 Term. The Agreement, for purposes of the License Back, shall commence on the Effective Date and shall remain in effect until terminated. 10.2 Termination for Breach. In the event of a material breach of the License Back provisions of this Agreement, the nonbreaching party shall be entitled to terminate the Agreement by written notice to the breaching party if such breach is not cured within thirty (30) days after written notice is given to the breaching party, identifying the breach. 11. General 11.1 Governing Law. The Agreement shall be governed and construed in accordance with the laws of the state of California, without reference to conflicts of law principles. The parties expressly consent to the exclusive jurisdiction of the Courts within the State of California, County of Los Angeles, 11.2 Assignability. SHOPPING PLANET may not assign any of the rights it has acquired under this Agreement without the prior knowing written consent of NETGATEWAY, which NETGATEWAY may grant or withhold in its sold and exclusive discretion. 11.3 Severability. In the event that any provision of the Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, the Agreement shall continue in full force and effect without said provision. 11.4 Further Cooperation. From time to time on and after the date of this Agreement, each party shall at the reasonable request of the other party deliver such records, data or other documents consistent with the provisions of this Agreement and take or cause to be taken such other actions, as may be reasonably necessary or desirable in order for the requesting party to obtain the benefit of the provisions of this Agreement and the transactions contemplated hereby. 11.5 Attorneys Fees. In the event that there is any dispute by or between the parties under the Agreement, the prevailing party shall be entitled to recover in addition to its provable damages, attorneys fees, and allowable costs as an additional element of cost or damages. 11.6 Notices. Any notice required or permitted to be given shall be effective if delivered in person or if mailed by first-class certified mail or overnight delivery service (such as Federal Express) to the other party at the address designated in writing by a party. Notices may also be sent by facsimile if confirming notice is sent as described above. 11.7 Counterparts. The Agreement may be executed in counterparts. All headings are inserted for convenience and reference only. 11.8 No Waiver. No waiver of any term or condition of the Agreement shall be valid or binding on either party unless agreed in writing by the party to be charged. The failure of either party to enforce at any time any of the provisions of the Agreement, or the future to require at any time performance by the other party of any of the provisions of the Agreement, shall in no way be construed to be a present or future waiver of such provisions, nor in any way affect the validity of either party to enforce each and every such provision thereafter. 11.9 Entire Agreement. The Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other communications or negotiations relating thereto between the parties. No amendment to the Agreement shall be effective unless in writing mid signed by authorized representatives of the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. NETGATEWAY, a Nevada corporation By /s/ Donald M. Colins, Jr. ------------------------------- Name: Donald M. Colins, Jr. Title: President PINAMAR CORPORATION, a California corporation By /s/ Alexis Quintana ------------------------------- Name: Alexis Quintana Title: President [Signatures continued on next page] [Signatures continued from prior page] UniNet IMAGING, INC., By /s/ Nestor Saforiti ------------------------------- Name: Nestor Saforiti Title: /s/ Luis Marcelo Polovo _______________________________ LUIS MARCELO POLOVO /s/ Osvaldo Federico Povolo _______________________________ OSVALDO FEDERICO POVOLO /s/ Nestor Saporiti _______________________________ NESTOR SAPORITI /s/ Alexis Favian Quintana _______________________________ ALEXIS FAVIAN QUINTANA EX-10.13 17 STOCK PURCHASE AGREEMENT Exhibit 10.13 EXECUTION COPY SPARTAN MULTIMEDIA, INC. ---------------------------------------- STOCK PURCHASE AGREEMENT Dated as of November 1, 1998 ---------------------------------------- Common Stock This STOCK PURCHASE AGREEMENT, dated as of November 1, 1998, is made and entered into by and among STORESONLINE.COM LTD., an Alberta corporation, ("Purchaser"), NETGATEWAY, INC., a Nevada corporation ("NetGateway,") and each of the individuals listed on Schedule 1 hereto ("Selling Stockholders"). Capitalized terms not otherwise defined herein have the meanings set forth in Section 10.01. WHEREAS, the Selling Stockholders own 1,666,668 shares of common stock, no par value per share, of Spartan Multimedia, Inc., an Alberta corporation (the "Company"), constituting all issued and outstanding shares of capital stock of the Company (such shares being referred to herein as the "Shares"); and WHEREAS, the Selling Stockholders desire to sell, and Purchaser desires to purchase, the Shares on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I SALE OF SHARES AND CLOSING 1.01 Purchase and Sale. The Selling Stockholders agree to sell to Purchaser, and Purchaser agrees to purchase from the Selling Stockholders, all of the right, title and interest of the Selling Stockholders in and to the Shares at the Closing on the terms and subject to the conditions set forth in this Agreement. 1.02 The aggregate purchase price for the Shares is $2,600,000.00 (the "Purchase Price"), which shall be payable, subject to the provisions of Section 1.03, by Purchaser's delivery of up to 260,000 shares of Purchaser=s Class B Common Stock (the "Exchangeable Shares"), which shall be exchangeable into NetGateway common stock ("NetGateway Shares") in accordance with the Purchaser's Articles of Incorporation set forth in Exhibit A hereto. All Dollar amounts set forth herein shall refer to United States Dollars unless otherwise indicated. 1.03 Share Subscription. (a) Vested Shares. At the Closing, Purchaser shall issue to the Selling Stockholders an aggregate of 130,000 fully-vested Exchangeable Shares (the "Vested Shares"). Each Selling Stockholder shall receive that number of vested shares shown opposite each Stockholder's name on Schedule 1 hereto. (b) Contingent Shares. In addition to the Vested Shares, the Selling Stockholders shall be eligible to receive up to an aggregate of 130,000 additional Exchangeable Shares (the "Contingent Shares") in three (3) installments, within 30 days after the first, second and third anniversary dates (each an "Anniversary Date" and, collectively, the "Anniversary Dates") following the Closing. Such installments shall be subject to the following number of Paying Accounts (as defined below) being attained by Purchaser or any of its Affilliates prior to the respective Anniversary Date. Out of any such Contingent Shares issued by Purchaser, each Selling Stockholder shall be entitled to receive each such Selling Stockholder's Percentage Interest of such Contingent Shares. Number of Paying Maximum Contingent Anniversary Date Accounts Shares - ---------------------------- ----------------------- ------------------------- First Anniversary Date 1,000 43,333 Second Anniversary Date 3,000 43,333 Third Anniversary Date 6,000 43,334 A paying account ("Paying Account") shall be an account with a customer that has entered into a Written Account Agreement with Purchaser, in the form of Exhibit B hereto, and which results in a minimum of $30.00 per month in revenues to Purchaser or any of its Affiliates, including StoresOnline.com, a California corporation. In the event that the annual Paying Account number is not reached in any year, then only a pro rata portion of the maximum number of Contingent Shares issuable in such installment shall be issued by Purchaser. For example, if on the First Anniversary Date, there are only 800 Paying Accounts, then the Selling Stockholders will only receive eighty percent (80%) of that installment of Contingent Shares. If, in any year, the required number of Paying Accounts is not met, any shortfall in Paying Accounts and Contingent Shares can be made up in any subsequent year up to the Third Anniversary Date, provided that the required number of Paying Accounts for such subsequent year is also met. In the event that the required number of Paying Accounts is reached prior to any Anniversary Date then, upon request by the Selling Stockholders, Purchaser shall issue the number of Contingent Shares corresponding to such number of Paying Accounts. On the Third Anniversary Date, Purchaser's only obligation shall be to issue to Sellers any additional amount of Contingent Shares which, when added to the number of previously issued Contingent Shares, equals the total number of Contingent Shares corresponding to the number of Paying Accounts existing on the Third Anniversary Date. After the Third Anniversary Date, Purchaser shall have no obligation to issue any additional Contingent Shares. (c) The number of Exchangeable Shares issued or issuable to the Selling Stockholders is subject to adjustment as follows: (i) February 28, 1999 shall be referred to herein as the "Adjustment Date." (ii) On March 1, 1999, Purchaser shall determine the average daily closing price ("ADP") of NetGateway's common stock during the forty-five (45) days immediately preceding the Adjustment Date. In determining the ADP, the actual closing sales price of NetGateway's common stock (as quoted on the exchange or other market on which NetGateway's common stock is normally traded) shall be used. Days on which no sales shall have been consummated shall be disregarded. By way of example, if during the Adjustment Period there are 40 trading days and NetGateway's common stock was traded on 30 of those days, the sum of the closing sales prices on the 30 days on which a sales transaction actually occurred shall be divided by 30 in order to determine the ADP. (iii) If the resultant ADP for the Adjustment Period is Ten Dollars ($10.00) or more, there shall be no adjustment in the number of Vested Shares or Contingent Shares issued or issuable to the Selling Stockholders pursuant to this subparagraph. If the ADP for the Adjustment Period is less than Ten Dollars ($10.00), Purchaser shall divide the Purchase Price by the ADP to determine the an aggregate number of Exchangeable Shares issuable by Purchaser to the Selling Stockholders, and the excess Exchangeable Shares to which the Selling Stockholders are entitled shall be delivered, in the case of the Vested Shares, and reserved for issuance to Seller, in the case of the Contingent Shares. Each Selling Stockholder shall be entitled to receive his or her Percentage Interest of any such Exchangeable Shares. (d) The Selling Stockholders agree that the Vested Shares and any issued Contingent Shares shall be subject to the pledge described in Article IX hereof. In addition, Purchaser shall have no obligation to issue any Contingent Shares to any Selling Stockholder to the extent that any such Selling Stockholder shall have any indemnification obligations pursuant to Article IX hereof. None of the foregoing shall limit or be construed to limit the liability of the Selling Stockholders under this Agreement or otherwise, nor will any pledged Shares be considered as liquidated damages for any breach under this Agreement. (e) The Selling Stockholders acknowledge that the issuance of the Exchangeable Shares is made in reliance on the representations, warranties and covenants of the Selling Stockholders set forth in Article III hereof. (f) Market Stand-Off. (i) In connection with any underwritten public offering by NetGateway of the NetGateway Shares pursuant to an effective registration statement filed under the 1933 Securities Act, as amended, no Selling Stockholder shall sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or other dispose of or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to any of the NetGateway Shares without the prior written consent of NetGateway and its underwriters, for such period of time from and after the effective date of such registration statement as may be requested by NetGateway or such underwriters; provided, however, that in no event shall such period exceed one hundred eighty (180) days. Following the lapse of such period, ten percent (10%) of the aggregate number of the NetGateway Shares issued and issuable shall be released each quarter thereafter from the foregoing market standoff provisions. (ii) Stop-Transfer Instructions. In order to enforce the provisions of this Section 1.03(f), NetGateway may impose stop-transfer instructions with respect to the NetGateway Shares until the end of the applicable standoff period. (iii) NetGateway covenants that the Affiliates of NetGateway will enter into similar market stand-off arrangements as those set forth in Section 1.03(f)(i). If such Affiliates enter into arrangements more favorable than the provisions of Section 1.03(f)(i), then the Selling Stockholders shall be afforded similar arrangements. 1.04 Closing. The Closing will take place in the principal offices of the Purchaser, at 10:00 A.M. local time, on the Closing Date. At the Closing, Purchaser will deliver the certificates representing the Vested Shares to the Selling Stockholders. Simultaneously, the Selling Stockholders will assign and transfer to Purchaser all of the Selling Stockholders' right, title and interest in and to the Shares by delivering to Purchaser a certificate or certificates representing the Shares, in genuine and unaltered form, duly endorsed in blank or accompanied by duly executed stock powers endorsed in blank, with requisite stock transfer tax stamps, if any, attached. At the Closing, there shall also be delivered to Purchaser the opinions, and certificates and other Contracts, documents and instruments to be delivered under Article VI. 1.05 Further Assurances; Post-Closing Cooperation. (a) At any time or from time to time after the Closing, the Selling Stockholders shall execute and deliver to Purchaser such other documents and instruments, provide such materials and information and take such other actions as Purchaser may reasonably request more effectively to vest title to the Shares in Purchaser and, to the full extent permitted by Law, to put Purchaser in actual possession and operating control of the Company and its Assets and Properties and Books and Records, and otherwise to cause the Selling Stockholders to fulfill their obligations under this Agreement. (b) Following the Closing, the Selling Stockholders will afford Purchaser, its counsel and its accountants, during normal business hours, reasonable access to the books, records and other data relating to the Business or Condition of the Company in their possession with respect to periods prior to the Closing and the right to make copies and extracts therefrom, to the extent that such access may be reasonably required by Purchaser in connection with (i) the preparation of tax returns, (ii) the determination or enforcement of rights and obligations under this Agreement, (iii) compliance with the requirements of any Governmental or Regulatory Authority, (iv) the determination or enforcement of the rights and obligations of any party to this Agreement or (v) in connection with any actual or threatened Action or Proceeding. (c) If, in order properly to prepare its tax returns, other documents or reports required to be filed with Governmental or Regulatory Authorities or its financial statements or to fulfill its obligations hereunder, it is necessary that a party be furnished with additional information, documents or records relating to the Business or Condition of the Company not referred to in paragraph (b) above, and such information, documents or records are in the possession or control of the other party, such other party shall use its best efforts to furnish or make available such information, documents or records (or copies thereof) at the recipient's request, cost and expense. Any information obtained by the Selling Stockholders in accordance with this paragraph shall be held confidential by the Selling Stockholders in accordance with Section 11.05. (d) Notwithstanding anything to the contrary contained in this Section, if the parties are in an adversarial relationship in litigation or arbitration, the furnishing of information, documents or records in accordance with any provision of this Section shall be subject to applicable rules relating to discovery. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE CONTROLLING STOCKHOLDERS Each of the Controlling Stockholders, jointly and severally, represents and warrants to Purchaser as follows: 2.01 Authority. This Agreement has been duly and validly executed and delivered by the Controlling Stockholders and constitutes a legal, valid and binding obligation of each Controlling Stockholder enforceable against each Controlling Stockholder in accordance with its terms. 2.02 Organization of the Company. The Company is a corporation duly organized, validly existing and in good standing under the Laws of the Province of Alberta, and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its Assets and Properties. Section 2.02 of the Disclosure Schedule lists all lines of business in which the Company is participating or engaged. The Company is duly qualified, licensed or admitted to do business and is in good standing in those jurisdictions specified in Section 2.02 of the Disclosure Schedule, which are the only jurisdictions in which the ownership, use or leasing of its Assets and Properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary, except for those jurisdictions in which the adverse effects of all such failures by the Company and the Subsidiaries to be qualified, licensed or admitted and in good standing can in the aggregate be eliminated without material cost or expense by the Company or a Subsidiary, as the case may be, becoming qualified or admitted and in good standing. The name of each director and officer of the Company on the date hereof, and the position with the Company held by each, are listed in Section 2.02 of the Disclosure Schedule. The Company has prior to the execution of this Agreement delivered to Purchaser true and complete copies of the charter documents of the Company as in effect on the date hereof. 2.03 Capital Stock. The authorized capital stock of the Company consists solely of Common Stock, of which only the Shares have been issued. The Shares are duly authorized, validly issued, outstanding, fully paid and nonassessable. 2.04 Subsidiaries. The Company does not have, nor has it ever had, any Subsidiaries. 2.05 No Conflicts. The execution and delivery by each Controlling Stockholder of this Agreement does not, and the performance by each Controlling Stockholder of its obligations under this Agreement and the consummation of the transactions contemplated hereby will not: (a) Conflict with or result in a violation or breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws (or other comparable corporate charter documents) of the Company; (b) Conflict with or result in a violation or breach of any term or provision of any Law or Order applicable to any Controlling Stockholder or the Company or any of their respective Assets and Properties; or (c) (i) Conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require any Controlling Stockholder or the Company to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, (iv) result in or give to any Person any right of termination, cancellation, acceleration or modification in or with respect to, (v) result in or give to any Person any additional rights or entitlement to increased, additional, accelerated or guaranteed payments under, or (vi) result in the creation or imposition of any Lien upon any Controlling Stockholder or the Company or any of their respective Assets and Properties under, any Contract or License to which any Controlling Stockholder or the Company is a party or by which any of their respective Assets and Properties is bound. 2.06 Governmental Approvals and Filings. No consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of Controlling Stockholder or the Company is required in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. 2.07 Books and Records. The minute books and other similar records of the Company as made available to Purchaser prior to the execution of this Agreement contain a true and complete record, in all material respects, of all action taken at all meetings and by all written consents in lieu of meetings of the stockholders, the boards of directors and committees of the board of directors of the Company. The stock transfer ledgers and other similar records of the Company as made available to Purchaser prior to the execution of this Agreement accurately reflect all record transfers prior to the execution of this Agreement in the capital stock of the Company. The Company does not have any of its Books and Records recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of the Company. 2.08 Financial Statements. Prior to the execution of this Agreement, the Company has delivered to Purchaser true and complete copies of the following financial statements: (a) The unaudited balance sheets of the Company for its fiscal year ended August 31, 1998 and for the period between such date and November 4, 1998, along with the related unaudited consolidated statements of operations, stockholders' equity and cash for each such period. All such financial statements (i) fairly present the financial condition and results of operations of the Company as of the respective dates thereof and for the respective periods covered thereby, and (ii) were compiled from the Books and Records of the Company regularly maintained by management and used to prepare the financial statements of the Company in accordance with the principles stated therein. The August 31, 1998 financial statements were prepared in accordance with Canadian GAAP. The Company has maintained its respective Books and Records in a manner sufficient to permit the preparation of financial statements in accordance with Canadian GAAP. 2.09 Absence of Changes. Except for the execution and delivery of this Agreement and the transactions to take place pursuant hereto on or prior to the Closing Date, since August 31, 1998, there has not been any material adverse change, or any event or development which, individually or together with other such events, could reasonably be expected to result in a material adverse change, in the Business or Condition of the Company. 2.10 No Undisclosed Liabilities. Except as reflected or reserved against in the balance sheet included in the Financial Statements, there are no Liabilities against, relating to or affecting the Company or any of its respective Assets and Properties, other than Liabilities (i) incurred in the ordinary course of business consistent with past practice and (ii) which, individually or in the aggregate, are not material to the Business or Condition of the Company. 2.11 Legal Proceedings. (a) There are no Actions or Proceedings pending or, to the Knowledge of any of the Controlling Stockholders, threatened against, relating to or affecting the Company or any of its Assets and Properties which (i) could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or otherwise result in a material diminution of the benefits contemplated by this Agreement to Purchaser, or (ii) if determined adversely against the Company, could reasonably be expected to result in (x) any injunction or other equitable relief against the Company that would interfere in any material respect with its business or operations or (y) Losses by the Company, individually or in the aggregate with Losses in respect of other such Actions or Proceedings, exceeding $5,000.00; (b) There are no facts or circumstances Known to any Controlling Stockholder that could reasonably be expected to give rise to any Action or Proceeding that would be required to be disclosed pursuant to clause (a) above; and (c) There are no Orders outstanding against the Company. 2.12 Compliance With Laws and Orders. The Company is not, nor has at any time been, nor has it received any notice that it is nor has at any time been, in violation of or in default under, in any material respect, any Law or Order applicable to the Company or any of its Assets and Properties. 2.13. Employee Benefit and Compensation Plans. Section 2.13 of the Disclosure Schedule contains a true and complete list of each Benefit Plan of the Company. The Company has no Liabilities and the Purchaser will incur no Liabilities with respect to, or on account of, any Benefit Plan of the Company, any of its Affiliates or any predecessor employer of any employee, including, but not limited to, Liabilities the Company may have to such employees under all employee benefit schemes, incentive compensation plans, bonus plans, pension and retirement plans, vacation, profit-sharing plans (including any profit-sharing plan with a cash-or-deferred arrangement) share purchase and option plans, savings and similar plans, medical, dental, travel, accident, life, disability and other insurance and other plans or arrangements, whether written or oral and whether "qualified" or "non-qualified," or to any employee as a result of termination of employment by the Company as contemplated by this Agreement. The Company has not, with respect to any employee, maintained or contributed to, or been obligated or required to contribute to, any retirement or pension plan or any employee benefit plan. The Company is not a party to any collective bargaining agreement covering any employee, and no Controlling Stockholder knows of any effort to organize any such employee as a part of any collective bargaining unit. 2.14 Real Property. (a) Section 2.14 of the Disclosure Schedule contains a true and correct list of each parcel of real property leased by the Company (as lessor or lessee). The Company owns no real property. (b) The Company has a valid and subsisting leasehold estate in and the right to quiet enjoyment of the real properties leased by it for the full term of the lease thereof. Each lease referred to in paragraph (a) above is a legal, valid and binding agreement, enforceable in accordance with its terms, of the Company and of each other Person that is a party thereto, and except as set forth in Section 2.14 of the Disclosure Schedule, there is no, and the Company has received no notice of any, default (or any condition or event which, after notice or lapse of time or both, would constitute a default) thereunder. The Company owes no brokerage commissions with respect to any such leased space. (c) The Company has delivered to Purchaser prior to the execution of this Agreement true and complete copies of all such leases (including any amendments and renewal letters). (d) The improvements on the real property identified in Section 2.14 of the Disclosure Schedule are in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, are adequate and suitable for the purposes for which they are presently being used and, to the Knowledge of each Controlling Stockholder, there are no condemnation or appropriation proceedings pending or threatened against any of such real property or the improvements thereon. 2.15 Tangible Personal Property; Investment Assets. (a) The Company is in possession of and has good title to, or has valid leasehold interests in or valid rights under Contract to use, all tangible personal property used in or reasonably necessary for the conduct of their business, including all tangible personal property reflected on the balance sheet included in the Financial Statements and tangible personal property acquired since the Financial Statement Date other than property disposed of since such date in the ordinary course of business consistent with past practice. All such tangible personal property is free and clear of all Liens, other than Permitted Liens, and is in good working order and condition, ordinary wear and tear excepted, and its use complies in all material respects with all applicable Laws. (b) Section 2.15 of the Disclosure Schedule describes each Investment Asset owned by the Company or any Subsidiary on the date hereof. All such Investment Assets are owned by the Company free and clear of all Liens other than Permitted Liens. 2.16 Intellectual Property Rights. The Company owns or licenses only the Intellectual Property disclosed in Section 2.16 of the Disclosure Schedule, as to which the Company either has all right, title and interest in or a valid and binding right under Contract to use. No other Intellectual Property is used or necessary in the conduct of the Business of the Company. Except as disclosed in Section 2.16 of the Disclosure Schedule, (i) the Company has the exclusive right to use the Intellectual Property disclosed in Section 2.16 of the Disclosure Schedule, (ii) all registrations with and applications to Governmental or Regulatory Authorities in respect of such Intellectual Property are valid and in full force and effect and are not subject to the payment of any Taxes or maintenance fees or the taking of any other actions by the Company to maintain their validity or effectiveness, (iii) there are no restrictions on the direct or indirect transfer of any Contract, or any interest therein, held by the Company in respect of such Intellectual Property, (iv) Seller will have delivered on or before the Closing Date to Purchaser in-line documentation with respect to any source code related to any such Intellectual Property, which in-line documentation is accurate in all material respects and reasonably sufficient in detail and content to identify and explain such source code and to facilitate its full and proper use without reliance on the special knowledge or memory of any Person; and Seller has no other documentation with respect to any other invention, process, design, computer program or other know-how or trade secret included in such Intellectual Property, (v) the Company has taken reasonable security measures to protect the secrecy, confidentiality and value of their trade secrets, (vi) the Company is not, nor has it received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default) under any Contract to use such Intellectual Property and (vii) except as disclosed in Section 2.16 of the Disclosure Schedule, no such Intellectual Property is being infringed by any other Person. Neither any Controlling Stockholder nor the Company has received notice that the Company is infringing any Intellectual Property of any other Person, no claim is pending or, has been made to such effect that has not been resolved and, to the Knowledge of each Controlling Stockholder, the Company's Intellectual Property does not infringe any Intellectual Property of any other Person. 2.17 Contracts. (a) Section 2.17 of the Disclosure Schedule (with paragraph references corresponding to those set forth below) contains a true and complete list of each Contract or other arrangement (true and complete copies or, if none, reasonably complete and accurate written descriptions of which, together with all amendments and supplements thereto and all waivers of any terms thereof, have been delivered to Purchaser prior to the execution of this Agreement), to which the Company is a party or by which any of its Assets and Properties is bound. (b) Each Contract disclosed in Section 2.17 of the Disclosure Schedule is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms, of each party thereto; and neither the Company nor, to the Knowledge of any Controlling Stockholder, any other party to such Contract is, or has received notice that it is, in violation or breach of or default under any such Contract (or with notice or lapse of time or both, would be in violation or breach of or default under any such Contract) in any material respect. 2.18 Licenses. Section 2.18 of the Disclosure Schedule contains a true and complete list of all Licenses used in and material, individually or in the aggregate, to the business or operations of the Company (and all pending applications for any such Licenses), setting forth the grantor, the grantee, the function and the expiration and renewal date of each. Prior to the execution of this Agreement, the Company has delivered to Purchaser true and complete copies of all such Licenses. Except as disclosed in Section 2.18 of the Disclosure Schedule: (i) The Company owns or validly holds all Licenses that are material, individually or in the aggregate, to its business or operations; (ii) Each License listed in Section 2.18 of the Disclosure Schedule is valid, binding and in full force and effect; and (iii) The Company is not, nor has it received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default) under any such License. 2.19 Insurance. The Company has not maintained and is not currently maintaining any liability, property, workers' compensation, directors' and officers' liability and other insurance policies insuring the business, operations or employees of the Company. 2.20 Affiliate Transactions. Except as disclosed in Section 2.20 of the Disclosure Schedule, there are no intercompany Liabilities between the Company, on the one hand, and any Selling Stockholder or any officer, director or Affiliate of any Selling Stockholder, on the other, (ii) neither any Selling Stockholder nor any such officer, director or Affiliate provides or causes to be provided any assets, services or facilities to the Company, (iii) the Company does not provide or cause to be provided any assets, services or facilities to any Seller or any such officer, director or Affiliate and (iv) the Company does not beneficially own, directly or indirectly, any Investment Assets issued by any Selling Stockholder or any such officer, director or Affiliate. 2.21 Employees; Labor Relations. Section 2.21 of the Disclosure Schedule contains a list of the name of each officer and employee of the Company at the date hereof, together with each such person's position or function, annual base salary or wages and any incentive or bonus arrangement with respect to such person in effect on such date. No Controlling Stockholder has received any information that would lead it to believe that a material number of such persons will or may cease to be employees, or will refuse offers of employment from Purchaser, because of the consummation of the transactions contemplated by this Agreement. All employees, consultants, officers, directors and shareholders of the Company that have had access to the Business are parties to a written agreement (a "Confidentiality Agreement"), under which each such person or entity (i) is obligated to disclose and transfer to the Company, without the receipt by such person of any additional value therefor (other than normal salary or fees for consulting services), all inventions, developments and discoveries which, during the period of employment with or performance of services for the Company, he or she makes or conceives of either solely or jointly with others, that relate to any subject matter with which his or her work for the Company in the Business may be concerned, and (ii) is obligated to maintain the confidentiality of proprietary information of the Business. To each Controlling Stockholder's knowledge, none of the Company's employees, consultants, officers or directors 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 conflict with their obligation to promote the interests of the Company with regard to the Business or the Assets or that would conflict with the Business or the Assets. Neither the execution nor the delivery of this Agreement, nor the carrying on of the Business by its employees and consultants, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such persons or entities are now obligated. It is currently not necessary nor will it be necessary for the Company to utilize in the Business any inventions of any of such persons or entities (or people it currently intends to hire) made or owned prior to their employment by or affiliation with the Company, nor is it or will it be necessary to utilize any other assets or rights of any such persons or entities (or people it currently intends to hire) made or owned prior to their employment with or engagement by the Company, in violation of any registered patents, trade names, trademarks or copyrights or any other limitations or restrictions to which any such persons or entity is a party or to which any of such assets or rights may be subject. To each Controlling Stockholder's knowledge, none of the Company's employees, consultants, officers, directors or shareholders that has had knowledge or access to information relating to the Assets has taken, removed or made use of any proprietary documentation, manuals, products, materials, or any other tangible item from his or her previous employer relating to the Assets by such previous employer which has resulted in the Company's access to or use of such proprietary items included in the Assets, and Company will not gain access to or make use of any such proprietary items in the Business. 2.22 Bank and Brokerage Accounts; Investment Assets. Section 2.22 of the Disclosure Schedule sets forth (a) a true and complete list of the names and locations of all banks, trust companies, securities brokers and other financial institutions at which the Company has an account or safe deposit box or maintains a banking, custodial, trading or other similar relationship; (b) a true and complete list and description of each such account, box and relationship, indicating in each case the account number and the names of the respective officers, employees, agents or other similar representatives of the Company having signatory power with respect thereto; and (c) a list of each Investment Asset, the name of the record and beneficial owner thereof, the location of the certificates, if any, therefor, the maturity date, if any, and any stock or bond powers or other authority for transfer granted with respect thereto. 2.23 No Powers of Attorney. The Company does not have any powers of attorney or comparable delegations of authority outstanding. 2.24 Accounts Receivable. The accounts and notes receivable of the Company reflected on the balance sheet included in the Financial Statements, and all accounts and notes receivable arising subsequent to August 31, 1998, (i) arose from bona fide sales transactions in the ordinary course of business and are payable on ordinary trade terms, (ii) are legal, valid and binding obligations of the respective debtors enforceable in accordance with their terms, (iii) are not subject to any valid set-off or counterclaim, (iv) do not represent obligations for goods sold on consignment, on approval or on a sale-or-return basis or subject to any other repurchase or return arrangement, (v) are collectible in the ordinary course of business consistent with past practice in the aggregate recorded amounts thereof, net of any applicable reserve reflected in the balance sheet included in the Financial Statements, and (vi) are not the subject of any Actions or Proceedings brought by or on behalf of the Company. Section 2.24 of the Disclosure Schedule sets forth a description of any security arrangements and collateral securing the repayment or other satisfaction of receivables of the Company. All steps necessary to render all such security arrangements legal, valid, binding and enforceable, and to give and maintain for the Company, a perfected security interest in the related collateral, have been taken. 2.25 Inventory. All inventory of the Company reflected on the balance sheet included in the Financial Statements consisted, and all such inventory acquired since the August 31, 1998 consists, of a quality and quantity usable and salable in the ordinary course of business consistent with past practice, subject to normal and customary allowances in the industry for spoilage, damage and outdated items. Except as disclosed in the notes to the Financial Statements, all items included in the inventory of the Company are the property of the Company, free and clear of any Lien other than Permitted Liens, have not been pledged as collateral, are not held by the Company on consignment from others and conform in all material respects to all standards applicable to such inventory or its use or sale imposed by Governmental or Regulatory Authorities. 2.26 Brokers. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by the Selling Stockholders directly with Purchaser without the intervention of any Person on behalf of the Selling Stockholders in such manner as to give rise to any valid claim by any Person against Purchaser or the Company for a finder's fee, brokerage commission or similar payment. 2.27 Taxes. The Company has filed all tax returns which are required to have been filed in any jurisdiction, and has paid all Taxes shown to be due and payable on such returns and all other Taxes payable by the Company to the extent the same have become due and payable and before they have become delinquent. No Selling Stockholder knows of any proposed material assessment for Taxes against the Company and in the opinion of the Selling Stockholders, all liabilities for Taxes are adequately provided for on the books of the Company. 2.28 Disclosure. All material facts relating to the Business or Condition of the Company have been disclosed to Purchaser in or in connection with this Agreement. No representation or warranty contained in this Agreement, and no statement contained in the Disclosure Schedule or in any certificate, list or other writing furnished to Purchaser pursuant to any provision of this Agreement (including without limitation the Financial Statements), contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein, in the light of the circumstances under which they were made, not misleading. 2.29 Paying Accounts. The current number of the Company's customer accounts under contract is 400, and of those more than 35 are Paying Accounts at rates no less than those set forth on the attached Exhibit C with the minimum rate not less than Thirty Dollars ($30.00) per month. The Paying Accounts are the subject of agreements in the form of the attached Exhibit B. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLING STOCKHOLDERS Each Selling Stockholder, severally but not jointly, represents and warrants to the Purchaser as of the date hereof and as of the Closing Date that: 3.01 Title. Such Selling Stockholder has good and marketable title to the number of Shares shown opposite each such Selling Stockholder's name on Schedule 1 hereto. Such Selling Stockholder's Shares are duly and validly issued, fully paid and nonassessable and free and clear of all Liens. 3.02 Authorization. Such Selling Stockholder has all requisite power and authority to execute and deliver this Agreement and any other documents or agreements to which such Selling Stockholder is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereunder and thereunder. Each of this Agreement and any other document or agreement to which such Selling Stockholder is a party contemplated hereby or thereby has been (or on the Closing Date will have been) duly authorized, executed and delivered by, and each is (or, when duly executed and delivered on the Closing Date, will be) the valid and binding obligation of, each such Selling Stockholder, enforceable in accordance with its terms, except as may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws or by legal or equitable principles relating to or limiting creditors' rights generally. 3.03 No Conflict. None of the execution and delivery of this Agreement, or the sale of the Shares by such Selling Stockholder, or the consummation of the transactions herein contemplated or compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent under, any applicable law or regulation, or any Order, writ, injunction or decree of any court or governmental authority or agency, or any Contract or instrument to which such Selling Stockholder is bound or to which such Selling Stockholder is subject, or constitute a default under any Contract or instrument, or result in the creation or imposition of any Lien upon any of the revenues or assets of such Selling Stockholder pursuant to the terms of any such agreement or instrument. 3.04 No Consents. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental or Regulatory Authority is required for the sale of the Shares by such Selling Stockholder or the valid delivery of such Shares or for the performance by such Selling Stockholder of this Agreement and any other documents or agreements contemplated hereby. 3.05 Representations Regarding Shares. The Exchangeable Shares and the NetGateway Shares will be acquired for investment for each Selling Stockholder's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and each Selling Stockholder has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, each Selling Stockholders further represent that such Selling Stockholder has no Contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of such Shares. 3.06. Restricted Shares. Each Selling Stockholder understands that the Exchangeable Shares being acquired, and the NetGateway Shares into which the Exchangeable Shares are exchangeable, are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired in a transaction not involving a public offering and that under such laws and applicable regulations such Shares may be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. In this connection, each Selling Stockholder represents that he or she is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. In addition, the Exchangeable Shares, and the NetGateway Shares into which the Exchangeable Shares are exchangeable, are issued or issuable subject to the terms and conditions hereof, including the performance requirements set forth herein and the pledge set forth in Exhibit D hereto. 3.07. Legends. It is understood that the certificates evidencing the Exchangeable Shares and the NetGateway Shares into which the Exchangeable Shares are exchangeable may bear one or all of the following legends: (a) "THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SHARES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR THAT SUCH SHARES ARE BEING SOLD PURSUANT TO RULE 144 OF SUCH ACT. IN ADDITION, ALL OF THE SHARES ARE SUBJECT TO RESTRICTIONS ON RESALE AND OTHER OBLIGATIONS SET FORTH IN AN ASSET PURCHASE AGREEMENT AND A PLEDGE AGREEMENT, EACH DATED NOVEMBER 1, 1998." (b) Any legend required by the laws of the State of California, including any legend required by the California Department of Corporations. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER AND NETGATEWAY Purchaser or NetGateway, as indicated below, represent and warrant to the Selling Stockholders as follows: 4.01 Authority. This Agreement has been duly and validly executed and delivered by Purchaser and NetGateway and constitutes a legal, valid and binding obligation of each such party enforceable against each such party in accordance with its terms. 4.02 Organization. Purchaser and NetGateway are corporations duly organized, validly existing and in good standing under the laws of the province of Alberta and the State of Nevada, respectively. Each such party has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its Assets and Properties. NetGateway is duly qualified, licensed or admitted to do business and is in good standing in those jurisdictions specified in Section 4.02 of the Disclosure Schedule, which are the only jurisdictions in which the ownership, use or leasing of its Assets and Properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary, except for those jurisdictions in which the adverse effects of all such failures by the Company and the Subsidiaries to be qualified, licensed or admitted and in good standing can in the aggregate be eliminated without material cost or expense by the Company or a Subsidiary, as the case may be, becoming qualified or admitted and in good standing. Purchaser and NetGateway have prior to the execution of this Agreement delivered to the Selling Stockholders true and complete copies of the charter documents of each such party as in effect on the date hereof. 4.03 Capital Stock. The authorized capital stock of Purchaser consists of Class A Preferred Stock, Class A Common Stock, Class B Common Stock and Exchangeable Shares, of which 100 shares of Class A Preferred Stock and the Exchangeable Shares have been issued. The Exchangeable Shares are duly authorized, validly issued, outstanding, fully paid and nonassessable. 4.04 Subsidiaries. The Purchaser does not have, nor has it ever had, any Subsidiaries. NetGateway has the subsidiaries listed on Section 4.04 of the Disclosure Schedule. 4.05 No Conflicts. The execution and delivery by Purchaser and NetGateway of this Agreement does not, and the performance by each such party of its obligations under this Agreement and the consummation of the transactions contemplated hereby will not: (a) Conflict with or result in a violation or breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws (or other comparable corporate charter documents) of Purchaser or NetGateway; (b) Conflict with or result in a violation or breach of any term or provision of any Law or Order applicable to Purchaser or NetGateway or any of their respective Assets and Properties; or (c) (i) Conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require Purchaser or NetGateway to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, (iv) result in or give to any Person any right of termination, cancellation, acceleration or modification in or with respect to, (v) result in or give to any Person any additional rights or entitlement to increased, additional, accelerated or guaranteed payments under, or (vi) result in the creation or imposition of any Lien upon Purchaser or NetGateway or any of their respective Assets and Properties under, any Contract or License to which Purchaser or NetGateway is a party or by which any of their respective Assets and Properties is bound. 4.06 Governmental Approvals and Filings. Except for any necessary federal, state or provincial securities law filings, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of Purchaser or NetGateway is required in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. 4.07 Books and Records. The minute books and other similar records of NetGateway as made available to the Selling Stockholders prior to the execution of this Agreement contain a true and complete record, in all material respects, of all action taken at such meetings and by such written consents in lieu of meetings of the stockholders, the boards of directors and committees of the board of directors of NetGateway. NetGateway does not have any of its Books and Records recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of NetGateway. 4.08 Financial Statements. Prior to the execution of this Agreement, NetGateway has delivered to the Selling Stockholders true and complete copies of the following financial statements (the "NetGateway Financial Statements"): (a) The unaudited financial statements of NetGateway for the period ended September 30, 1998 (the "NetGateway Financial Statements Date"). All such financial statements (i) were prepared in accordance with GAAP, (ii) fairly present the financial condition and results of operations of NetGateway as of the respective dates thereof and for the respective periods covered thereby, and (ii) were compiled from the Books and Records of NetGateway regularly maintained by management and used to prepare the financial statements of NetGateway in accordance with the principles stated therein. NetGateway has maintained its respective Books and Records in a manner sufficient to permit the preparation of financial statements in accordance with GAAP. 4.09 No Undisclosed Liabilities. Except as reflected or reserved against in the balance sheet included in the NetGateway Financial Statements, there are no Liabilities against, relating to or affecting NetGateway or any of its respective Assets and Properties, other than Liabilities (i) incurred in the ordinary course of business consistent with past practice and (ii) which, individually or in the aggregate, are not material to the Business or Condition of NetGateway. 4.10 Legal Proceedings. (a) There are no Actions or Proceedings pending or, to the Knowledge of NetGateway, threatened against, relating to or affecting NetGateway or any of its Assets and Properties which (i) could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or otherwise result in a material diminution of the benefits contemplated by this Agreement to the Selling Stockholders, or (ii) if determined adversely against NetGateway, could reasonably be expected to result in (x) any injunction or other equitable relief against NetGateway that would interfere in any material respect with its business or operations or (y) Losses by NetGateway, individually or in the aggregate with Losses in respect of other such Actions or Proceedings, exceeding $5,000.00; (b) There are no facts or circumstances Known to NetGateway that could reasonably be expected to give rise to any Action or Proceeding that would be required to be disclosed pursuant to clause (a) above; and (c) There are no Orders outstanding against NetGateway. 4.11 Compliance With Laws and Orders. NetGateway is not, nor has at any time been, nor has it received any notice that it is nor has at any time been, in violation of or in default under, in any material respect, any Law or Order applicable to any or any of its Assets and Properties. 4.12. Employee Benefit and Compensation Plans. Section 4.12 of the Disclosure Schedule contains a true and complete list of each Benefit Plan of NetGateway. NetGateway has no Liabilities and the Selling Stockholders will incur no Liabilities with respect to, or on account of, any Benefit Plan of NetGateway, any of its Affiliates or any predecessor employer of any employee, including, but not limited to, Liabilities NetGateway may have to such employees under all employee benefit schemes, incentive compensation plans, bonus plans, pension and retirement plans, vacation, profit-sharing plans (including any profit-sharing plan with a cash-or-deferred arrangement) share purchase and option plans, savings and similar plans, medical, dental, travel, accident, life, disability and other insurance and other plans or arrangements, whether written or oral and whether "qualified" or "non-qualified," or to any employee as a result of termination of employment by NetGateway as contemplated by this Agreement. NetGateway has not, with respect to any employee, maintained or contributed to, or been obligated or required to contribute to, any retirement or pension plan or any employee benefit plan. NetGateway is not a party to any collective bargaining agreement covering any employee, and NetGateway knows of no effort to organize any such employee as a part of any collective bargaining unit. 4.13 Real Property. (a) Section 4.13 of the Disclosure Schedule contains a true and correct list of each parcel of real property leased by NetGateway (as lessor or lessee). NetGateway owns no real property. (b) NetGateway has a valid and subsisting leasehold estate in and the right to quiet enjoyment of the real properties leased by it for the full term of the lease thereof. Each lease referred to in paragraph (a) above is a legal, valid and binding agreement, enforceable in accordance with its terms, of NetGateway and of each other Person that is a party thereto, and except as set forth in Section 4.13 of the Disclosure Schedule, there is no, and NetGateway has received no notice of any, default (or any condition or event which, after notice or lapse of time or both, would constitute a default) thereunder. NetGateway owes no brokerage commissions with respect to any such leased space. 4.14 Tangible Personal Property; Investment Assets. (a) NetGateway is in possession of and has good title to, or has valid leasehold interests in or valid rights under Contract to use, all tangible personal property used in or reasonably necessary for the conduct of their business, including all tangible personal property reflected on the balance sheet included in the NetGateway Financial Statements and tangible personal property acquired since the NetGateway Financial Statements Date other than property disposed of since such date in the ordinary course of business consistent with past practice. All such tangible personal property is free and clear of all Liens, other than Permitted Liens, and is in good working order and condition, ordinary wear and tear excepted, and its use complies in all material respects with all applicable Laws. (b) Section 4.14 of the Disclosure Schedule describes each Investment Asset owned by NetGateway. All such Investment Assets are owned by NetGateway free and clear of all Liens other than Permitted Liens. 4.15 Intellectual Property Rights. NetGateway owns or licenses only the Intellectual Property disclosed in Section 4.15 of the Disclosure Schedule, as to which NetGateway either has all right, title and interest in or a valid and binding right under Contract to use. No other Intellectual Property is used or necessary in the conduct of the Business of NetGateway. Except as disclosed in Section 4.15 of the Disclosure Schedule, (i) NetGateway has the exclusive right to use the Intellectual Property disclosed in Section 4.15 of the Disclosure Schedule, (ii) all registrations with and applications to Governmental or Regulatory Authorities in respect of such Intellectual Property are valid and in full force and effect and are not subject to the payment of any Taxes or maintenance fees or the taking of any other actions by NetGateway to maintain their validity or effectiveness, (iii) there are no restrictions on the direct or indirect transfer of any Contract, or any interest therein, held by NetGateway in respect of such Intellectual Property, (iv) NetGateway has delivered to the Selling Stockholders prior to the execution of this Agreement documentation with respect to any invention, process, design, computer program or other know-how or trade secret included in such Intellectual Property, which documentation is accurate in all material respects and reasonably sufficient in detail and content to identify and explain such invention, process, design, computer program or other know-how or trade secret and to facilitate its full and proper use without reliance on the special knowledge or memory of any Person, (v) NetGateway has taken reasonable security measures to protect the secrecy, confidentiality and value of their trade secrets, (vi) NetGateway is not, nor has it received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default) under any Contract to use such Intellectual Property and (vii) except as disclosed in Section 4.15 of the Disclosure Schedule, no such Intellectual Property is being infringed by any other Person. NetGateway has not received notice that NetGateway is infringing any Intellectual Property of any other Person, no claim is pending or, has been made to such effect that has not been resolved and, to the Knowledge of NetGateway, NetGateway's Intellectual Property does not infringe any Intellectual Property of any other Person. 4.16 Insurance. Section 4.16 of the Disclosure Schedule contains a true and complete list (including the names and addresses of the insurers, the names of the Persons to whom such policies have been issued, the expiration dates thereof, the annual premiums and payment terms thereof, whether it is a "claims made" or an "occurrence" policy and a brief description of the interests insured thereby) of all liability, property, workers' compensation, directors' and officers' liability and other insurance policies currently in effect that insure the business, operations or employees of NetGateway or affect or relate to the ownership, use or operation of any of the Assets and Properties of NetGateway and that (i) have been issued to NetGateway or (ii) have been issued to any Person (other than NetGateway) for the benefit of NetGateway. The insurance coverage provided by any of the policies described in clause (i) above will not terminate or lapse by reason of the transactions contemplated by this Agreement. Each policy listed in Section 4.16 of the Disclosure Schedule is valid and binding and in full force and effect, no premiums due thereunder have not been paid and neither NetGateway, any Subsidiary nor the Person to whom such policy has been issued has received any notice of cancellation or termination in respect of any such policy or is in default thereunder. The insurance policies listed in Section 4.16 of the Disclosure Schedule are placed with financially sound and reputable insurers and, in light of the respective business, operations and Assets and Properties of NetGateway, are in amounts and have coverages that are reasonable and customary for Persons engaged in such businesses and operations and having such Assets and Properties. Neither NetGateway nor the Person to whom such policy has been issued has received notice that any insurer under any policy referred to in this Section is denying liability with respect to a claim thereunder or defending under a reservation of rights clause. 4.17 Affiliate Transactions. Except as disclosed in Section 4.17 of the Disclosure Schedule, there are no intercompany Liabilities between NetGateway, on the one hand, and any shareholders, director or Affiliate of NetGateway, on the other, (ii) neither NetGateway nor any such shareholders officer, director or Affiliate provides or causes to be provided any assets, services or facilities to NetGateway, (iii) NetGateway does not provide or cause to be provided any assets, services or facilities to any Seller or any such Shareholders officer, director or Affiliate and (iv) NetGateway does not beneficially own, directly or indirectly, any Investment Assets issued by any Selling Stockholder or any such shareholders, officer, director or Affiliate. 4.18 Employees; Labor Relations. All employees, consultants, officers, directors and shareholders of NetGateway that have had access to the Business are parties to a written agreement (a "Confidentiality Agreement"), under which each such person or entity (i) is obligated to disclose and transfer to NetGateway, without the receipt by such person of any additional value therefor (other than normal salary or fees for consulting services), all inventions, developments and discoveries which, during the period of employment with or performance of services for NetGateway, he or she makes or conceives of either solely or jointly with others, that relate to any subject matter with which his or her work for NetGateway in the Business may be concerned, and (ii) is obligated to maintain the confidentiality of proprietary information of the Business. To NetGateway's knowledge, none of NetGateway's employees, consultants, officers or directors 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 conflict with their obligation to promote the interests of NetGateway with regard to the Business or the Assets or that would conflict with the Business or the Assets. Neither the execution nor the delivery of this Agreement, nor the carrying on of the Business by its employees and consultants, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such persons or entities are now obligated. It is currently not necessary nor will it be necessary for NetGateway to utilize in the Business any inventions of any of such persons or entities (or people it currently intends to hire) made or owned prior to their employment by or affiliation with NetGateway, nor is it or will it be necessary to utilize any other assets or rights of any such persons or entities (or people it currently intends to hire) made or owned prior to their employment with or engagement by NetGateway, in violation of any registered patents, trade names, trademarks or copyrights or any other limitations or restrictions to which any such persons or entity is a party or to which any of such assets or rights may be subject. To NetGateway's knowledge, none of NetGateway's employees, consultants, officers, directors or shareholders that has had knowledge or access to information relating to the Assets has taken, removed or made use of any proprietary documentation, manuals, products, materials, or any other tangible item from his or her previous employer relating to the Assets by such previous employer which has resulted in NetGateway's access to or use of such proprietary items included in the Assets, and Company will not gain access to or make use of any such proprietary items in the Business. 4.19 No Powers of Attorney. NetGateway does not have any powers of attorney or comparable delegations of authority outstanding. 4.20 Brokers. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by NetGateway and Purchaser directly with the Selling Stockholders without the intervention of any Person on behalf of NetGateway or Purchaser in such manner as to give rise to any valid claim by any Person against the Selling Stockholders for a finder's fee, brokerage commission or similar payment. 4.21 NetGateway has filed all tax returns which are required to have been filed in any jurisdiction, and has paid all Taxes shown to be due and payable on such returns and all other Taxes payable by NetGateway to the extent the same have become due and payable and before they have become delinquent. NetGateway knows of no proposed material assessment for Taxes against NetGateway and in the opinion of NetGateway, all liabilities for Taxes are adequately provided for on the books of NetGateway. 4.22 Accounts Receivable. The accounts and notes receivable of NetGateway, including that certain Secured Promissory Note payable by Admor Memory Corp., reflected on the balance sheet included in the NetGateway Financial Statements, (i) arose from bona fide sales transactions in the ordinary course of business and are payable on ordinary trade terms, (ii) are legal, valid and binding obligations of the respective debtors enforceable in accordance with their terms, (iii) are not subject to any valid set-off or counterclaim, (iv) do not represent obligations for goods sold on consignment, on approval or on a sale-or-return basis or subject to any other repurchase or return arrangement, (v) are collectible in the ordinary course of business consistent with past practice in the aggregate recorded amounts thereof, net of any applicable reserve reflected in the balance sheet included in the NetGateway Financial Statements, and (vi) are not the subject of any Actions or Proceedings brought by or on behalf of NetGateway. 4.23 Disclosure. All material facts relating to the Business or Condition of Purchaser or NetGateway have been disclosed to Seller in or in connection with this Agreement. No representation or warranty contained in this Agreement, and no statement contained in the Disclosure Schedule or in any certificate, list or other writing furnished to Seller pursuant to any provision of this Agreement (including without limitation the NetGateway Financial Statements), contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein, in the light of the circumstances under which they were made, not misleading. 4.24 Contracts. (a) Section 4.24 of the Disclosure Schedule (with paragraph references corresponding to those set forth below) contains a true and complete list of each Contract or other arrangement (true and complete copies or, if none, reasonably complete and accurate written descriptions of which, together with all amendments and supplements thereto and all waivers of any terms thereof, have been delivered to the Company prior to the execution of this Agreement), to which NetGateway is a party or by which any of its Assets and Properties is bound. (b) Each Contract disclosed in Section 4.24 of the Disclosure Schedule is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms, of each party thereto; and neither NetGateway nor, to the Knowledge of NetGateway, any other party to such Contract is, or has received notice that it is, in violation or breach of or default under any such Contract (or with notice or lapse of time or both, would be in violation or breach of or default under any such Contract) in any material respect. 4.25 Licenses. Section 4.25 of the Disclosure Schedule contains a true and complete list of all Licenses used in and material, individually or in the aggregate, to the business or operations of the NetGateway (and all pending applications for any such Licenses), setting forth the grantor, the grantee, the function and the expiration and renewal date of each. Prior to the execution of this Agreement, NetGateway has delivered to the Company true and complete copies of all such Licenses. Except as disclosed in Section 4.25 of the Disclosure Schedule: (i) NetGateway owns or validly holds all Licenses that are material, individually or in the aggregate, to its business or operations; (ii) Each License listed in Section 4.25 of the Disclosure Schedule is valid, binding and in full force and effect; and (iii) NetGateway is not, nor has it received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default) under any such License. ARTICLE V COVENANTS OF THE CONTROLLING STOCKHOLDERS AND THE SELLING STOCKHOLDERS The Controlling Stockholders or the Selling Stockholders, as the case may be, covenant and agree with Purchaser that, at all times from and after the date hereof until the Closing and, with respect to any covenant or agreement by its terms to be performed in whole or in part after the Closing, for the period specified therein or, if no period is specified therein, indefinitely, the Controlling Stockholders or the Selling Stockholders, as the case may be, will comply with all covenants and provisions of this Article V, except to the extent Purchaser may otherwise consent in writing. 5.01 Regulatory and Other Approvals. The Controlling Stockholders will, and will cause the Company to, as promptly as practicable, (a) take all commercially reasonable steps necessary or desirable to obtain all consents, approvals or actions of, make all filings with and give all notices to Governmental or Regulatory Authorities or any other Person required of the Controlling Stockholders or the Company to consummate the transactions contemplated hereby, (b) provide such other information and communications to such Governmental or Regulatory Authorities or other Persons as Purchaser or such Governmental or Regulatory Authorities or other Persons may reasonably request in connection therewith, and (c) cooperate with Purchaser in connection with the performance of its obligations hereunder. 5.02 Investigation by Purchaser. The Controlling Stockholders will, and will cause the Company to, (a) provide Purchaser and its officers, directors, employees, agents, counsel, accountants, financial advisors, consultants and other representatives (together "Representatives") with full access, upon reasonable prior notice and during normal business hours, to all officers, employees, agents and accountants of the Company and its Assets and Properties and Books and Records, and (b) furnish Purchaser and such Representatives with all such information and data (including without limitation copies of Contracts, Benefit Plans and other Books and Records) concerning the business and operations of the Company as Purchaser or any of such Representatives reasonably may request in connection with such investigation. 5.03 No Solicitations. The Controlling Stockholders will not take, nor will they permit the Company or any Affiliate of the Company (or authorize or permit any investment banker, financial advisor, attorney, accountant or other Person retained by or acting for or on behalf of the Controlling Stockholders, the Company, or any such Affiliate) to take, directly or indirectly, any action to solicit, encourage, receive, negotiate, assist or otherwise facilitate (including by furnishing confidential information with respect to the Company or permitting access to the Assets and Properties and Books and Records of the Company) any offer or inquiry from any Person concerning an Acquisition Proposal. If the Controlling Stockholders, the Company, or any such Affiliate (or any such Person acting for or on their behalf) receives from any Person any offer, inquiry or informational request referred to above, the Controlling Stockholders will promptly advise such Person, by written notice, of the terms of this Section 5.03 and will promptly, orally and in writing, advise Purchaser of such offer, inquiry or request and deliver a copy of such notice to Purchaser. 5.04 Conduct of Business. The Controlling Stockholders will cause the Company to conduct business only in the ordinary course consistent with past practice. 5.05 Certain Restrictions. The Controlling Stockholders will cause the Company to refrain from: (a) Amending its Articles of Incorporation or By-laws (or other comparable corporate charter documents) or taking any action with respect to any such amendment or any recapitalization, reorganization, liquidation or dissolution of any such corporation; (b) Authorizing, issuing, selling or otherwise disposing of any shares of capital stock of or any Option with respect to the Company, or modifying or amending any right of any holder of outstanding shares of capital stock of or Option with respect to the Company; (c) Declaring, setting aside or paying any dividend or other distribution in respect of the capital stock of the Company, or directly or indirectly redeeming, purchasing or otherwise acquiring any capital stock of or any Option with respect to the Company; (d) Acquiring or disposing of, or incurring any Lien (other than a Permitted Lien) on, any Assets and Properties, other than in the ordinary course of business consistent with past practice; (e) (i) Entering into, amending, modifying, terminating (partially or completely), granting any waiver under or giving any consent with respect to (A) any Contract or (B) any material License or (ii) granting any irrevocable powers of attorney; (f) Violating, breaching or defaulting under in any material respect, or taking or failing to take any action that (with or without notice or lapse of time or both) would constitute a material violation or breach of, or default under, any term or provision of any License held or used by the Company or any Contract to which the Company is a party or by which any of its Assets and Properties is bound; (g) Incurring Indebtedness in excess of $5,000; (h) Engaging with any Person in any merger or other business combination; (i) Making capital expenditures; (j) Writing off or writing down any of the Company=s Assets and Properties; or (k) entering into any Contract to do or engage in any of the foregoing. 5.06 Affiliate Transactions. Immediately prior to the Closing, any Indebtedness and any other amounts owing under Contracts between any Selling Stockholder, or any officer, director or Affiliate of any Selling Stockholder, on the one hand, and the Company, on the other, will be paid in full, and the Selling Stockholders will terminate and will cause any such officer, director or Affiliate to terminate each Contract with the Company. Prior to the Closing, the Company will not enter into any Contract or amend or modify any existing Contract, and will not engage in any transaction outside the ordinary course of business consistent with past practice or not on an arm's-length basis, with any Selling Stockholder or any such officer, director or Affiliate thereof. 5.07 Books and Records. On the Closing Date, the Company will deliver or make available to Purchaser at the offices of the Company all of the Books and Records, and if at any time after the Closing, any Controlling Stockholders discover in their possession or under their control any other Books and Records, they will forthwith deliver such Books and Records to Purchaser. 5.08 Noncompetition. (a) The Selling Stockholders will, for a period of two (2) years from the Closing Date, refrain from, either alone or in conjunction with any other Person, or directly or indirectly through its present or future Affiliates: (i) Employing, engaging or seeking to employ or engage any Person who within the prior twenty four (24) months had been an officer or employee of the Company, except for that certain Consulting Agreement between Jordi MacDonald and Shawn Abbot dated June 1, 1998; (ii) Causing or attempting to cause (A) any client, customer or supplier of the Company to terminate or materially reduce its business with the Company or (B) any officer, employee or consultant of the Company to resign or sever a relationship with the Company; (iii) Disclosing (unless compelled by judicial or administrative process) or using any confidential or secret information relating to the Company or any of their respective clients, customers or suppliers; or (iv) Participating or engaging in (other than through the ownership of five percent (5%) or less of any class of securities registered under the Securities Exchange Act of 1934, as amended), or otherwise lending assistance (financial or otherwise) to any Person participating or engaged in, the provision of services or software for the conduct of electronic commerce in those areas actively being pursued by NetGateway and the Company presently or in the future. (b) The parties hereto recognize that the Laws and public policies of the various provinces of Canada and states of the United States may differ as to the validity and enforceability of covenants similar to those set forth in this Section. It is the intention of the parties that the provisions of this Section be enforced to the fullest extent permissible under the Laws and policies of each jurisdiction in which enforcement may be sought, and that the unenforceability (or the modification to conform to such Laws or policies) of any provisions of this Section shall not render unenforceable, or impair, the remainder of the provisions of this Section. Accordingly, if any provision of this Section shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall be deemed to apply only with respect to the operation of such provision in the particular jurisdiction in which such determination is made and not with respect to any other provision or jurisdiction. (c) The parties hereto acknowledge and agree that any remedy at Law for any breach of the provisions of this Section would be inadequate, and each Selling Stockholder hereby consents to the granting by any court of an injunction or other equitable relief, without the necessity of actual monetary loss being proved, in order that the breach or threatened breach of such provisions may be effectively restrained. 5.09 Notice and Cure. Each Selling Stockholder will notify Purchaser in writing (where appropriate, through updates to the Disclosure Schedule) of, and contemporaneously will provide Purchaser with true and complete copies of any and all information or documents relating to, and will use all commercially reasonable efforts to cure before the Closing, any event, transaction or circumstance, as soon as practicable after it becomes known to each such Stockholder, occurring after the date of this Agreement that causes or will cause any covenant or agreement of each such Stockholder under this Agreement to be breached or that renders or will render untrue any representation or warranty of each such Stockholder contained in this Agreement as if the same were made on or as of the date of such event, transaction or circumstance. No notice given pursuant to this Section shall have any effect on the representations, warranties, covenants or agreements contained in this Agreement for purposes of determining satisfaction of any condition contained herein or shall in any way limit Purchaser's right to seek indemnity under Article IX. 5.10 Fulfillment of Conditions. The Selling Stockholders will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of Purchaser contained in this Agreement and will not, and will not permit the Company or any Subsidiary to, take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition. 5.11 Employment Agreements. David Rosenvall, Jordi MacDonald and Clint McKinlay will on or before Closing enter into employment agreements with Purchaser substantially in the form of Exhibits E, F, and G, respectively, hereto (the "Employment Agreements"). 5.12 Taxes. The Selling Stockholders will pay all Taxes (including interest and penalties), other than Taxes imposed on the income of Purchaser, which may be payable in respect of the execution and delivery of this Agreement or of the sale and delivery of any of the Shares or of any amendment of, or waiver or consent under or with respect to, this Agreement and will hold Purchaser and all subsequent holders of the Shares harmless against any loss or liability resulting from nonpayment or delay in payment of any such Taxes. ARTICLE V CONDITIONS TO OBLIGATIONS OF PURCHASER The obligations of Purchaser hereunder to purchase the Shares are subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by Purchaser in its sole discretion): 6.01 Representations and Warranties. Each of the representations and warranties made by the Controlling Stockholders and the Selling Stockholders in this Agreement (other than those made as of a specified date earlier than the Closing Date) shall be true and correct in all material respects on and as of the Closing Date as though such representation or warranty was made on and as of the Closing Date, and any representation or warranty made as of a specified date earlier than the Closing Date shall have been true and correct in all material respects on and as of such earlier date. 6.02 Performance. The Selling Stockholders shall have performed and complied with, in all material respects, each agreement, covenant and obligation required by this Agreement to be so performed or complied with by such parties at or before the Closing. 6.03 Orders and Laws. There shall not be in effect on the Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or which could reasonably be expected to otherwise result in a material diminution of the benefits of the transactions contemplated by this Agreement to Purchaser, and there shall not be pending on the Closing Date any Action or Proceeding in, before or by any Governmental or Regulatory Authority which could reasonably be expected to result in the issuance of any such Order or the enactment, promulgation or deemed applicability to Purchaser, the Company, any Subsidiary or the transactions contemplated by this Agreement of any such Law. 6.04 Regulatory Consents and Approvals. All consents, approvals and actions of, filings with and notices to any Governmental or Regulatory Authority necessary to permit Purchaser and the Selling Stockholders to perform their obligations under this Agreement and to consummate the transactions contemplated hereby (a) shall have been duly obtained, made or given, (b) shall be in form and substance reasonably satisfactory to Purchaser, (c) shall not be subject to the satisfaction of any condition that has not been satisfied or waived and (d) shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement shall have occurred. 6.05 Third Party Consents. All consents (or in lieu thereof waivers) to the performance by Purchaser and the Selling Stockholders of their obligations under this Agreement or to the consummation of the transactions contemplated hereby as are required under any Contract to which Purchaser, any Selling Stockholder, the Company or any Subsidiary is a party or by which any of their respective Assets and Properties are bound (a) shall have been obtained, (b) shall be in form and substance reasonably satisfactory to Purchaser, (c) shall not be subject to the satisfaction of any condition that has not been satisfied or waived and (d) shall be in full force and effect, except where the failure to obtain any such consent (or in lieu thereof waiver) could not reasonably be expected, individually or in the aggregate with other such failures, to materially adversely affect Purchaser or the Business or Condition of the Company or otherwise result in a material diminution of the benefits of the transactions contemplated by this Agreement to Purchaser. 6.06 Opinion of Counsel. Purchaser shall have received the opinion of Tingle & Associates, counsel to the Selling Stockholders and the Company, dated the Closing Date, substantially in the form and to the effect of Exhibit H hereto. 6.07 Resignations of Directors and Officers. Such members of the boards of directors and such officers of the Company as are designated in a written notice delivered at least two (2) Business Days prior to the Closing Date by Purchaser to the Controlling Stockholders shall have tendered, effective at the Closing, their resignations as such directors and officers. 6.08 Proceedings. All proceedings to be taken on the part of the Company, the Controlling Stockholders or the Selling Stockholders in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to Purchaser, and Purchaser shall have received copies of all such documents and other evidences as Purchaser may reasonably request in order to establish the consummation of such transactions and the taking of all proceedings in connection therewith. 6.09 Employment Agreements. The Controlling Stockholders shall have duly executed and delivered the Employment Agreements to Purchaser. 6.10 Articles of Incorporation. The Articles of Incorporation of Purchaser attached hereto as Exhibit A shall be filed and in effect. 6.11 Support Agreement. The Support Agreement attached hereto as Exhibit I shall have been executed and delivered by the parties hereto. 6.12 Pledge Agreement. The Pledge Agreement attached hereto as Exhibit D shall have been duly executed and delivered by each Selling Stockholder and Purchaser. 6.13 Elections. Purchaser and the Company shall have made the income tax and Goods and Services Tax elections agreed to by the parties. ARTICLE VI CONDITIONS TO OBLIGATIONS OF THE SELLING STOCKHOLDERS The obligations of the Selling Stockholders hereunder to sell the Shares are subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by the Selling Stockholders in their sole discretion): 7.01 Representations and Warranties. Each of the representations and warranties made by Purchaser and NetGateway in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though such representation or warranty was made on and as of the Closing Date. 7.02 Performance. Purchaser shall have performed and complied with, in all material respects, each agreement, covenant and obligation required by this Agreement to be so performed or complied with by Purchaser at or before the Closing. 7.03 Notice and Cure. Purchaser will notify each Selling Stockholder in writing (where appropriate, through updates to the Disclosure Schedule) of, and contemporaneously will provide each Selling Stockholder with true and complete copies of any and all information or documents relating to, and will use all commercially reasonable efforts to cure before the Closing, any event, transaction or circumstance, as soon as practicable after it becomes known to the Purchaser, occurring after the date of this Agreement that causes or will cause any covenant or agreement of the Purchaser under this Agreement to be breached or that renders or will render untrue any representation or warranty of the Purchaser or NetGateway contained in this Agreement as if the same were made on or as of the date of such event, transaction or circumstance. No notice given pursuant to this Section shall have any effect on the representations, warranties, covenants or agreements contained in this Agreement for purposes of determining satisfaction of any condition contained herein or shall in any way limit each Selling Stockholder's right to seek indemnity under Article IX. 7.04 Fulfillment of Conditions. The Purchaser will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of the Selling Stockholders contained in this Agreement and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition. 7.05 Delivery of Agreements. Purchaser or NetGateway will execute and deliver the Employment Agreements, the Pledge Agreement and the Support Agreement. 7.06 Elections. Purchaser and the Company shall have made the income tax and Goods and Services Tax elections agreed to by the parties. 7.07 Opinion of Counsel. The Selling Stockholders shall have received the opinion of Nida & Maloney, P.C., counsel to NetGateway, dated the Closing Date, substantially in the form of Exhibit J hereto. 7.08 The Controlling Stockholders shall have duly executed and delivered the Employment Agreements to Purchaser. 7.09 Articles of Incorporation. The Articles of Incorporation of Purchaser attached hereto as Exhibit A shall be filed and in effect. 7.10 Support Agreement. The Support Agreement attached hereto as Exhibit I shall have been executed and delivered by the parties hereto. ARTICLE VIII SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS; POST-CLOSING COVENANTS 8.01 Survival of Representations, Warranties, Covenants and Agreements. Notwithstanding any right of Purchaser (whether or not exercised) to investigate the affairs of the Company or any right of any party (whether or not exercised) to investigate the accuracy of the representations and warranties of the other parties contained in this Agreement, the Selling Stockholders and Purchaser have the right to rely fully upon the representations, warranties, covenants and agreements of the other contained in this Agreement. The representations, warranties, covenants and agreements of the Selling Stockholders, the Controlling Stockholders, Purchaser and NetGateway contained in this Agreement will survive the Closing indefinitely and the covenants and agreements contained herein will survive until sixty (60) days after the expiration of all applicable statutes of limitation (including all periods of extension, whether automatic or permissive) with respect to matters covered thereby. 8.02 Post-Closing Covenants. Within one year following the Closing, NetGateway shall become a reporting company pursuant to Section 12 (g) of the 1934 Exchange Act, as amended, and use its best efforts to list its common stock on a national stock exchange (including NASDAQ) in the United States. In addition, NetGateway shall (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by NetGateway for the offering of its securities to the general public so long as NetGateway remains subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act; (b) file with the SEC in a timely manner all reports and other documents required of NetGateway under the Securities Act of 1933, as amended and the Exchange Act; and (c) upon the request of any Selling Stockholder, but subject to such Selling Stockholder satisfying NetGateway that the requested action complies with all applicable laws, NetGateway shall remove the legends from the certificates representing such Selling Stockholder's NetGateway Shares. In addition, within a reasonable period following the Closing, Purchaser or NetGateway shall either obtain: (a) a Section 116 Order from the Alberta Securities Commission exempting the re-sale of NetGateway Shares by the Selling Stockholders form the restrictions on re-sale contained in Section 110 of the Securities Act (Alberta); or (b) an unqualified opinion of Bennett Jones in form reasonably acceptable to the Controlling Stockholders, stating that NetGateway Shares may be sold by the Selling Stockholders on a U.S. exchange or the NASDAQ without regard to the provisions of the Securities Act (Alberta), the regulations or rules enacted thereunder, or the policies of the Alberta Securities Commission. 8.03 Additional Post-Closing Covenants. NetGateway shall pay off or eliminate the $1,800,000 liability to Pro-Soft reflected in the NetGateway Financial Statements. The parties have agreed upon the initial budget (the "Initial Budget") of Buyer for the twelve-month period commencing November 1, 1998. The Initial Budget is attached hereto as Exhibit K, and NetGateway shall provide, from time to time, the resources necessary to implement the provisions of the Initial Budget. NetGateway, in its reasonable discretion, and upon review and approval of each subsequent annual budget for Buyer, shall provide from time to time the resources required to implement the provisions of each subsequent budget. ARTICLE IX INDEMNIFICATION 9.01 Controlling Stockholders. Subject to Section 9.05 hereof, the Controlling Stockholders, jointly and severally, shall indemnify the Purchaser Indemnified Parties in respect of, and hold each of them harmless from and against, any Losses suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from, arising out of or relating to any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the party of the Company or the Controlling Stockholders contained in this Agreement or any other documents or agreements contemplated hereby; provided, however, that, subject to Section 9.05 hereof, each Controlling Stockholder's liability under this Section 9.01 may be satisfied by the return of up to all of the Exchangeable Shares received hereunder by such Controlling Stockholder and any other securities pledged pursuant to the Pledge Agreement, with each Exchangeable Share to have a fair market value deemed to be the lesser of the ADP or $10.00 USD. 9.02 Selling Stockholders. Subject to Section 9.05 hereof, each of the Selling Stockholders, severally but no jointly, shall indemnify the Purchaser Indemnified Parties in respect of, and hold each of them harmless from and against, any and all Losses suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from, arising out of or relating to any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of such Selling Stockholder contained in this Agreement or any other documents or agreements contemplated hereby; provided, however, that, subject to Section 9.05 hereof, each Selling Stockholder's liability under this Section 9.02 may be satisfied by the return of up to all of the Exchangeable Shares received by such Selling Stockholder, and any other securities pledged pursuant to the Pledge Agreement, with each Exchangeable Share to have a deemed fair market value of the lesser of the ADP or $10.00 USD. 9.03 Purchaser and NetGateway. Purchaser and NetGateway shall indemnify the Selling Stockholders in respect of, and hold each of them harmless from and against, any and all Losses suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from, arising out of or relating to any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the party of the Purchaser and NetGateway contained in this Agreement or any other documents or agreements contemplated hereby; provided, however, that the aggregate liability of Purchaser and NetGateway under this Section 9.03 shall not exceed the aggregate fair market value of the Shares, which shall be deemed to be the lesser of the ADP or the Purchase Price. 9.04 Procedures. In the event that any claim is asserted against any party hereto, or any party hereto is made a party defendant in any action or proceeding, and such claim, action or proceeding involves a matter which is subject of a claim for indemnification hereunder, then such party (an "Indemnified Party") promptly shall give written notice to the Purchaser or the Selling Stockholders, as the case may be (the "Indemnifying Party"), of such claim, Action or Proceeding, and such Indemnifying Party's own cost and expense and, if the Indemnifying Party agrees in writing to be bound by and to promptly pay the full amount of any final judgment from which no further appeal may be taken and if the Indemnified Party is reasonably assured of the Indemnifying Party's ability to satisfy such agreement, then at the option of the Indemnifying Party, such Indemnifying Party may take over the defense of such claim, action or proceeding, except that, in such case, the Indemnified Party shall have the right to join in the defense of said claim, action or proceeding at its own cost and expense. 9.05 Interpretation. The liability of the Controlling Stockholders for any breach of the representations set forth in Articles II and III above, and the Selling Stockholders for any breach of the representations set forth in Article III above, shall be solely as set forth in this Article IX. Notwithstanding the foregoing, nothing in this Agreement shall be construed (i) as limiting the liability of any of the Controlling Stockholders or Selling Stockholders for any claims, damages or other losses suffered by the Purchaser (A) arising out of any provisions of this Agreement other than Articles II and III, (B) for any claims arising out of fraud or intentional misrepresentation, (C) for any claims for equitable relief, or (D) for any claims not arising out of this Agreement, or (ii) to deny or limit (except as limited by this Article IX) Purchaser's ability to pursue any and all legal or equitable remedies available to Purchaser. 9.06 Arbitration. Any and all disputes arising out of or in connection with the negotiation, execution, or interpretation of this Agreement shall be finally settled by arbitration in accordance with the rules of the American Arbitration Association by arbitrators familiar with software. The arbitration will be held in Los Angeles, California, on consecutive business days. The award rendered shall be final and binding upon the parties. Judgment on any award may be entered in any court having jurisdiction over the parties or their assets. The costs of the arbitration shall be shared equally by the parties. Each party will pay their own attorneys' fees and costs. 9.07 Pledge of Shares. As security for the indemnification obligations of the Selling Stockholders under this Agreement, but without limitation of the Selling Stockholders' obligations under this Agreement, except as otherwise set forth in this Article IX, the Selling Stockholders shall pledge the Exchangeable Shares to Purchaser in accordance with Exhibit D hereto. From time to time, Purchaser may apply and/or retain all or any part of the Exchangeable Shares (in such manner as Purchaser shall determine) in order to pay, or to provide for the payment of, any liability of the Selling Stockholders arising under the indemnities contained in this Agreement. Purchaser will release and deliver ten percent (10%) of the Exchangeable Shares per each three month period following the Closing and will release and deliver any remaining Exchangeable Shares to the Selling Stockholders on the date which is twelve (12) months after the Closing Date (to the extent they have not been used to satisfy any Selling Stockholder's indemnification obligations hereunder). Except as otherwise set forth in this Article IX, nothing in this Section 9.07 will be construed as limiting the liability of the Selling Stockholders under this Agreement or any Exhibit hereto, nor will the Exchangeable Shares be considered as liquidated damages for any breach under this Agreement or any Exhibit hereto. ARTICLE X DEFINITIONS 10.01 Definitions. (a) Defined Terms. As used in this Agreement, the following defined terms have the meanings indicated below: "Acquisition Proposal" means any proposal for a merger or other business combination to which the Company is a party or the direct or indirect acquisition of any equity interest in, or a substantial portion of the assets of the Company, other than the transactions contemplated by this Agreement. "Actions or Proceedings" means any action, suit, proceeding, arbitration or Governmental or Regulatory Authority investigation or audit. "Adjustment Date" shall have the meaning ascribed to such term in Section 1.03(c). "ADP" shall have the meaning ascribed to such term in Section 1.03(c). "Affiliate" means any Person that directly, or indirectly through one of more intermediaries, controls or is controlled by or is under common control with the Person specified. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by Contract or otherwise and, in any event and without limitation of the previous sentence, any Person owning ten percent (10%) or more of the voting securities of another Person shall be deemed to control that Person. "Agreement" means this Stock Purchase Agreement and the exhibits and the schedules hereto and the certificates delivered in accordance herewith, as the same shall be amended from time to time. "Assets and Properties" of any Person means all assets and properties of every kind, nature, character and description (whether real, personal or mixed, whether tangible or intangible, whether absolute, accrued, contingent, fixed or otherwise and wherever situated), including the goodwill related thereto, operated, owned or leased by such Person, including without limitation cash, cash equivalents, Investment Assets, accounts and notes receivable, chattel paper, documents, instruments, general intangibles, real estate, equipment, inventory, goods and Intellectual Property. "Benefit Plan" means any Plan established by the Company, or any predecessor or Affiliate of any of the foregoing, existing at the Closing Date or prior thereto, to which the Company contributes or has contributed, or under which any employee, former employee or director of the Company or any beneficiary thereof is covered, is eligible for coverage or has benefit rights. "Books and Records" means all files, documents, instruments, papers, books and records relating to the Business or Condition of the Company, including without limitation financial statements, tax returns and related work papers and letters from accountants, budgets, pricing guidelines, ledgers, journals, deeds, title policies, minute books, stock certificates and books, stock transfer ledgers, Contracts, Licenses, customer lists, computer files and programs, retrieval programs, operating data and plans and environmental studies and plans. "Business Day" means a day other than Saturday, Sunday or any day on which banks located in the States of Illinois and Texas are authorized or obligated to close. "Business or Condition of the Company" means the business, condition (financial or otherwise), results of operations, Assets and Properties and prospects of the Company taken as a whole. "Canadian GAAP" means accounting principles generally accepted at the relevant time in Canada, and where the "CICA Handbook", as amended from time to time, or any successor publication published by the Canadian Institute of Chartered Accountants, contains (i) a single recommendation as to treatment of a matter, such recommendation shall constitute GAAP and generally accepted accounting principles herein, or (ii) more than one recommendation as to treatment of a matter, any of such recommendations shall constitute GAAP and generally accepted accounting principles herein. "Closing" means the closing of the transactions contemplated by Section 1.04. "Closing Date" means the date of the Closing. "Code" means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Common Stock" means the common stock, par value $1.00 per share, of the Company. "Company" has the meaning ascribed to it in the forepart of this Agreement. "Contingent Shares" shall have the meaning ascribed to it in Section 1.03(b). "Contract" means any agreement, lease, license, evidence of Indebtedness, mortgage, indenture, security agreement or other contract (whether written or oral). "Controlling Stockholders" shall mean David Rosenvall, Jordi MacDonald and Clint McKinlay. "Disclosure Schedule" means the record delivered to Purchaser by Sellers herewith and dated as of the date hereof, containing all lists, descriptions, exceptions and other information and materials as are required to be included therein by Sellers pursuant to this Agreement. "Employment Agreement" has the meaning ascribed to it in Section 4.11. "Exchangeable Shares" has the meaning ascribed to it in Section 1.02. "Financial Statements" means the financial statements of the Company delivered to Purchaser pursuant to Section 2.08. "GAAP" means the United States generally accepted accounting principles, consistently applied throughout the specified period and in the immediately prior comparable period. "Governmental or Regulatory Authority" means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision. "Indebtedness" of any Person means all obligations of such Person (i) for borrowed money, (ii) evidenced by notes, bonds, debentures or similar instruments, (iii) for the deferred purchase price of goods or services (other than trade payables or accruals incurred in the ordinary course of business), (iv) under capital leases and (v) in the nature of guarantees of the obligations described in clauses (i) through (iv) above of any other Person. "Indemnified Party" means any Person claiming indemnification under any provision of Article VIII. "Indemnifying Party" means any Person against whom a claim for indemnification is being asserted under any provision of Article VIII. "Intellectual Property" means all patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, brand names, inventions, processes, formulae, copyrights and copyright rights, trade dress, business and product names, logos, slogans, trade secrets, industrial models, processes, designs, methodologies, computer programs (including all source codes) and related documentation, technical information, manufacturing, engineering and technical drawings, know-how and all pending applications for and registrations of patents, trademarks, service marks and copyrights. "Investment Assets" means all debentures, notes and other evidences of Indebtedness, stocks, securities (including rights to purchase and securities convertible into or exchangeable for other securities), interests in joint ventures and general and limited partnerships, mortgage loans and other investment or portfolio assets owned of record or beneficially by the Company or any Subsidiary and issued by any Person other than the Company (other than trade receivables generated in the ordinary course of business of the Company). "IRS" means the United States Internal Revenue Service. "Knowledge" or "Known" means the knowledge of the referenced party. "Laws" means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision or of any Governmental or Regulatory Authority. "Liabilities" means all Indebtedness, obligations and other liabilities of a Person (whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due). "Licenses" means all licenses, permits, certificates of authority, authorizations, approvals, registrations, franchises and similar consents granted or issued by any Governmental or Regulatory Authority. "Liens" means any mortgage, pledge, assessment, security interest, lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or any conditional sale Contract, title retention Contract or other Contract to give any of the foregoing. "Loss" means any and all damages, fines, fees, penalties, deficiencies, losses and expenses (including without limitation interest, court costs, fees of attorneys, accountants and other experts or other expenses of litigation or other proceedings or of any claim, default or assessment). "NetGateway Financial Statements" means the financial statements of NetGateway delivered to the Selling Stockholders pursuant to Section 4.08. "NetGateway Shares" shall have the meaning ascribed to it in Section 1.02 hereof. "Option" with respect to any Person means any security, right, subscription, warrant, option, "phantom" stock right or other Contract that gives the right to (i) purchase or otherwise receive or be issued any shares of capital stock of such Person or any security of any kind convertible into or exchangeable or exercisable for any shares of capital stock of such Person or (ii) receive or exercise any benefits or rights similar to any rights enjoyed by or accruing to the holder of shares of capital stock of such Person, including any rights to participate in the equity or income of such Person or to participate in or direct the election of any directors or officers of such Person or the manner in which any shares of capital stock of such Person are voted. "Order" means any writ, judgment, decree, injunction or similar order of any Governmental or Regulatory Authority (in each such case whether preliminary or final). "Paying Account" shall have the meaning ascribed to it in Section 1.03 (b). "Percentage Interest" shall mean the percentage interest of a Selling Stockholder which is equal to the number of Shares owned by such Selling Stockholder divided by the total number of shares purchased by the Purchaser hereunder. "Permitted Lien" means (i) any Lien for Taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with Canadian GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of Law with respect to a Liability that is not yet due or delinquent and (iii) any minor imperfection of title or similar Lien which individually or in the aggregate with other such Liens does not materially impair the value of the property subject to such Lien or the use of such property in the conduct of the business of the Company or any Subsidiary. "Person" means any natural person, corporation, general partnership, limited partnership, proprietorship, other business organization, trust, union, association or Governmental or Regulatory Authority. "Plan" means any bonus, incentive compensation, deferred compensation, pension, profit sharing, retirement, stock purchase, stock option, stock ownership, stock appreciation rights, phantom stock, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health, accident, disability, workmen's compensation or other insurance, severance, separation or other employee benefit plan, practice, policy or arrangement of any kind, whether written or oral, including, but not limited to, any "employee benefit plan" within the meaning of Section 3(3) of ERISA. "Purchase Price" has the meaning ascribed to it in Section 1.02. "Purchaser" has the meaning ascribed to it in the forepart of this Agreement. "Purchaser Indemnified Parties" means Purchaser and its officers, directors, employees, agents, shareholders and Affiliates. "Representatives" has the meaning ascribed to it in Section 5.02. "Selling Stockholders" shall have the meaning ascribed to it in the preamble of this Agreement. "Shares" has the meaning ascribed to it in the forepart of this Agreement. "Subsidiary" means any Person in which the Company, directly or indirectly through Subsidiaries or otherwise, beneficially owns more than fifty percent (50%) of either the equity interests in, or the voting control of, such Person. "Taxes" means any tax, fee, levy, charge, or other amount assessed by or payable to any Governmental or Regulatory Authority, including without limitation any interest, penalty, or other amount related thereto. "Vested Shares" shall have the meaning ascribed to it in Section 1.03(b). (b) Construction of Certain Terms and Phrases. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement; (iv) the terms "Article" or "Section" refer to the specified Article or Section of this Agreement; and (v) the phrases "ordinary course of business" and "ordinary course of business consistent with past practice" refer to the business and practice of the Company or a Subsidiary. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP or Canadian GAAP, as applicable. ARTICLE XI MISCELLANEOUS 11.01 Notices. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally or by facsimile transmission or mailed (first class postage prepaid) to the parties at the following addresses or facsimile numbers: If to Seller, addressed to: Spartan Multimedia, Inc. 26 Rocky Ridge Landing NW Calgary, Alberta Canada T3G 4E5 With a copy to: Tingle & Associates Suite 1250 Standard Life Building 639-5th Avenue S.W. Calgary, Alberta TRP 0M9 Attn: Bryce C. Tingle Facsimile: (403) 571-8008 If to Purchaser or NetGateway, addressed to: NetGateway, Inc. 300 Oceangate, 5th Floor Long Beach, CA 90802 Attn: Don Corliss, Jr., President Fax: (562) 308-0021 With a copy to: Nida & Maloney, P.C. 800 Anacapa Street Santa Barbara, CA 93101 Attn: C. Thomas Hopkins, Esq. Fax: (805) 568-1955 All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon i, and (iii) if delivered by mail in the manner described above to the address as provided in this Section, be deemed given upon receipt (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice, request or other communication is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other party hereto. 11.02 Entire Agreement. This Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter hereof, including without limitation that certain letter agreement between the parties dated October 30, 1998 and contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof. 11.03 Expenses. Within thirty (30) days of the Closing, Purchaser shall reimburse the Selling Stockholders for their reasonable expenses incurred in consummating the transactions contemplated herein; provided, however, that Purchaser shall only be obligated to reimburse the Selling Stockholders for up to an aggregate of Twenty-Five Thousand Dollars ($25,000.00) and the any such expenses must be approved by Purchasers prior to their being incurred. Except for the foregoing, whether or not the transactions contemplated hereby are consummated, each party will pay its own costs and expenses, and the Selling Stockholders shall pay the costs and expenses of the Company, incurred in connection with the negotiation, execution and closing of this Agreement and the transactions contemplated hereby. 11.04 Public Announcements. At all times at or before the Closing, the Selling Stockholders and Purchaser will not issue or make any reports, statements or releases to the public or generally to the employees, customers, suppliers or other Persons to whom the Company sells goods or provides services or with whom the Company otherwise has significant business relationships, with respect to this Agreement or the transactions contemplated hereby without the consent of the other, which consent shall not be unreasonably withheld. If either party is unable to obtain the approval of its public report, statement or release from the other party and such report, statement or release is, in the opinion of legal counsel to such party, required by Law in order to discharge such party's disclosure obligations, then such party may make or issue the legally required report, statement or release and promptly furnish the other party with a copy thereof. Purchaser may without obtaining the Selling Stockholders' approval, issue one or more press releases following the Closing announcing the consummation of the transactions contemplated by this Agreement. 11.05. Each party hereto will hold, and will use its best efforts to cause its Affiliates, and their respective Representatives to hold, in strict confidence from any Person (other than any such Affiliate or Representative), unless (i) compelled to disclose 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 or (ii) disclosed in an Action or Proceeding brought by a party hereto in pursuit of its rights or in the exercise of its remedies hereunder, all documents and information concerning the other party or any of its Affiliates furnished to it by the other party or such other party's Representatives in connection with this Agreement or the transactions contemplated hereby, except to the extent that such documents or information can be shown to have been (a) previously known by the party receiving such documents or information, (b) in the public domain (either prior to or after the furnishing of such documents or information hereunder) through no fault of such receiving party or (c) later acquired by the receiving party from another source if the receiving party is not aware that such source is under an obligation to another party hereto to keep such documents and information confidential; provided that following the Closing the foregoing restrictions will not apply to Purchaser's use of documents and information concerning the Company furnished by Sellers hereunder. In the event the transactions contemplated hereby are not consummated, upon the request of the other party, each party hereto will, and will cause its Affiliates and their respective Representatives to, promptly redeliver or cause to be redelivered all copies of documents and information furnished by the other party in connection with this Agreement or the transactions contemplated hereby and destroy or cause to be destroyed all notes, memoranda, summaries, analyses, compilations and other writings related thereto or based thereon prepared by the party furnished such documents and information or its Representatives. 11.06 Section 85. Purchaser and the Company shall, at the written request of the Selling Stockholders, exercise jointly with the Selling Stockholders, an election in the form prescribed for the purposes of Section 85 of the Income Tax Act (Canada). 11.07 Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not alternative. 11.08 Amendment. This Agreement may be amended, supplemented or modified only by a written instrument duly executed by or on behalf of each party hereto. 11.09 No Third Party Beneficiary. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person other than any Person entitled to indemnity under Article VIII. 11.10 No Assignment; Binding Effect. Neither this Agreement nor any right, interest or obligation hereunder may be assigned by any party hereto without the prior written consent of the other party hereto and any attempt to do so will be void, except for assignments and transfers by operation of Law. Subject to the preceding sentence, this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns. Notwithstanding this Section 11,09 and the restrictions set forth in Section 1.02 hereof, in the event of a Selling Stockholder's death, all right, title and interest of Sellers in the Exchangeable Shares may be transferred to a successor or assign of such Selling Stockholder (or by operation of intestate laws). 11.11 Headings. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. 11.12 Consent to Jurisdiction and Service of Process. Subject to the provisions of Section 9.06, each party hereby irrevocably submits to the non-exclusive jurisdiction of the federal and state courts located in Los Angeles, California in any such action, suit or proceeding arising out of or relating to this Agreement or any of the transactions contemplated hereby, provided, however, that such consent to jurisdiction is solely for the purpose referred to in this Section 11.11 and shall not be deemed to be a general submission to the jurisdiction of said courts or in the State of California other than for such purpose. Each party hereby irrevocably waives, to the fullest extent permitted by Law, any objection that it may now or hereafter have to the laying of the venue of any such action, suit or proceeding brought in such a court and any claim that any such action, suit or proceeding brought in such a court has been brought in an inconvenient forum. Nothing herein shall affect the right of any party to serve process in any other manner permitted by Law or to commence legal proceedings or otherwise proceed against the other in any other jurisdiction. 11.13 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future Law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, and (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. 11.14 Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of California applicable to a Contract executed and performed in such State, without giving effect to the conflicts of laws principles thereof. 11.15 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Signatures may be exchanged by telecopy, with original signatures to follow. Each of the parties hereto agrees that it will be bound by its own telecopied signature and that it accepts the telecopied signatures of the other parties to this Agreement. The original signature pages shall be forwarded to the Purchaser or its counsel and the Purchaser or its counsel will provide all of the parties hereto with a copy of the entire Agreement. 11.16 Registration Rights; Additional NetGateway Obligation. As an additional condition to the Closing, the parties shall enter into the Registration Rights Agreement attached hereto as Exhibit L. In the event that Purchaser is unable for any reason to retract the Exchangeable Shares as contemplated by Article 5 of the Purchaser's Articles of Incorporation, then if requested in writing by the Selling Stockholders, NetGateway will pay the Retraction Price (as defined in such Articles) directly to the Selling Stockholders. [Signatures on following page] IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officer of each party hereto as of the date first above written. PURCHASER: STORESONLINE.COM LTD., an Alberta corporation By: /s/ Donald M. Corliss, Jr. ------------------------------------ Name: Donald M. Corliss, Jr. Title: President NETGATEWAY: NETGATEWAY, INC., a Nevada corporation By: /s/ Donald M. Corliss, Jr. ------------------------------------ Name: Donald M. Corliss, Jr. Title: President /s/ David Rosenvall SELLING STOCKHOLDERS --------------------------------------- David Rosenvall /s/ Jordi MacDonald --------------------------------------- Jordi MacDonald /s/ Clint McKinlay --------------------------------------- Clint McKinlay /s/ Shawn Abbot --------------------------------------- Shawn Abbot /s/ Dan Freedman --------------------------------------- Dan Freedman /s/ Cani Services Inc. --------------------------------------- Cani Services Inc. /s/ Gerald W. Moore --------------------------------------- Gerald W. Moore /s/ Ed Warner --------------------------------------- Ed Warner DISCLOSURE SCHEDULE Disclosure Schedule - [November 1, 1998] 4.01 Authority 4.02 Organization NetGateway is qualified to do business and in good standing in the state of California and is incorporated and in good standing in the state of Nevada. 4.03 Capital Stock None 4.03 Subsidiaries o NetGateway, a Nevada corporation o eKnowledge, a Nevada corporation o StoresOnline.com, Inc., a California corporation o StoresOnline.com, Ltd., a Canadian corporation 4.04 No Conflicts None 4.06 Governmental Approvals and Filings None 4.07 Books and Records None 4.08 (a) Financial Statements Unaudited financial statements of NetGateway for the period ended September 30, 1998. 4.09 Undisclosed Liabilities None 4.10 Legal Proceedings None 4.11 Compliance with Laws and Orders None 4.12 Employee Benefit and Compensation Plans o Compensation - cash plus options. o Medical, dental, and vision insurance coverage for each employee and one dependent are paid by NetGateway. Coverage for additional dependents is available at the employees' expense. o Sick Leave - 40 hours per calendar year. Sick leave cannot be carried into the following year and will not be paid out at the end of the year or upon termination of employment. o Vacation Leave - 80 hours per calendar year after 1 year of continuous employment. 4.13 Real Property NetGateway leases and occupies approximately 4,400 square feet of office space at 300 Oceangate, Suite 500, Long Beach, CA 90802. 4.14 Tangible Personal Property and Investment Assets Secured promissory note in the principal amount of $800,000 payable to NetGateway by Admor Memory Corporation. 4.15 Intellectual Property Rights o Applications for the trademarks, tradenames and service marks used in connection with NetGateway's business are pending o Prosoft Training License pursuant to which NetGateway has the non-exclusive right to reproduce and sell certain Prosoft courseware titles in the educational market [NetGateway is currently negotiating with Prosoft to give up its right to exclusivity in the educational market in consideration for the termination of its continuing obligations under this license] o Prosoft Training License pursuant to which NetGateway has the exclusive right to reproduce and sell certain Prosoft courseware titles in the federal government market 4.16 Insurance Name of Insurer: Cigna Name of Insured: NetGateway, Inc. Expiration Date: 01/22/99 Annual Premium: $20,000 Payment Terms: Monthly Type of Coverage: Computer related technology errors and omissions based on $10,000,000 limit. Name of Insurer: Hartford Fire Insurance Company Name of Insured: NetGateway, Inc. Expiration Date: 01/22/99 Annual Premium: $5,300 Payment Terms: Annual Type of Coverage: Comprehensive Business Liability including bodily injury and property damage liability. $1,000,000 each occurrence and $2,000,000 general aggregate. 4.17 Affiliate Transactions NetGateway resells the help desk support services of Action Call, a Limited Liability Company, which is owned by a member of NetGateway's Board of Directors 4.18 Employees; Labor Relations None 4.19 Powers of Attorney None 4.20 Brokers None 4.21 Taxes None 4.22 Accounts Receivable None 4.23 Disclosure None 4.24 Contracts o Office Lease Agreement o Employment Agreements o Vendor Service Agreements - Nida & Maloney - Legal - KPMG Peat Marwick - Accounting - BSMG Worldwide - Corporate Communications - North Coast Capital - Consulting - Burchmont Equities Group - Consulting - DeMonte Associates - Investor Relations - PaymentNet Inc. - Payment Processing o Customer Contracts - Admor Memory Corp. - Westin Bonaventure Hotel - ImageOne - Satisbuy - JD Power & Associates - Advanced Business Graphics o Agreements Related to the Acquisition of Assets or Intellectual Property - NetGateway transferred 400,000 shares of NetGateway common stock to Digital Genesis, a Limited Liability Company ("Digital Genesis"), in consideration for substantially all of the assets of Digital Genesis - NetGateway transferred 35,000 shares of NetGateway common stock to Shopping Planet, in consideration for the rights to certain software developed by Shopping Planet and the services of an employee on a consultancy basis 4.25 Licenses o Prosoft Educational Training License o Prosoft Government Training License o Microsoft Certification EXHIBIT D PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT (this "Agreement") is made as of November 1, 1998 by and among the individuals listed on the signature pages hereto (the "Selling Stockholders"), STORESONLINE.COM LTD., an Alberta corporation ("Buyer") and NETGATEWAY, INC., a Nevada corporation ("NetGateway"). R E C I T A L S WHEREAS, the Selling Stockholders, NetGateway and Buyer have entered into the Stock Purchase Agreement dated as of November 1, 1998 (the "Stock Purchase Agreement"); WHEREAS, in connection with the consummation of the Stock Purchase Agreement, the Selling Stockholders will be entitled to receive, subject to adjustment as provided therein, up to 260,000 restricted Exchangeable Shares of Buyer (referred to herein as the "Shares"); and WHEREAS, pursuant to the Stock Purchase Agreement, the Selling Stockholders hereby agree to pledge the Shares as security for their indemnification obligations under the Stock Purchase Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows Section 1. Definitions and Interpretation Section 1.01. Certain Defined Terms. Capitalized terms used herein without definition shall have the meanings set forth in the Stock Purchase Agreement. In addition, the following terms shall have the following meanings under this Agreement: "Collateral" shall have the meaning assigned to that term in Section 2.01. "Collateral Account" shall have the meaning assigned to that term in Section 3.01. "Obligations" shall mean collectively: (i) All obligations, covenants, agreements, and liabilities of the Selling Stockholders to Buyer, in connection with the Stock Purchase Agreement or any Exhibits thereto; (ii) Any and all other indebtedness of the Selling Stockholders to Buyer now or hereafter owing, whether direct or indirect, primary or secondary, fixed or contingent, joint or several, regardless of how evidenced or arising; (iii) All obligations of the Selling Stockholders under this Agreement; and (iv) Any extensions or renewals of all such obligations described in clauses (i) through (iii) above, whether or not any extension agreements or renewal instruments are executed. "Pledged Stock" shall have the meaning assigned to that term in Section 2.01(A). "Stock Collateral" shall have the meaning assigned to that term in Section 2.01(A). "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in the State of California from time to time or, by reason of mandatory application, any other applicable jurisdiction. Section 1.02. Interpretation. In this Agreement, unless otherwise indicated, the singular includes the plural and plural the singular; words importing any gender include the others; references to statutes or regulations are to be construed as including all statutory or regulatory provisions consolidating, amending or replacing the statute or regulation referred to; references to "writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to articles, sections (or subdivisions of sections), exhibits, annexes or schedules are to this Agreement; references to agreements and other contractual instruments shall be deemed to include all subsequent amendments, extensions and other modifications to such instruments; and references to persons and entities include their respective permitted successors and assigns. Section 2. Collateral Section 2.01. Grant. As security for the full and prompt payment and faithful performance of the Obligations, the Selling Stockholders hereby absolutely and unconditionally PLEDGE, HYPOTHECATE, TRANSFER, ASSIGN, SET OVER AND DELIVER to Buyer, for the benefit of Buyer and grant to Buyer, for the same benefit, a continuing security interest in all of the Selling Stockholders' right, title and interest in and to the following property, whether now owned or hereafter acquired by the Selling Stockholders and whether now existing or hereafter coming into existence (collectively, the "Collateral"): (A) (i) all of the Shares represented by the certificates therefor and all other Shares of capital stock of whatever class of the Buyer or NetGateway, now owned or hereafter acquired by the Selling Stockholders, including the NetGateway common stock for which the Shares are exchangeable, together with, in each case, the certificates representing the same (collectively, the "Pledged Stock"); and (ii) all shares, monies or property representing a dividend on, or a distribution or return of capital in respect of any of the Pledged Stock, resulting from a split-up, revision, reclassification or other like change of any of the Pledged Stock or otherwise received in exchange for any of the Pledged Stock and any and all other rights issued to the holders of, or otherwise in respect of, any of the Pledged Stock (collectively, and together with the property described in clause (i) above, the "Stock Collateral"). (B) to the extent related to all or any part of the other Collateral, all books, correspondence, credit files, records, invoices, tapes, cards, computer runs and other papers and documents in the possession or under the control of the Selling Stockholders or any computer bureau or service Buyer from time to time acting for the Selling Stockholders; and (C) all proceeds and products of and to any of the property of the Selling Stockholders described in clause (A) of this Section 2.01. Section 2.02. Perfection. Concurrently with the execution and delivery of this Agreement, the Selling Stockholders shall (i) deliver to Buyer all certificates for the Shares, accompanied by undated stock powers duly executed in blank and (ii) take all such other reasonable actions as shall be necessary or as Buyer may request to perfect and establish the priority of the liens granted by this Agreement. Section 2.03. Preservation and Protection of Security Interests. The Selling Stockholders shall: (A) upon the acquisition after the date hereof by the Selling Stockholders of any Stock Collateral, promptly notify Buyer in writing of such acquisition and either (i) transfer and deliver to Buyer all such Stock Collateral (together with any certificates representing such Stock Collateral duly endorsed in blank or accompanied by undated stock powers duly executed in blank) or (ii) take such other action as Buyer shall deem necessary or appropriate to perfect, and establish the priority of, the liens granted by this Agreement in such Stock Collateral; and (B) give, execute, deliver, file or record any and all financing statements, notices, contracts, agreements or other instruments, obtain any and all governmental approvals and take any and all steps that may be necessary or as Buyer may request to create, perfect, establish the priority of, or to preserve the validity, perfection or priority of, the liens granted by this Agreement or to enable Buyer to exercise and enforce its rights, remedies, powers and privileges under this Agreement with respect to such liens, including causing any or all of the Stock Collateral to be transferred of record into the name of Buyer or its nominee (and Buyer agrees that if any Stock Collateral is transferred into its name or the name of its nominee, Buyer will thereafter promptly give to the Selling Stockholders copies of any notices and communications received by it with respect to the Stock Collateral pledged by the Selling Stockholders). Section 2.04. Attorney-in-Fact. Subject to the rights of the Selling Stockholders under Section 2.05, Buyer is hereby appointed the attorney-in-fact of the Selling Stockholders for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instruments which Buyer may deem necessary or advisable to accomplish the purposes of this Agreement, to preserve the validity, perfection and priority of the liens granted by this Agreement and, following any default of the Obligations, to exercise its rights, remedies, powers and privileges under this Agreement, and to transfer the Collateral and to collect the proceeds thereof. This appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Buyer shall be entitled under this Agreement upon the occurrence and continuation of any default under the Obligations until such default is timely cured (i) to ask, demand, collect, sue for, recover, receive and give receipt and discharge for amounts due and to become due under and in respect of all or any part of the Collateral; (ii) to receive, endorse and collect any drafts, instruments, documents and chattel paper in connection with clause (i) above; (iii) to file any claims or take any action or proceeding that Buyer may deem necessary or advisable for the collection of all or any part of the Collateral; and (iv) to execute, in connection with any sale or disposition of the Collateral under Section 5, any endorsements, assignments, bills of sale or other instruments of conveyance or transfer with respect to all or any part of the Collateral. Section 2.05. Special Provisions Relating to Stock Collateral. (A) So long as no default of the Obligations shall have occurred and be continuing, the Selling Stockholders shall have the right to exercise any voting, consensual and other powers of ownership pertaining to the Stock Collateral for all purposes not inconsistent with the terms of the Stock Purchase Agreement or any of the documents related thereto, provided that the Selling Stockholders agree that they will not vote the Stock Collateral in any manner that is inconsistent with the terms hereof or of the Stock Purchase Agreement or any of the documents related thereto; and Buyer shall, at the Selling Stockholders' expense, execute and deliver to the Selling Stockholders or cause to be executed and delivered to the Selling Stockholders any such proxies, powers of attorney, dividend and other orders and other instruments, without recourse, as the Selling Stockholders may reasonably request for the purpose of enabling the Selling Stockholders to exercise any rights and powers which they are entitled to exercise pursuant to this Section 2.05(A). (B) So long as no default of the Obligations shall have occurred and be continuing, the Selling Stockholders shall be entitled to receive and retain any dividends on the Stock Collateral paid in cash out of earned surplus. (C) If any default of the Obligations shall have occurred and be continuing, all dividends and other distributions on the Stock Collateral shall be paid directly to Buyer and retained by it, and, if Buyer shall so request, the Selling Stockholders agree to execute and deliver to Buyer appropriate additional dividend, distribution and other orders and instruments to that end. Section 2.06. Rights and Obligations. No reference in this Agreement to proceeds or to the sale or other disposition of Collateral shall authorize the Selling Stockholders to sell or otherwise dispose of any Collateral. Section 2.07. Termination. This Agreement shall terminate one (1) year from the Closing Date of the Stock Purchase Agreement, provided, that, Buyer has no claims pending with respect to the Stock Purchase Agreement, any document related thereto, or any of the Obligations and Buyer shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect of the Collateral, to or on the order of the Selling Stockholders. The obligations of the Selling Stockholders under this Agreement shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of the Selling Stockholders or any other Person or any other application of funds (including the proceeds of any collateral for all or any part of the Obligations) in respect of all or any part of the Obligations is rescinded or must be otherwise restored by any holder of such Obligations, whether as a result of any proceedings in bankruptcy, reorganization or otherwise, and the Selling Stockholders agree that they will indemnify Buyer on demand for all reasonable costs and expenses (including fees and expenses of counsel) incurred by Buyer in connection with such rescission or restoration. Section 3. Representations and Warranties As of the date hereof, the Selling Stockholders, jointly and severally, represent and warrant to Buyer: Section 3.01 Title. Each Selling Stockholder is the sole beneficial owner of the Collateral in which he purports to grant a lien pursuant to this Agreement, and such Collateral is free and clear of all liens (and, with respect to the Stock Collateral, no right or option to acquire the same exists in favor of any other Person). The liens granted by this Agreement in favor of Buyer for the benefit of Buyer have attached and constitute a perfected security interest in all of such Collateral prior to all other liens. Section 3.02. Pledged Stock. (A) Except as set forth herein and in the Support Agreement entered into among the parties on the date hereof, none of such Pledged Stock is subject to any contractual restriction. (B) After giving effect to the transactions contemplated by the Stock Purchase Agreement, as of the Closing Date, the Pledged Stock constitutes all of the issued and outstanding Shares of capital stock of all classes of the Buyer or NetGateway beneficially owned by the Selling Stockholders on the date hereof (whether or not registered in the name of any Selling Stockholder). Section 4. Covenants. Section 4.01. Sales and Other Liens. Without the prior written consent of Buyer, the Selling Stockholders shall not assign, sell, transfer, pledge, encumber or dispose of any Collateral, create, incur, assume or suffer to exist any lien upon any Collateral or file or suffer to be on file or authorize to be filed, in any jurisdiction, any financing statement or like instrument with respect to all or any part of the Collateral; Section 4.02. Further Assurances. The Selling Stockholders agree that, from time to time upon the written request of Buyer, the Selling Stockholders will execute and deliver such further documents and do such other acts and things as Buyer may reasonably request in order to fully effect the purposes of this Agreement. Section 5. Remedies Section 5.01. Events of Default, Etc. If any default of the Obligations shall have occurred and be continuing: (A) Buyer in its discretion may, in its name or in the name of any Selling Stockholders or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for all or any part of the Collateral, but shall be under no obligation to do so; (B) Buyer in its discretion may, upon ten business days prior written notice to the Selling Stockholders of the time and place, with respect to all or any part of the Collateral which shall then be or shall thereafter come into the possession, custody or control of Buyer or its agents, sell or otherwise dispose of all or any part of such Collateral, at such place or places as Buyer deems best, for cash, for credit or for future delivery (without thereby assuming any credit risk) and at public or private sale, without demand of performance or notice of intention to effect any such disposition or of time or place of any such sale (except such notice as is required above or by applicable statute and cannot be waived), and Buyer or any other Person may be the Buyer or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale) and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Selling Stockholders, or any such demand, notice and right or equity being hereby expressly waived and released. Buyer may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned; and (C) Buyer shall have, and in its discretion may exercise, all of the rights, remedies, powers and privileges with respect to the Collateral of a Buyer under the Uniform Commercial Code (whether or not the Uniform Commercial Code is in effect in the jurisdiction where such rights, remedies, powers and privileges are asserted) and such additional rights, remedies, powers and privileges to which a Buyer is entitled under the laws in effect in any jurisdiction where any rights, remedies, powers and privileges in respect of this Agreement or the Collateral may be asserted, including the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if Buyer were the sole and absolute owner of the Collateral (and the Selling Stockholders agree to take all such action as may be appropriate to give effect to such right). The proceeds of, and other realization upon, the Collateral by virtue of the exercise of remedies under this Section 5.01 shall be applied in accordance with Section 5.04. Section 5.02. Deficiency. If the proceeds of, or other realization upon, the Collateral by virtue of the exercise of remedies under Section 5 are insufficient to cover the costs and expenses of such exercise and the payment in full of the other Obligations, the Selling Stockholders shall remain liable for any deficiency to the extent and only to the extent the Selling Stockholders shall otherwise be liable for such Obligations. Section 5.03. Private Sale. Buyer shall incur no liability as a result of the sale, lease or other disposition of all or any part of the Collateral at any private sale pursuant to Section 5 conducted in a commercially reasonable manner. The Selling Stockholders hereby waive any claims against Buyer arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if Buyer accepts the first offer received and does not offer the Collateral to more than one offered. The Selling Stockholders recognize that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and other applicable Shares laws, Buyer may be compelled, with respect to any sale of all or any part of the Collateral, to limit Buyers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to distribution or resale. The Selling Stockholders acknowledge that any such private sales may be at prices and on terms less favorable to Buyer than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Buyer shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the respective issuer of such Collateral to register it for public sale. Section 5.04. Application of Proceeds. Except as otherwise expressly provided in this Agreement and except as provided below in this Section 5.04, the proceeds of, or other realization upon, all or any part of the Collateral by virtue of the exercise of remedies under this Section 5 or this Section 5, shall be applied by Buyer: First, to the payment of the costs and expenses of such exercise of remedies, including reasonable out-of-pocket costs and expenses of Buyer, the fees and expenses of its agents and counsel and all other expenses incurred and advances made by Buyer in that connection; Next, to the payment in full of the remaining Obligations; and Finally, to the payment to the Selling Stockholders, or their respective successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining. As used in this Section 5, "proceeds" of Collateral shall mean cash, shares and other property realized in respect of, and distributions in kind of, Collateral, including any property received under any bankruptcy, reorganization or other similar proceeding as to the Selling Stockholders or any issuer of, or account debtor or other obligor on, any of the Collateral. Section 6. Miscellaneous Section 6.01. Notices. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally or by facsimile transmission, recognized overnight courier (carriage prepaid) or mail (first class postage prepaid) to the parties at the following addresses or facsimile numbers: If to the Selling Stockholders, addressed to: 26 Rocky Ridge Landing NW Calgary, Alberta Canada T3G 4E5 With a copy to: Tingle & Associates Suite 1250 Standard Life Building 639-5th Avenue S.W. Calgary, Alberta TRP 0M9 Attn: Bryce C. Tingle Facsimile: (403) 571-8008 If to Buyer, addressed to: NetGateway, Inc. 300 Oceangate, 5th Floor Long Beach, CA 90802 Attn: Donald M. Corliss, Jr., President Fax : (562) 308-0021 With a copy to: Nida & Maloney, P.C. 800 Anacapa Street Santa Barbara, CA 93101 Attn: C. Thomas Hopkins, Esq. Fax: (805) 568-1955 Section 6.02. Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not alternative. Section 6.03. Amendment. This Agreement may be amended, supplemented or modified only by a written instrument duly executed by or on behalf of each party hereto. Section 6.04. Headings. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. Section 6.05. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future Law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance here from and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. Section 6.06. Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of California applicable to a contract executed and performed in such State without giving effect to the conflicts of laws principles thereof. Section 6.07. Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Signatures may be exchanged by telecopy, with original signatures to follow. Each of the parties hereto agrees that it will be bound by its own telecopied signature and that it accepts the telecopied signatures of the other parties to this Agreement. The original signature pages shall be forwarded to Buyer or its counsel and Buyer or its counsel will provide all of the parties hereto with a copy of the entire Agreement. Section 6.08. Dispute Resolution. Any dispute under this Pledge and Security Agreement shall be submitted to arbitration in accordance with the Stock Purchase Agreement. [Signature Page to Follow] IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officer of each party hereto as of the date first above written. BUYER: STORESONLINE.COM, an Alberta corporation By: ____________________________ Name: Title: NETGATEWAY, INC., A Nevada corporation By: ____________________________ THE SELLING STOCKHOLDERS: ________________________________ David Rosenvall ________________________________ Jordi MacDonald ________________________________ Clint McKinlay ________________________________ Name: ________________________________ Name: ________________________________ Name: ________________________________ Name: ________________________________ Name: EXHIBIT E EMPLOYMENT AGREEMENT This AGREEMENT is made and entered into as of this 1st day of November, 1998, between StoresOnline.com Ltd., an Alberta corporation (the "Company") and David Rosenvall (the "Executive"). WHEREAS, NetGateway, Inc. ("NetGateway") and the shareholders of Spartan Multimedia, Inc. ("Spartan") have entered into a Stock Purchase Agreement dated of even date herewith (the "Stock Purchase Agreement"); and WHEREAS, as a condition precedent to the consummation of the Stock Purchase Agreement, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment (the "Agreement") and the Executive desires to accept such employment and to enter into the Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company and the Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. All terms not otherwise defined herein shall have the meanings given such terms in the Stock Purchase Agreement. (a) "Affiliate" shall mean any corporation, partnership or other entity in which the Company owns, directly or indirectly, an equity interest of 50% or more or which owns, directly or indirectly, an equity interest of 50% in the Company. (b) "Board" shall mean the Board of Directors of the Company. (c) "Cause" shall mean (i) the Executive is convicted of a felony involving moral turpitude, (ii) the Executive, in carrying out his duties under this Agreement, is guilty of continued willful gross neglect or continued willful gross misconduct resulting, in either case, in material economic harm to the Company, unless such act, or failure to act, was believed by the Executive in good faith to be in the best interests of the Company or any Affiliate, (iii) the breach by Executive of Sections 8, 9 or 10 hereof, or (iv) any other action or inaction that a court of competent jurisdiction in Alberta has deemed or deems to be just cause for termination. (d) "Confidential Information" shall mean all nonpublic information respecting the Company's business including, but not limited to, its products, research and development, processes, customer lists, marketing plans and strategies and any other trade secrets. Confidential information does not include information that is, or becomes, available to the public unless such availability occurs through an unauthorized act on the part of the Executive. (e) "Disability" shall mean the Executive's inability to render, for 180 consecutive days, full and effective services hereunder by reason of permanent physical or mental disability, whether resulting from illness, accident or otherwise. (f) "Salary" shall mean the salary provided for in Section 3 of this Agreement or any adjusted salary granted to the Executive by the Board. (g) "Salary Continuation Period" shall mean the period after the termination of the Executive's employment pursuant to the terms of this Agreement during which the Executive is entitled to continued payment of the Salary. (h) "Term of this Agreement" shall mean that period of time specified in Section 2(b). (i) "Term of Employment" shall mean the period of the Executive's employment by the Company. 2. Term of Agreement, Position and Duties. (a) The Company hereby employs the Executive and the Executive hereby accepts employment with the Company for the Term of this Agreement in the position and with the duties and responsibilities set forth below and upon such other terms and conditions as are hereinafter stated. (b) The term of this Agreement shall commence as of November __, 1998 and shall terminate upon the first to occur of (i) the termination of this Agreement as provided herein or (ii) three years from such date. (c) During the Term of this Agreement, the Executive shall be employed as President of the Company. During the time as he serves in this position, the Executive shall serve under the direction of and report directly to the Board of Directors of the Company. During the Term of Employment, the Executive agrees to devote his full time and attention to carrying out his duties and responsibilities hereunder and shall use his best efforts, skills and abilities to further the interests of the Company. Notwithstanding the foregoing, the Executive shall be entitled to complete any consulting agreements with third parties in effect on the date hereof and to consult on any other non-commercial matters, provided that such consulting does not materially adversely affect the performance of Executive's duties. During the Term of Employment, the Executive may not serve on the board of directors of any other business entities without the express written permission of the Board and subject to such limitations as may be imposed by the Board in granting such permission. 3. Salary. During the Term of this Agreement, the Executive shall be paid a salary at the annual rates set forth below by the Company. Such salary shall be payable in accordance with the Company's standard payroll practice and subject to the other provisions of this Section 3. The Executive shall receive a salary at an annual rate of Forty Thousand Dollars ($40,000 USD) for the first ninety (90) days following the date hereof. Following such 90-day period, the Executive shall receive a salary at an annual rate of Sixty Thousand Dollars ($60,000 USD) (the "Pre-Profit Rate") until the Company is profitable. Once the Company is profitable, the Executive shall be entitled to receive a minimum salary at an annual rate of Eighty Thousand Dollars ($80,000.00 USD) or such portion thereof as can be paid out of the "profits" of the Company, but in no event less than the Pre-Profit Rate. Notwithstanding the foregoing, once the Company is profitable for two consecutive fiscal quarters, the Executive shall be entitled to receive a minimum annual salary of Eighty Thousand Dollars ($80,000 USD). Such salary shall be reviewed at least annually for adjustment. Subject to the other provisions of this Section 3, any adjustment shall be determined by the Board, in its sole discretion. For purposes hereof, "profits" shall be determined based on EBITDA in accordance with GAAP, and NetGateway, the Company's parent, will only charge the Company for expenses which are Company-specific and will not charge the Company for any of the general operating expenses of NetGateway. The Company shall reimburse Executive for reasonable out-of-pocket expenses incurred by the Executive in the performance of his duties in accordance with the Company's standard practices. 4. Annual Bonus. During the Term of Employment, the Board may grant the Executive an annual bonus. The amount of such annual bonus, if any, shall be determined by the Board, in its sole discretion. 5. Employee Benefit Programs. During the Term of this Agreement, the Executive shall be eligible to participate in employee benefit plans and programs available, from time to time, to all senior executives of the Company. Specifically, the Executive shall be entitled to the current annual vacation entitlement as set by the Board, but not less than 10 business days of vacation for each employment year with the Company. The Executive shall be entitled to a pro rata share of an annual accrual for fractional years of employment with the Company. 6. Termination of Employment. (a) Termination Due to Death. In the event of the death of the Executive during the Term of this Agreement, this Agreement shall immediately terminate and the estate or other legal representative of the Executive shall be entitled to: (i) Salary at the rate in effect at the time of the Executive's death, through the end of the month in which his death occurs; and (ii) any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of his death, determined in accordance with the applicable terms and provisions of such programs. (b) Termination Due to Disability. The Company may terminate the Executive's employment due to the Disability of the Executive. In the event of such a termination of the Executive's employment due to Disability during the Term of this Agreement, this Agreement shall immediately terminate and the Executive shall be entitled to: (i) Salary at the rate in effect at the time the Executive's Disability is deemed to have commenced, through the date on which he is terminated due to Disability; and (ii) any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of his Termination Due to Disability, determined in accordance with the applicable terms and provisions of such programs. (c) Termination for Cause. The Executive's employment may be terminated immediately by the Company for Cause. In the event the Executive's employment is terminated for Cause during the Term of this Agreement, the Executive shall be entitled to: (i) Salary at the rate in effect at the time of the Termination for Cause, through the date on which such Termination for Cause occurs; and (ii) any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of the Termination for Cause, determined in accordance with the applicable terms and provisions of such programs. (d) Termination Without Cause. The Executive's employment under this Agreement may be terminated without Cause, as provided in this subsection. "Termination Without Cause" shall mean a termination of the Executive's employment by the Company during the Term of this Agreement other than due to death, due to Disability or for Cause. In the event there is a Termination Without Cause of the Executive's employment, the Executive shall be entitled to: (i) Salary at the rate in effect immediately prior to the Termination Without Cause, for a period which shall end upon the earlier of (x) the end of the ninth month following such termination of employment or (y) the Executive's reemployment in a position comparable to that which he held with the Company immediately prior to the termination of his employment ("Comparable Reemployment"), provided, however, any Salary due the Executive under this subsection shall be off-set by any compensation earned by the Executive in respect of reemployment other than Comparable Reemployment, or consulting services provided, during the Salary Continuation Period; and (ii) for the length of the Salary Continuation Period, any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of his Termination Without Cause, determined in accordance with the applicable terms and provisions of such programs; and (iii) any bonus awarded but not yet paid at the time of Executive's Termination Without Cause. provided, however, that if at any time during the Salary Continuation Period, the Company becomes aware of any action on the part of the Executive that would constitute grounds for termination of the Executive's employment by the Company for Cause, the Company shall be under no obligation to make any payments or provide any rights or other benefits due under this Agreement. Any payments received by the Executive under this Agreement that are attributable to the termination of the Executive's employment shall be in full and complete satisfaction of any and all claims the Executive may have against the Company which are, in any way, related to the employment relationship between the Executive and the Company. (e) Contingent Shares. In the event that there is a Termination Without Cause of Executive's employment prior to the Third Anniversary Date, NetGateway shall be obligated to issue to Executive his Percentage Interest of any unissued Contingent Shares. The foregoing shall not apply in the event that Executive resigns or there is Termination for Cause. In such event, NetGateway's only obligation shall be to issue to Executive that portion of such Executive's Percentage Interest of the Contingent Shares to which Executive is entitled in accordance with Section 1.03 of the Stock Purchase Agreement. 7. Indemnification. (a) The Company agrees that if the Executive is made a party or is threatened to be made a party to any action, suit or proceeding by reason of the fact that he is or was a director or officer of the Company (a "Proceeding"), he shall be indemnified by the Company to the fullest extent authorized by Alberta law, consistent with the Company's certificate of incorporation (or charter) and by-laws, against expenses, liabilities and losses reasonably incurred or suffered by the Executive in connection therewith; provided, however: (i) written notice of such Proceeding is given promptly to the Company by the Executive; (ii) the Company is permitted to participate in and assume the defense of such Proceeding; and (iii) such liability results from the final judgment of a court of competent jurisdiction or, as a result of a settlement entered into with the prior written consent of the Company or is required (x) by such court as a bond, payment into escrow or similar payment, or (y) otherwise to forestall imminent attachment or similar process against any of the Executive's Stocks, and, provided further that the Company agrees to indemnify the Executive if he seeks indemnification in connection with a Proceeding (or part thereof) initiated by the Executive only if such Proceeding (or part thereof) was authorized by the Board. (b) Notwithstanding anything to the contrary in subsection (a) above, the Company shall be under no obligation to indemnify the Executive with respect to any act or acts of the Executive: (i) in a knowing violation of any written agreement between the Executive and the Company; (ii) for which a court, having jurisdiction in the matter, determines that indemnification is not lawful; or (iii) which a court, having jurisdiction in the matter, determines to have been knowingly and fraudulently committed by the Executive or which is the result of willful misconduct by the Executive. (c) D&O Insurance. To the extent available on commercially reasonable terms, the Company agrees to obtain a directors and officers liability insurance policy covering the Executive and this policy shall be maintained and provide coverage that is reasonable in relation to the Executive's position during the Term of Employment. 8. Covenant Not to Engage in Certain Acts. (a) During the Term of Employment, and for a period equal to the greater of (x) 12-months following the end of the Term of Employment or (y) the Salary Continuation Period, the Executive shall not, except when acting on behalf of the Company or an Affiliate: (i) take any action to divert any business from the Company, or from any Affiliate, or any business which was under active consideration by the Company, or by any Affiliate, during the Term of Employment; or (ii) induce customers, suppliers, agents, franchisees or other persons under contract or franchise or otherwise doing business with the Company, to terminate, reduce or alter business with or from the Company or any Affiliate. The subsections of this Section are intended by the Parties as separate and divisible provisions and if, for any reason, any one of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision shall thereby be affected. It is the intention of the Parties that the restrictions on the Executive's future employment imposed by this Section be reasonable in duration. If an Alberta court shall find that the 12-month period set forth in the first paragraph hereof is unreasonable, then the parties agree that the provisions hereof shall be applicable for a period of nine (9) months. If such nine (9) month period shall be deemed unreasonable by an Alberta court, then the parties agree that the provisions hereof shall be applicable for a period of six (6) months. The Executive understands that the provisions of this Section may limit his ability to earn a livelihood in a business similar to the business of the Company, but nevertheless believes that he shall receive sufficient remuneration and other benefits hereunder to justify the restrictions contained in such provisions which, given his education, skills and abilities, he does not believe would prevent him from earning a living. (b) The Executive agrees that for the Term of Employment and for the period described in subsection (a) above, except when acting on behalf of the Company or any Affiliate, he shall not induce any person in the employment of the Company or any Affiliate to (i) terminate such employment, (ii) accept employment with anyone other than the Company or any Affiliate or (iii) interfere with the business of the Company or any Affiliate in any material manner. (c) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement. 9. Inventions. (a) The Executive shall, during the Term of Employment, disclose to the Company, immediately after the same is made, discovered or devised, any improvement, process, development, discovery or invention (including works of authorship, trade secrets, technology, computer programs, formulas, compositions, ideas, designs, techniques and data, whether or not patentable or otherwise capable of being protected and whether or not related to technical or commercial matters) which he may make, discover or devise (alone or in conjunction with others) either: (i) in the course of his normal duties (or of duties specifically assigned to him); (ii) as a result of knowledge gained during his employment; or (iii) as a result of the use by the Executive of materials, equipment or facilities of the Company. Subject to subsection (b) below, all such items shall become the absolute property of the Company without further payment and the Executive shall satisfy his obligation in this regard by presenting the same to the Company. The Executive hereby assigns any and all rights in such items to the Company. The Executive shall not at any time during the Term of Employment (except in the performance of his duties) or thereafter, disclose any such improvement, process, development, discovery or invention to any third party and, further, shall, if and whenever required so to do by the Company (at the Company's expense), do all acts and things as the Company may reasonably require for obtaining any patent or other protection in respect thereof and vesting the same and all rights therein in the Company or as the Company may direct; provided that the above restriction shall not apply to any such improvement, process, development, discovery or invention which is or becomes generally available to the public other than as a result of disclosure by the Executive or by any person to whom he has made such disclosure. (b) In respect of any particular improvement, process, development, discovery or invention which is not covered by subsection (a) above, the Executive shall (before exploiting or disclosing the same or otherwise committing himself to a third party) discuss any such item with the Company. If the Executive shows, to the reasonable satisfaction of the Company, that any such item is not a corporate opportunity of the Company, then Executive shall be entitled thereafter to exploit or disclose such item. (c) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement, including, without limitation, his obligation to do all acts and other things that the Company may reasonably require for obtaining any patent or other protection in respect of any improvement, process, development, discovery, or invention, and his obligation to disclose to the Company, immediately after the same is made, discovered or devised, any improvement, discovery or invention as provided in subsection (a) above. 10. Covenants to Protect Confidential Information. (a) The Executive shall not, during the Term of Employment or thereafter, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership or corporation, except while employed by the Company in the business of and for the benefit of the Company or when required to do so by a lawful order of a court of competent jurisdiction, any Confidential Information. (b) Except as may be otherwise consented to in writing by the Company, the Executive shall proffer to an appropriate officer of the Company, at the termination of his employment, without retaining any copies, notes or excerpts thereof, all memoranda, diaries, notes, records, cost information, customer lists, marketing plans and strategies, and any other documents containing any Confidential Information made or compiled by, or delivered or made available to, or otherwise obtained by the Executive in his possession or subject to his control at such time except that the Executive may proffer a legible copy, and retain the original, of any personal diary or personal notes. (c) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement. 11. Remedy for Violation of Noncompetition, Confidential Information or Inventions Provisions. (a) The Executive acknowledges that the Company has no adequate remedy at law and would be irreparably harmed if the Executive breaches or threatens to breach the provisions of Sections 8, 9 or 10 above, and, therefore, agrees that the Company shall be entitled to injunctive relief to prevent any breach or threatened breach of any of those sections, and to specific performance of the terms of each of such section in addition to any other legal or equitable remedy it may have. The Executive further agrees that he shall not, in any equity proceeding involving him relating to the enforcement of Sections 8, 9, or 10 above, raise the defense that the Company has an adequate remedy at law. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity that it may have or any other rights that it may have under any other agreement. (b) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement. Notwithstanding anything herein to the contrary, in no event shall the Company be obligated to provide payments or benefits pursuant to this Section if, and to the extent, such payments or benefits would be nondeductible for Revenue Canada income tax purposes. Any determination to be made with respect to this clause shall be made by the Company's regular independent certified accountants. 12. Withholding. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 13. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits hereunder, which may be transferred only by will or operation of law and subject to the limitations of this Agreement. 14. Representation. The Executive represents and warrants that the performance of the Executive's duties under this Agreement will not violate any agreement between the Executive and any other person, firm, partnership, corporation or organization. 15. Mutual Intent. The language used in this Agreement is the language chosen by the Parties to express their mutual intent. The Parties agree that in the event that any language, section, clause, phrase or word used in this Agreement is determined to be ambiguous, no presumption shall arise against or in favor of either Party and that no rule of strict construction shall be applied against either Party with respect to such ambiguity. 16. Entire Agreement. This Agreement contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto. 17. Amendment or Waiver. No provision in this Agreement may be amended or waived unless such amendment or waiver is approved by the Board of Directors of the Company and set forth in a writing, signed by the Chairman of the Board of the Company. No waiver by the Company of any breach by the other Party of any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. 18. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 19. Survivorship. The respective rights and obligations of the Parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. The provisions of this Section are in addition to the survivorship provisions of any other section of this Agreement. 20. Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the province of Alberta. The Parties agree to submit exclusively to the jurisdiction of the courts of the province of Alberta with respect to any controversy, dispute or claim arising out of this Agreement. 21. Notices. Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered (whether by telecopy or otherwise) or two days after being sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give notice of: If to the Company: NetGateway, Inc. 300 Oceangate, 5th Floor Long Beach, CA 90802 Attn: Donald M. Corliss, Jr. With a copy to: Nida & Maloney, P.C. 800 Anacapa Street Santa Barbara, California 93101 Attn: C. Thomas Hopkins, Esq. If to the Executive: David Rosenvall __________________________________ __________________________________ __________________________________ With a copy to: Tingle & Associates Suite 1250, Standard Life Building 639-5th Avenue S.W. Calgary, Alberta T2P 0M9 Attn: Bryce C. Tingle, Esq. 22. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 23. Counterparts. This Agreement may be executed in two or more counterparts. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. STORESONLINE.COM LTD. By:________________________ EXECUTIVE ___________________________ David Rosenvall EXHIBIT F EMPLOYMENT AGREEMENT This AGREEMENT is made and entered into as of this 1st day of November, 1998, between StoresOnline.com Ltd., an Alberta corporation (the "Company") and Jordi MacDonald (the "Executive"). WHEREAS, NetGateway, Inc. ("NetGateway") and the shareholders of Spartan Multimedia, Inc. ("Spartan") have entered into a Stock Purchase Agreement dated of even date herewith (the "Stock Purchase Agreement"); and WHEREAS, as a condition precedent to the consummation of the Stock Purchase Agreement, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment (the "Agreement") and the Executive desires to accept such employment and to enter into the Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company and the Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. All terms not otherwise defined herein shall have the meanings given such terms in the Stock Purchase Agreement. (a) "Affiliate" shall mean any corporation, partnership or other entity in which the Company owns, directly or indirectly, an equity interest of 50% or more or which owns, directly or indirectly, an equity interest of 50% in the Company. (b) "Board" shall mean the Board of Directors of the Company. (c) "Cause" shall mean (i) the Executive is convicted of a felony involving moral turpitude, (ii) the Executive, in carrying out his duties under this Agreement, is guilty of continued willful gross neglect or continued willful gross misconduct resulting, in either case, in material economic harm to the Company, unless such act, or failure to act, was believed by the Executive in good faith to be in the best interests of the Company or any Affiliate, (iii) the breach by Executive of Sections 8, 9 or 10 hereof, or (iv) any other action or inaction that a court of competent jurisdiction in Alberta has deemed or deems to be just cause for termination. (d) "Confidential Information" shall mean all nonpublic information respecting the Company's business including, but not limited to, its products, research and development, processes, customer lists, marketing plans and strategies and any other trade secrets. Confidential information does not include information that is, or becomes, available to the public unless such availability occurs through an unauthorized act on the part of the Executive. (e) "Disability" shall mean the Executive's inability to render, for 180 consecutive days, full and effective services hereunder by reason of permanent physical or mental disability, whether resulting from illness, accident or otherwise. (f) "Salary" shall mean the salary provided for in Section 3 of this Agreement or any adjusted salary granted to the Executive by the Board. (g) "Salary Continuation Period" shall mean the period after the termination of the Executive's employment pursuant to the terms of this Agreement during which the Executive is entitled to continued payment of the Salary. (h) "Term of this Agreement" shall mean that period of time specified in Section 2(b). (i) "Term of Employment" shall mean the period of the Executive's employment by the Company. 2. Term of Agreement, Position and Duties. (a) The Company hereby employs the Executive and the Executive hereby accepts employment with the Company for the Term of this Agreement in the position and with the duties and responsibilities set forth below and upon such other terms and conditions as are hereinafter stated. (b) The term of this Agreement shall commence as of November __, 1998 and shall terminate upon the first to occur of (i) the termination of this Agreement as provided herein or (ii) three years from such date. (c) During the Term of this Agreement, the Executive shall be employed as Senior Vice President, Technology of the Company. During the time as he serves in this position, the Executive shall serve under the direction of and report directly to the President of the Company. During the Term of Employment, the Executive agrees to devote his full time and attention to carrying out his duties and responsibilities hereunder and shall use his best efforts, skills and abilities to further the interests of the Company. Notwithstanding the foregoing, the Executive shall be entitled to complete any consulting agreements with third parties in effect on the date hereof and to consult on any other non-commercial matters, provided that such consulting does not materially adversely affect the performance of Executive's duties. During the Term of Employment, the Executive may not serve on the board of directors of any other business entities without the express written permission of the Board and subject to such limitations as may be imposed by the Board in granting such permission. 3. Salary. During the Term of this Agreement, the Executive shall be paid a salary at the annual rates set forth below by the Company. Such salary shall be payable in accordance with the Company's standard payroll practice and subject to the other provisions of this Section 3. The Executive shall receive a salary at an annual rate of Thirty-Seven Thousand Five Hundred Dollars ($37,500 USD) for the first ninety (90) days following the date hereof. Following such 90-day period, the Executive shall receive a salary at an annual rate of Fifty-Six Thousand Two Hundred Fifty Dollars ($56,250 USD) (the Pre-Profit Rate") until the Company is profitable. Once the Company is profitable, the Executive shall be entitled to receive a minimum salary at an annual rate of Seventy-Five Thousand Dollars ($75,000.00 USD) or such portion thereof as can be paid out of the "profits" of the Company, but in no event less than the Pre-Profit Rate. Notwithstanding the foregoing, once the Company is profitable for two consecutive fiscal quarters, the Executive shall be entitled to receive a minimum annual salary of Seventy-Five Thousand Dollars ($75,000.00 USD). Such salary shall be reviewed at least annually for adjustment. Subject to the other provisions of this Section 3, any adjustment shall be determined by the Board, in its sole discretion. For purposes hereof, "profits" shall be determined based on EBITDA in accordance with GAAP, and NetGateway, the Company's parent, will only charge the Company for expenses which are Company-specific and will not charge the Company for any of the general operating expenses of NetGateway. The Company shall reimburse Executive for reasonable out-of-pocket expenses incurred by the Executive in the performance of his duties in accordance with the Company's standard practices. 4. Annual Bonus. During the Term of Employment, the Board may grant the Executive an annual bonus. The amount of such annual bonus, if any, shall be determined by the Board, in its sole discretion. 5. Employee Benefit Programs. During the Term of this Agreement, the Executive shall be eligible to participate in employee benefit plans and programs available, from time to time, to all senior executives of the Company. Specifically, the Executive shall be entitled to the current annual vacation entitlement as set by the Board, but not less than 10 business days of vacation for each employment year with the Company. The Executive shall be entitled to a pro rata share of an annual accrual for fractional years of employment with the Company. 6. Termination of Employment. (a) Termination Due to Death. In the event of the death of the Executive during the Term of this Agreement, this Agreement shall immediately terminate and the estate or other legal representative of the Executive shall be entitled to: (i) Salary at the rate in effect at the time of the Executive's death, through the end of the month in which his death occurs; and (ii) any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of his death, determined in accordance with the applicable terms and provisions of such programs. (b) Termination Due to Disability. The Company may terminate the Executive's employment due to the Disability of the Executive. In the event of such a termination of the Executive's employment due to Disability during the Term of this Agreement, this Agreement shall immediately terminate and the Executive shall be entitled to: (i) Salary at the rate in effect at the time the Executive's Disability is deemed to have commenced, through the date on which he is terminated due to Disability; and (ii) any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of his Termination Due to Disability, determined in accordance with the applicable terms and provisions of such programs. (c) Termination for Cause. The Executive's employment may be terminated immediately by the Company for Cause. In the event the Executive's employment is terminated for Cause during the Term of this Agreement, the Executive shall be entitled to: (i) Salary at the rate in effect at the time of the Termination for Cause, through the date on which such Termination for Cause occurs; and (ii) any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of the Termination for Cause, determined in accordance with the applicable terms and provisions of such programs. (d) Termination Without Cause. The Executive's employment under this Agreement may be terminated without Cause, as provided in this subsection. "Termination Without Cause" shall mean a termination of the Executive's employment by the Company during the Term of this Agreement other than due to death, due to Disability or for Cause. In the event there is a Termination Without Cause of the Executive's employment, the Executive shall be entitled to: (i) Salary at the rate in effect immediately prior to the Termination Without Cause, for a period which shall end upon the earlier of (x) the end of the sixth month following such termination of employment or (y) the Executive's reemployment in a position comparable to that which he held with the Company immediately prior to the termination of his employment ("Comparable Reemployment"), provided, however, any Salary due the Executive under this subsection shall be off-set by any compensation earned by the Executive in respect of reemployment other than Comparable Reemployment, or consulting services provided, during the Salary Continuation Period; and (ii) for the length of the Salary Continuation Period, any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of his Termination Without Cause, determined in accordance with the applicable terms and provisions of such programs; and (iii) any bonus awarded but not yet paid at the time of Executive's Termination Without Cause. provided, however, that if at any time during the Salary Continuation Period, the Company becomes aware of any action on the part of the Executive that would constitute grounds for termination of the Executive's employment by the Company for Cause, the Company shall be under no obligation to make any payments or provide any rights or other benefits due under this Agreement. Any payments received by the Executive under this Agreement that are attributable to the termination of the Executive's employment shall be in full and complete satisfaction of any and all claims the Executive may have against the Company which are, in any way, related to the employment relationship between the Executive and the Company. (e) Contingent Shares. In the event that there is a Termination Without Cause of Executive's employment prior to the Third Anniversary Date, NetGateway shall be obligated to issue to Executive his Percentage Interest of any unissued Contingent Shares. The foregoing shall not apply in the event that Executive resigns or there is Termination for Cause. In such event, NetGateway's only obligation shall be to issue to Executive that portion of such Executive's Percentage Interest of the Contingent Shares to which Executive is entitled in accordance with Section 1.03 of the Stock Purchase Agreement. 7. Indemnification. (a) The Company agrees that if the Executive is made a party or is threatened to be made a party to any action, suit or proceeding by reason of the fact that he is or was a director or officer of the Company (a "Proceeding"), he shall be indemnified by the Company to the fullest extent authorized by Alberta law, consistent with the Company's certificate of incorporation (or charter) and by-laws, against expenses, liabilities and losses reasonably incurred or suffered by the Executive in connection therewith; provided, however: (i) written notice of such Proceeding is given promptly to the Company by the Executive; (ii) the Company is permitted to participate in and assume the defense of such Proceeding; and (iii) such liability results from the final judgment of a court of competent jurisdiction or, as a result of a settlement entered into with the prior written consent of the Company or is required (x) by such court as a bond, payment into escrow or similar payment, or (y) otherwise to forestall imminent attachment or similar process against any of the Executive's Stocks, and, provided further that the Company agrees to indemnify the Executive if he seeks indemnification in connection with a Proceeding (or part thereof) initiated by the Executive only if such Proceeding (or part thereof) was authorized by the Board. (b) Notwithstanding anything to the contrary in subsection (a) above, the Company shall be under no obligation to indemnify the Executive with respect to any act or acts of the Executive: (i) in a knowing violation of any written agreement between the Executive and the Company; (ii) for which a court, having jurisdiction in the matter, determines that indemnification is not lawful; or (iii) which a court, having jurisdiction in the matter, determines to have been knowingly and fraudulently committed by the Executive or which is the result of willful misconduct by the Executive. (c) D&O Insurance. To the extent available on commercially reasonable terms, the Company agrees to obtain a directors and officers liability insurance policy covering the Executive and this policy shall be maintained and provide coverage that is reasonable in relation to the Executive's position during the Term of Employment. 8. Covenant Not to Engage in Certain Acts. (a) During the Term of Employment, and for a period equal to the greater of (x) 12-months following the end of the Term of Employment or (y) the Salary Continuation Period, the Executive shall not, except when acting on behalf of the Company or an Affiliate: (i) take any action to divert any business from the Company, or from any Affiliate, or any business which was under active consideration by the Company, or by any Affiliate, during the Term of Employment; or (ii) induce customers, suppliers, agents, franchisees or other persons under contract or franchise or otherwise doing business with the Company, to terminate, reduce or alter business with or from the Company or any Affiliate. The subsections of this Section are intended by the Parties as separate and divisible provisions and if, for any reason, any one of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision shall thereby be affected. It is the intention of the Parties that the restrictions on the Executive's future employment imposed by this Section be reasonable in duration. If an Alberta court shall find that the 12-month period set forth in the first paragraph hereof is unreasonable, then the parties agree that the provisions hereof shall be applicable for a period of nine (9) months. If such nine (9) month period shall be deemed unreasonable by an Alberta court, then the parties agree that the provisions hereof shall be applicable for a period of six (6) months. The Executive understands that the provisions of this Section may limit his ability to earn a livelihood in a business similar to the business of the Company, but nevertheless believes that he shall receive sufficient remuneration and other benefits hereunder to justify the restrictions contained in such provisions which, given his education, skills and abilities, he does not believe would prevent him from earning a living. (b) The Executive agrees that for the Term of Employment and for the period described in subsection (a) above, except when acting on behalf of the Company or any Affiliate, he shall not induce any person in the employment of the Company or any Affiliate to (i) terminate such employment, (ii) accept employment with anyone other than the Company or any Affiliate or (iii) interfere with the business of the Company or any Affiliate in any material manner. (c) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement. 9. Inventions. (a) The Executive shall, during the Term of Employment, disclose to the Company, immediately after the same is made, discovered or devised, any improvement, process, development, discovery or invention (including works of authorship, trade secrets, technology, computer programs, formulas, compositions, ideas, designs, techniques and data, whether or not patentable or otherwise capable of being protected and whether or not related to technical or commercial matters) which he may make, discover or devise (alone or in conjunction with others) either: (i) in the course of his normal duties (or of duties specifically assigned to him); (ii) as a result of knowledge gained during his employment; or (iii) as a result of the use by the Executive of materials, equipment or facilities of the Company. Subject to subsection (b) below, all such items shall become the absolute property of the Company without further payment and the Executive shall satisfy his obligation in this regard by presenting the same to the Company. The Executive hereby assigns any and all rights in such items to the Company. The Executive shall not at any time during the Term of Employment (except in the performance of his duties) or thereafter, disclose any such improvement, process, development, discovery or invention to any third party and, further, shall, if and whenever required so to do by the Company (at the Company's expense), do all acts and things as the Company may reasonably require for obtaining any patent or other protection in respect thereof and vesting the same and all rights therein in the Company or as the Company may direct; provided that the above restriction shall not apply to any such improvement, process, development, discovery or invention which is or becomes generally available to the public other than as a result of disclosure by the Executive or by any person to whom he has made such disclosure. (b) In respect of any particular improvement, process, development, discovery or invention which is not covered by subsection (a) above, the Executive shall (before exploiting or disclosing the same or otherwise committing himself to a third party) discuss any such item with the Company. If the Executive shows, to the reasonable satisfaction of the Company, that any such item is not a corporate opportunity of the Company, then Executive shall be entitled thereafter to exploit or disclose such item. (c) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement, including, without limitation, his obligation to do all acts and other things that the Company may reasonably require for obtaining any patent or other protection in respect of any improvement, process, development, discovery, or invention, and his obligation to disclose to the Company, immediately after the same is made, discovered or devised, any improvement, discovery or invention as provided in subsection (a) above. 10. Covenants to Protect Confidential Information. (a) The Executive shall not, during the Term of Employment or thereafter, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership or corporation, except while employed by the Company in the business of and for the benefit of the Company or when required to do so by a lawful order of a court of competent jurisdiction, any Confidential Information. (b) Except as may be otherwise consented to in writing by the Company, the Executive shall proffer to an appropriate officer of the Company, at the termination of his employment, without retaining any copies, notes or excerpts thereof, all memoranda, diaries, notes, records, cost information, customer lists, marketing plans and strategies, and any other documents containing any Confidential Information made or compiled by, or delivered or made available to, or otherwise obtained by the Executive in his possession or subject to his control at such time except that the Executive may proffer a legible copy, and retain the original, of any personal diary or personal notes. (c) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement. 11. Remedy for Violation of Noncompetition, Confidential Information or Inventions Provisions. (a) The Executive acknowledges that the Company has no adequate remedy at law and would be irreparably harmed if the Executive breaches or threatens to breach the provisions of Sections 8, 9 or 10 above, and, therefore, agrees that the Company shall be entitled to injunctive relief to prevent any breach or threatened breach of any of those sections, and to specific performance of the terms of each of such section in addition to any other legal or equitable remedy it may have. The Executive further agrees that he shall not, in any equity proceeding involving him relating to the enforcement of Sections 8, 9, or 10 above, raise the defense that the Company has an adequate remedy at law. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity that it may have or any other rights that it may have under any other agreement. (b) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement. Notwithstanding anything herein to the contrary, in no event shall the Company be obligated to provide payments or benefits pursuant to this Section if, and to the extent, such payments or benefits would be nondeductible for Revenue Canada income tax purposes. Any determination to be made with respect to this clause shall be made by the Company's regular independent certified accountants. 12. Withholding. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 13. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits hereunder, which may be transferred only by will or operation of law and subject to the limitations of this Agreement. 14. Representation. The Executive represents and warrants that the performance of the Executive's duties under this Agreement will not violate any agreement between the Executive and any other person, firm, partnership, corporation or organization. 15. Mutual Intent. The language used in this Agreement is the language chosen by the Parties to express their mutual intent. The Parties agree that in the event that any language, section, clause, phrase or word used in this Agreement is determined to be ambiguous, no presumption shall arise against or in favor of either Party and that no rule of strict construction shall be applied against either Party with respect to such ambiguity. 16. Entire Agreement. This Agreement contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto. 17. Amendment or Waiver. No provision in this Agreement may be amended or waived unless such amendment or waiver is approved by the Board of Directors of the Company and set forth in a writing, signed by the Chairman of the Board of the Company. No waiver by the Company of any breach by the other Party of any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. 18. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 19. Survivorship. The respective rights and obligations of the Parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. The provisions of this Section are in addition to the survivorship provisions of any other section of this Agreement. 20. Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the province of Alberta. The Parties agree to submit exclusively to the jurisdiction of the courts of the province of Alberta with respect to any controversy, dispute or claim arising out of this Agreement. 21. Notices. Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered (whether by telecopy or otherwise) or two days after being sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give notice of: If to the Company: NetGateway, Inc. 300 Oceangate, 5th Floor Long Beach, CA 90802 Attn: Donald M. Corliss, Jr. With a copy to: Nida & Maloney, P.C. 800 Anacapa Street Santa Barbara, California 93101 Attn: C. Thomas Hopkins, Esq. If to the Executive: Jordi MacDonald __________________________________ __________________________________ __________________________________ With a copy to: Tingle & Associates Suite 1250, Standard Life Building 639-5th Avenue S.W. Calgary, Alberta T2P 0M9 Attn: Bryce C. Tingle, Esq. 22. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 23. Counterparts. This Agreement may be executed in two or more counterparts. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. STORESONLINE.COM LTD. By:____________________________ EXECUTIVE _______________________________ Jordi MacDonald EXHIBIT G EMPLOYMENT AGREEMENT This AGREEMENT is made and entered into as of this 1st day of November, 1998, between StoresOnline.com, Inc., a California corporation (the "Company") and Clint McKinlay (the "Executive"). WHEREAS, NetGateway, Inc. ("NetGateway") and the shareholders of Spartan Multimedia, Inc. ("Spartan") have entered into a Stock Purchase Agreement dated of even date herewith (the "Stock Purchase Agreement"); and WHEREAS, as a condition precedent to the consummation of the Stock Purchase Agreement, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment (the "Agreement") and the Executive desires to accept such employment and to enter into the Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company and the Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. All terms not otherwise defined herein shall have the meanings given such terms in the Stock Purchase Agreement. (a) "Affiliate" shall mean any corporation, partnership or other entity in which the Company owns, directly or indirectly, an equity interest of 50% or more or which owns, directly or indirectly, an equity interest of 50% in the Company. (b) "Board" shall mean the Board of Directors of the Company. (c) "Cause" shall mean (i) the Executive is convicted of a felony involving moral turpitude, (ii) the Executive, in carrying out his duties under this Agreement, is guilty of continued willful gross neglect or continued willful gross misconduct resulting, in either case, in material economic harm to the Company, unless such act, or failure to act, was believed by the Executive in good faith to be in the best interests of the Company or any Affiliate, (iii) the breach by Executive of Sections 8, 9 or 10 hereof, or (iv) any other action or inaction that a court of competent jurisdiction in Alberta has deemed or deems to be just cause for termination. (d) "Confidential Information" shall mean all nonpublic information respecting the Company's business including, but not limited to, its products, research and development, processes, customer lists, marketing plans and strategies and any other trade secrets. Confidential information does not include information that is, or becomes, available to the public unless such availability occurs through an unauthorized act on the part of the Executive. (e) "Disability" shall mean the Executive's inability to render, for 180 consecutive days, full and effective services hereunder by reason of permanent physical or mental disability, whether resulting from illness, accident or otherwise. (f) "Salary" shall mean the salary provided for in Section 3 of this Agreement or any adjusted salary granted to the Executive by the Board. (g) "Salary Continuation Period" shall mean the period after the termination of the Executive's employment pursuant to the terms of this Agreement during which the Executive is entitled to continued payment of the Salary. (h) "Term of this Agreement" shall mean that period of time specified in Section 2(b). (i) "Term of Employment" shall mean the period of the Executive's employment by the Company. 2. Term of Agreement, Position and Duties. (a) The Company hereby employs the Executive and the Executive hereby accepts employment with the Company for the Term of this Agreement in the position and with the duties and responsibilities set forth below and upon such other terms and conditions as are hereinafter stated. (b) The term of this Agreement shall commence as of November __, 1998 and shall terminate upon the first to occur of (i) the termination of this Agreement as provided herein or (ii) three years from such date. (c) During the Term of this Agreement, the Executive shall be employed as Vice President, Marketing of the Company. During the time he serves in this position, the Executive shall serve under the direction of and report directly to the President of the Company's Affiliate, StoresOnline.com, Ltd., an Alberta corporation. During the Term of Employment, the Executive agrees to devote his full time and attention to carrying out his duties and responsibilities hereunder and shall use his best efforts, skills and abilities to further the interests of the Company. Notwithstanding the foregoing, the Executive shall be entitled to complete any consulting agreements with third parties in effect on the date hereof and to consult on any other non-commercial matters, provided that such consulting does not materially adversely affect the performance of Executive's duties. During the Term of Employment, the Executive may not serve on the board of directors of any other business entities without the express written permission of the Board and subject to such limitations as may be imposed by the Board in granting such permission. 3. Salary. During the Term of this Agreement, the Executive shall be paid a salary at the annual rates set forth below by the Company. Such salary shall be payable in accordance with the Company's standard payroll practice and subject to the other provisions of this Section 3. The Executive shall receive a salary at an annual rate of Thirty-Seven Thousand Five Hundred Dollars ($37,500 USD) for the first ninety (90) days following the date hereof. Following such 90-day period, the Executive shall receive a salary at an annual rate of Fifty-Six Thousand Two Hundred Fifty Dollars ($56,250 USD) (the "Pre-Profit Rate") until the Company is profitable. Once the Company is profitable, the Executive shall be entitled to receive a minimum salary at an annual rate of Seventy-Five Thousand Dollars ($75,000.00 USD) or such portion thereof as can be paid out of the "profits" of the Company, but in no event less than the Pre-Profit Rate. Notwithstanding the foregoing, once the Company is profitable for two consecutive fiscal quarters, the Executive shall be entitled to receive a minimum annual salary of Seventy-Five Thousand Dollars ($75,000.00 USD). Such salary shall be reviewed at least annually for adjustment. Subject to the other provisions of this Section 3, any adjustment shall be determined by the Board, in its sole discretion. For purposes hereof, "profits" shall be determined based on EBITDA in accordance with GAAP, and NetGateway, the Company's parent, will only charge the Company for expenses which are Company-specific and will not charge the Company for any of the general operating expenses of NetGateway. The Company shall reimburse Executive for reasonable out-of-pocket expenses incurred by the Executive in the performance of his duties in accordance with the Company's standard practices. 4. Annual Bonus. During the Term of Employment, the Board may grant the Executive an annual bonus. The amount of such annual bonus, if any, shall be determined by the Board, in its sole discretion. 5. Employee Benefit Programs. During the Term of this Agreement, the Executive shall be eligible to participate in employee benefit plans and programs available, from time to time, to all senior executives of the Company. Specifically, the Executive shall be entitled to the current annual vacation entitlement as set by the Board, but not less than 10 business days of vacation for each employment year with the Company. The Executive shall be entitled to a pro rata share of an annual accrual for fractional years of employment with the Company. 6. Termination of Employment. (a) Termination Due to Death. In the event of the death of the Executive during the Term of this Agreement, this Agreement shall immediately terminate and the estate or other legal representative of the Executive shall be entitled to: (i) Salary at the rate in effect at the time of the Executive's death, through the end of the month in which his death occurs; and (ii) any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of his death, determined in accordance with the applicable terms and provisions of such programs. (b) Termination Due to Disability. The Company may terminate the Executive's employment due to the Disability of the Executive. In the event of such a termination of the Executive's employment due to Disability during the Term of this Agreement, this Agreement shall immediately terminate and the Executive shall be entitled to: (i) Salary at the rate in effect at the time the Executive's Disability is deemed to have commenced, through the date on which he is terminated due to Disability; and (ii) any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of his Termination Due to Disability, determined in accordance with the applicable terms and provisions of such programs. (c) Termination for Cause. The Executive's employment may be terminated immediately by the Company for Cause. In the event the Executive's employment is terminated for Cause during the Term of this Agreement, the Executive shall be entitled to: (i) Salary at the rate in effect at the time of the Termination for Cause, through the date on which such Termination for Cause occurs; and (ii) any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of the Termination for Cause, determined in accordance with the applicable terms and provisions of such programs. (d) Termination Without Cause. The Executive's employment under this Agreement may be terminated without Cause, as provided in this subsection. "Termination Without Cause" shall mean a termination of the Executive's employment by the Company during the Term of this Agreement other than due to death, due to Disability or for Cause. In the event there is a Termination Without Cause of the Executive's employment, the Executive shall be entitled to: (i) Salary at the rate in effect immediately prior to the Termination Without Cause, for a period which shall end upon the earlier of (x) the end of the sixth month following such termination of employment or (y) the Executive's reemployment in a position comparable to that which he held with the Company immediately prior to the termination of his employment ("Comparable Reemployment"), provided, however, any Salary due the Executive under this subsection shall be off-set by any compensation earned by the Executive in respect of reemployment other than Comparable Reemployment, or consulting services provided, during the Salary Continuation Period; and (ii) for the length of the Salary Continuation Period, any other rights and benefits available under employee benefit programs of the Company in which the Executive was a participant at the time of his Termination Without Cause, determined in accordance with the applicable terms and provisions of such programs; and (iii) any bonus awarded but not yet paid at the time of Executive's Termination Without Cause. provided, however, that if at any time during the Salary Continuation Period, the Company becomes aware of any action on the part of the Executive that would constitute grounds for termination of the Executive's employment by the Company for Cause, the Company shall be under no obligation to make any payments or provide any rights or other benefits due under this Agreement. Any payments received by the Executive under this Agreement that are attributable to the termination of the Executive's employment shall be in full and complete satisfaction of any and all claims the Executive may have against the Company which are, in any way, related to the employment relationship between the Executive and the Company. (e) Contingent Shares. In the event that there is a Termination Without Cause of Executive's employment prior to the Third Anniversary Date, NetGateway shall be obligated to issue to Executive his Percentage Interest of any unissued Contingent Shares. The foregoing shall not apply in the event that Executive resigns or there is Termination for Cause. In such event, NetGateway's only obligation shall be to issue to Executive that portion of such Executive's Percentage Interest of the Contingent Shares to which Executive is entitled in accordance with Section 1.03 of the Stock Purchase Agreement. 7. Indemnification. (a) The Company agrees that if the Executive is made a party or is threatened to be made a party to any action, suit or proceeding by reason of the fact that he is or was a director or officer of the Company (a "Proceeding"), he shall be indemnified by the Company to the fullest extent authorized by Alberta law, consistent with the Company's certificate of incorporation (or charter) and by-laws, against expenses, liabilities and losses reasonably incurred or suffered by the Executive in connection therewith; provided, however: (i) written notice of such Proceeding is given promptly to the Company by the Executive; (ii) the Company is permitted to participate in and assume the defense of such Proceeding; and (iii) such liability results from the final judgment of a court of competent jurisdiction or, as a result of a settlement entered into with the prior written consent of the Company or is required (x) by such court as a bond, payment into escrow or similar payment, or (y) otherwise to forestall imminent attachment or similar process against any of the Executive's Stocks, and, provided further that the Company agrees to indemnify the Executive if he seeks indemnification in connection with a Proceeding (or part thereof) initiated by the Executive only if such Proceeding (or part thereof) was authorized by the Board. (b) Notwithstanding anything to the contrary in subsection (a) above, the Company shall be under no obligation to indemnify the Executive with respect to any act or acts of the Executive: (i) in a knowing violation of any written agreement between the Executive and the Company; (ii) for which a court, having jurisdiction in the matter, determines that indemnification is not lawful; or (iii) which a court, having jurisdiction in the matter, determines to have been knowingly and fraudulently committed by the Executive or which is the result of willful misconduct by the Executive. (c) D&O Insurance. To the extent available on commercially reasonable terms, the Company agrees to obtain a directors and officers liability insurance policy covering the Executive and this policy shall be maintained and provide coverage that is reasonable in relation to the Executive's position during the Term of Employment. 8. Covenant Not to Engage in Certain Acts. (a) During the Term of Employment, and for a period equal to the greater of (x) 12-months following the end of the Term of Employment or (y) the Salary Continuation Period, the Executive shall not, except when acting on behalf of the Company or an Affiliate: (i) take any action to divert any business from the Company, or from any Affiliate, or any business which was under active consideration by the Company, or by any Affiliate, during the Term of Employment; or (ii) induce customers, suppliers, agents, franchisees or other persons under contract or franchise or otherwise doing business with the Company, to terminate, reduce or alter business with or from the Company or any Affiliate. The subsections of this Section are intended by the Parties as separate and divisible provisions and if, for any reason, any one of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision shall thereby be affected. It is the intention of the Parties that the restrictions on the Executive's future employment imposed by this Section be reasonable in duration. If an Alberta court shall find that the 12-month period set forth in the first paragraph hereof is unreasonable, then the parties agree that the provisions hereof shall be applicable for a period of nine (9) months. If such nine (9) month period shall be deemed unreasonable by an Alberta court, then the parties agree that the provisions hereof shall be applicable for a period of six (6) months. The Executive understands that the provisions of this Section may limit his ability to earn a livelihood in a business similar to the business of the Company, but nevertheless believes that he shall receive sufficient remuneration and other benefits hereunder to justify the restrictions contained in such provisions which, given his education, skills and abilities, he does not believe would prevent him from earning a living. (b) The Executive agrees that for the Term of Employment and for the period described in subsection (a) above, except when acting on behalf of the Company or any Affiliate, he shall not induce any person in the employment of the Company or any Affiliate to (i) terminate such employment, (ii) accept employment with anyone other than the Company or any Affiliate or (iii) interfere with the business of the Company or any Affiliate in any material manner. (c) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement. 9. Inventions. (a) The Executive shall, during the Term of Employment, disclose to the Company, immediately after the same is made, discovered or devised, any improvement, process, development, discovery or invention (including works of authorship, trade secrets, technology, computer programs, formulas, compositions, ideas, designs, techniques and data, whether or not patentable or otherwise capable of being protected and whether or not related to technical or commercial matters) which he may make, discover or devise (alone or in conjunction with others) either: (i) in the course of his normal duties (or of duties specifically assigned to him); (ii) as a result of knowledge gained during his employment; or (iii) as a result of the use by the Executive of materials, equipment or facilities of the Company. Subject to subsection (b) below, all such items shall become the absolute property of the Company without further payment and the Executive shall satisfy his obligation in this regard by presenting the same to the Company. The Executive hereby assigns any and all rights in such items to the Company. The Executive shall not at any time during the Term of Employment (except in the performance of his duties) or thereafter, disclose any such improvement, process, development, discovery or invention to any third party and, further, shall, if and whenever required so to do by the Company (at the Company's expense), do all acts and things as the Company may reasonably require for obtaining any patent or other protection in respect thereof and vesting the same and all rights therein in the Company or as the Company may direct; provided that the above restriction shall not apply to any such improvement, process, development, discovery or invention which is or becomes generally available to the public other than as a result of disclosure by the Executive or by any person to whom he has made such disclosure. (b) In respect of any particular improvement, process, development, discovery or invention which is not covered by subsection (a) above, the Executive shall (before exploiting or disclosing the same or otherwise committing himself to a third party) discuss any such item with the Company. If the Executive shows, to the reasonable satisfaction of the Company, that any such item is not a corporate opportunity of the Company, then Executive shall be entitled thereafter to exploit or disclose such item. (c) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement, including, without limitation, his obligation to do all acts and other things that the Company may reasonably require for obtaining any patent or other protection in respect of any improvement, process, development, discovery, or invention, and his obligation to disclose to the Company, immediately after the same is made, discovered or devised, any improvement, discovery or invention as provided in subsection (a) above. 10. Covenants to Protect Confidential Information. (a) The Executive shall not, during the Term of Employment or thereafter, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership or corporation, except while employed by the Company in the business of and for the benefit of the Company or when required to do so by a lawful order of a court of competent jurisdiction, any Confidential Information. (b) Except as may be otherwise consented to in writing by the Company, the Executive shall proffer to an appropriate officer of the Company, at the termination of his employment, without retaining any copies, notes or excerpts thereof, all memoranda, diaries, notes, records, cost information, customer lists, marketing plans and strategies, and any other documents containing any Confidential Information made or compiled by, or delivered or made available to, or otherwise obtained by the Executive in his possession or subject to his control at such time except that the Executive may proffer a legible copy, and retain the original, of any personal diary or personal notes. (c) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement. 11. Remedy for Violation of Noncompetition, Confidential Information or Inventions Provisions. (a) The Executive acknowledges that the Company has no adequate remedy at law and would be irreparably harmed if the Executive breaches or threatens to breach the provisions of Sections 8, 9 or 10 above, and, therefore, agrees that the Company shall be entitled to injunctive relief to prevent any breach or threatened breach of any of those sections, and to specific performance of the terms of each of such section in addition to any other legal or equitable remedy it may have. The Executive further agrees that he shall not, in any equity proceeding involving him relating to the enforcement of Sections 8, 9, or 10 above, raise the defense that the Company has an adequate remedy at law. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity that it may have or any other rights that it may have under any other agreement. (b) The Executive agrees that the provisions of this Section shall survive the termination of this Agreement. Notwithstanding anything herein to the contrary, in no event shall the Company be obligated to provide payments or benefits pursuant to this Section if, and to the extent, such payments or benefits would be nondeductible for Revenue Canada income tax purposes. Any determination to be made with respect to this clause shall be made by the Company's regular independent certified accountants. 12. Withholding. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 13. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits hereunder, which may be transferred only by will or operation of law and subject to the limitations of this Agreement. 14. Representation. The Executive represents and warrants that the performance of the Executive's duties under this Agreement will not violate any agreement between the Executive and any other person, firm, partnership, corporation or organization. 15. Mutual Intent. The language used in this Agreement is the language chosen by the Parties to express their mutual intent. The Parties agree that in the event that any language, section, clause, phrase or word used in this Agreement is determined to be ambiguous, no presumption shall arise against or in favor of either Party and that no rule of strict construction shall be applied against either Party with respect to such ambiguity. 16. Entire Agreement. This Agreement contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto. 17. Amendment or Waiver. No provision in this Agreement may be amended or waived unless such amendment or waiver is approved by the Board of Directors of the Company and set forth in a writing, signed by the Chairman of the Board of the Company. No waiver by the Company of any breach by the other Party of any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. 18. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 19. Survivorship. The respective rights and obligations of the Parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. The provisions of this Section are in addition to the survivorship provisions of any other section of this Agreement. 20. Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the province of Alberta. The Parties agree to submit exclusively to the jurisdiction of the courts of the province of Alberta with respect to any controversy, dispute or claim arising out of this Agreement. 21. Notices. Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered (whether by telecopy or otherwise) or two days after being sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give notice of: If to the Company: NetGateway, Inc. 300 Oceangate, 5th Floor Long Beach, CA 90802 Attn: Donald M. Corliss, Jr. With a copy to: Nida & Maloney, P.C. 800 Anacapa Street Santa Barbara, California 93101 Attn: C. Thomas Hopkins, Esq. If to the Executive: Clint McKinlay __________________________________ __________________________________ __________________________________ With a copy to: Tingle & Associates Suite 1250, Standard Life Building 639-5th Avenue S.W. Calgary, Alberta T2P 0M9 Attn: Bryce C. Tingle, Esq. 22. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 23. Counterparts. This Agreement may be executed in two or more counterparts. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. STORESONLINE.COM, INC. By:________________________ EXECUTIVE ____________________________ Clint McKinlay EXHIBIT H [Form of Opinion of Counsel to Company and Selling Stockholders] [Name and Address of Purchaser] Ladies and Gentlemen: We have acted as counsel to Spartan Multimedia, Inc., an Alberta corporation (the "Company") and all the shareholders thereof (the "Selling Stockholders"), in connection with the Stock Purchase Agreement dated as of November ___, 1998 (the "Stock Purchase Agreement"), by and between the Selling Stockholders, StoresOnline.com Ltd., an Alberta corporation, and NetGateway, Inc., a Nevada corporation and the transactions contemplated thereby. Capitalized terms used but not defined herein shall have the respective meanings given to such terms in the Stock Purchase Agreement. In rendering the opinions expressed below, we have examined (a) the Stock Purchase Agreement and (b) such corporate records of the Company and such other documents as we have deemed necessary as a basis for the opinions expressed below. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon certificates of government officials and of the Company and the Selling Stockholders and upon representations and warranties made in or pursuant to the Stock Purchase Agreement. In rendering the opinions expressed below, we have assumed (other than as to the Selling Stockholders and the Company) that all of the documents referred to in this opinion have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all of the parties to such documents, that all signatories to such documents have been duly authorized and that all such parties are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform such documents. Based upon and subject to the foregoing, and having considered such questions of law as we deemed necessary as a basis for the opinions expressed below, we are of the opinion that: 1. The Selling Stockholders have full power and authority to execute and deliver the Stock Purchase Agreement, to perform its obligations thereunder and to consummate the transactions contemplated thereby. 2. The Stock Purchase Agreement has been duly and validly executed and delivered by the Selling Stockholders and constitutes a legal, valid and binding obligation of the Selling Stockholders, enforceable against the Selling Stockholders in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Stock Purchase Agreement is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including without limitation (i) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (ii) concepts of materiality, reasonableness, good faith and fair dealing. 3. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the province of Alberta, and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its Assets and Properties. The Company is duly qualified, licensed or admitted to do business and is in good standing in those jurisdictions where the ownership, use or leasing of its Assets and Properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary, except for those jurisdictions in which the adverse effects of all such failures by the Company to be qualified, licensed or admitted and in good standing can in the aggregate be eliminated without material cost or expense by the Company, as the case may be, becoming qualified, licensed or admitted and in good standing. 4. The authorized capital stock of the Company consists solely of ______ shares of Common Stock, of which only the Shares have been issued. The Shares are duly authorized, validly issued, outstanding, fully paid and nonassessable. To our knowledge, except for the Stock Purchase Agreement, there are no outstanding Options with respect to the Company. The delivery of the certificate or certificates representing the Shares in the manner provided in Section 1.04 of the Stock Purchase Agreement will transfer to Purchaser good and valid title to the Shares, free of any adverse claim. 5. The Company does not have, nor has it ever had, any Subsidiaries. 6. The execution, delivery and performance by the Selling Stockholders of the Stock Purchase Agreement and the consummation of the transactions contemplated thereby did not and will not (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws of the Company, (b) conflict with or result in a violation or breach of any term or provision of any law, statute, rule or regulation, or of any other Law or Order known to us, applicable to the Selling Stockholders or the Company or any of their respective Assets and Properties or (c) (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require the Selling Stockholders or the Company to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, (iv) result in or give to any Person any right of termination, cancellation, acceleration or modification in or with respect to, (v) result in or give to any Person any additional rights or entitlement to increased, additional, accelerated or guaranteed payments under or (vi) result in the creation or imposition of any Lien upon the Selling Stockholders or the Company or any of their respective Assets and Properties under, any Contract or License known to us to which the Selling Stockholders or the Company is a party or by which any of their respective Assets and Properties is bound. 7. No consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of the Selling Stockholders or the Company is required in connection with the execution, delivery and performance of the Stock Purchase Agreement or the consummation of the transactions contemplated thereby. 8. There are no Actions or Proceedings pending or threatened against, relating to or affecting the Selling Stockholders, the Company or any of the Company's Assets and Properties which (a) could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by the Stock Purchase Agreement, or (b) if determined adversely to the Selling Stockholders or the Company, could reasonably be expected, individually or in the aggregate with other such Actions or Proceedings, to have a material adverse effect on the Business or Condition of the Company. At the request of our clients, this opinion is being provided to you pursuant to Section 6.06 of the Stock Purchase Agreement, and this opinion may not be relied upon by any other Person or for any purpose other than in connection with the transactions contemplated by the Stock Purchase Agreement without, in each instance, our prior written consent. Very truly yours, EXHIBIT I SUPPORT AGREEMENT MEMORANDUM OF AGREEMENT made as of the ____ day of December, 1998, B E T W E E N: NETGATEWAY, INC., a corporation incorporated under the laws of the State of Nevada (hereinafter referred to as "NetGateway") - and - STORESONLINE.COM LTD., a corporation incorporated under the laws of the Province of Alberta and having its head and principal office located in the City of Calgary, in the Province of Alberta (hereinafter referred to as the "Corporation") - and - DAVID ROSENVALL, an individual resident in the City of Calgary, in the Province of Alberta ("Rosenvall") - and - JORDI MacDONALD, an individual resident in the City of Calgary, in the Province of Alberta ("MacDonald") - and - CLINT McKINLAY, an individual resident in the City of Calgary, in the Province of Alberta ("McKinlay") - and - (Rosenvall, MacDonald and McKinlay hereinafter referred to collectively as the "Shareholders") WHEREAS pursuant to the terms of the Stock Purchase Agreement dated concurrently herewith and between the parties hereto (the "Purchase Agreement"), the Shareholders have been issued Exchangeable Shares in the capital of the Corporation (the "Exchangeable Shares"); and WHEREAS the Articles of Incorporation of the Corporation dated December ___________, 1998 set forth the rights, privileges, restrictions and conditions (collectively, the "Exchangeable Share Provisions") attaching to the Exchangeable Shares; and WHEREAS the parties hereto desire to make appropriate provision and to establish a procedure whereby NetGateway will take certain actions and make certain payments and deliveries necessary to ensure that the Corporation will be able to make certain payments and to deliver or cause to be delivered shares of NetGateway Common Stock in satisfaction of the obligations of the Corporation under the Exchangeable Share Provisions with respect to the payment and satisfaction of dividends, Liquidation Amounts, Retraction Prices and Redemption Prices, all in accordance with the Exchangeable Share Provisions. NOW THEREFORE in consideration of the respective covenants and agreements provided in this Agreement and in the Purchase Agreement and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties agree as follows: ARTICLE 1 DEFINITIONS AND INTERPRETATION 1.1 Defined Terms. Each term denoted herein by initial capital letters and not otherwise defined herein shall have the meaning attributed thereto in the Exchangeable Share Provisions, unless the context requires otherwise. 1.2 Interpretation not Affected by Headings, etc. The division of this Agreement into articles, sections and paragraphs and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. 1.3 Number, Gender, etc. Words importing the singular number only shall include the plural and vice versa. Words importing the use of any gender shall include all genders. 1.4 Date for any Action. If any date on which any action is required to be taken under this Agreement is not a Business Day, such action shall be required to be taken on the next succeeding Business Day. ARTICLE 2 COVENANTS OF NETGATEWAY AND THE CORPORATION 1.5 Covenants of NetGateway Regarding Exchangeable Shares. So long as any Exchangeable Shares are outstanding, NetGateway will: (1) take all such actions and do all such things as are necessary or desirable to enable and permit the Corporation, in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of the Liquidation Amount in respect of each issued and outstanding Exchangeable Share upon the liquidation, dissolution or winding-up of the Corporation, including without limitation all such actions and all such things as are necessary or desirable to enable and permit the Corporation to cause to be delivered shares of NetGateway Common Stock to the holders of Exchangeable Shares in accordance with the provisions of Article 5 of the Exchangeable Share Provisions; (2) take all such actions and do all such things as are necessary or desirable to enable and permit the Corporation, in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of the Retraction Price and the Redemption Price, including without limitation all such actions and all such things as are necessary or desirable to enable and permit the Corporation to cause to be delivered shares of NetGateway Common Stock to the holders of Exchangeable Shares, upon the retraction or redemption of the Exchangeable Shares in accordance with the provisions of Article 6 or Article 7 of the Exchangeable Share Provisions, as the case may be; and (3) not exercise its vote as a shareholder to initiate the voluntary liquidation, dissolution or winding-up of the Corporation nor take any action or omit to take any action that is designed to result in the liquidation, dissolution or winding-up of the Corporation. 1.6 Segregation of Funds. NetGateway will cause the Corporation to deposit a sufficient amount of funds in a separate account and segregate a sufficient amount of such assets and other property as is necessary to enable the Corporation to pay or otherwise satisfy the Liquidation Amount, Retraction Price or Redemption Price, in each case for the benefit of holders from time to time of the Exchangeable Shares, and use such funds, assets and other property so segregated exclusively for the payment or other satisfaction of the Liquidation Amount, the Retraction Price or the Redemption Price, as applicable, net of any corresponding withholding tax obligations and for the remittance of such withholding tax obligations. 1.7 Reservation of Shares of NetGateway Common Stock. NetGateway hereby represents, warrants and covenants that it has irrevocably reserved for issuance and will at all times keep available, free from pre-emptive and other rights, out of its authorized and unissued capital stock such number of shares of NetGateway Common Stock (or other shares or securities into which NetGateway Common Stock may be reclassified or changed as contemplated by Section 2.6 hereof) (a) as is equal to the sum of (i) the number of Exchangeable Shares issued and outstanding from time to time and (ii) the number of Exchangeable Shares issuable upon the exercise of all rights to acquire Exchangeable Shares outstanding from time to time and (b) as are now and may hereafter be required to enable and permit the Corporation to meet its obligations hereunder, under the Exchangeable Share Provisions and under any other security or commitment pursuant to which NetGateway may now or hereafter be required to issue shares of NetGateway Common Stock. 1.8 Notification of Certain Events. In order to assist NetGateway to comply with its obligations hereunder, the Corporation will give NetGateway notice of each of the following events at the time set forth below: (1) in the event of any determination by the board of directors of the Corporation to institute voluntary liquidation, dissolution or winding-up proceedings with respect to the Corporation or to effect any other distribution of the assets of the Corporation among its shareholders for the purpose of winding-up its affairs, at least 30 days prior to the proposed effective date of such liquidation, dissolution, winding-up or other distribution; (2) immediately, upon the earlier of (i) receipt by the Corporation of notice of, and (ii) the Corporation otherwise becoming aware of, any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of the Corporation or to effect any other distribution of the assets of the Corporation among its shareholders for the purpose of winding-up its affairs; (3) immediately, upon receipt by the Corporation of a Retraction Notice (as defined in the Exchangeable Share Provisions); (4) at least 70 days prior to any accelerated Automatic Redemption Date determined by the board of directors of the Corporation in accordance with the Exchangeable Share Provisions; and (5) as soon as practicable upon the issuance by the Corporation of any Exchangeable Shares or rights to acquire Exchangeable Shares. 1.9 Delivery of Shares of NetGateway Common Stock. In furtherance of its obligations hereunder, upon notice of any event which requires the Corporation to cause to be delivered shares of NetGateway Common Stock to any holder of Exchangeable Shares, NetGateway shall forthwith issue and deliver the requisite shares of NetGateway Common Stock to or to the order of the former holder of the surrendered Exchangeable Shares, as the Corporation shall direct. All such shares of NetGateway Common Stock shall be duly issued as fully paid and non-assessable and shall be free and clear of any lien, claim, encumbrance, security interest or adverse claim ("Encumbrances"). 1.10 Equivalence. (1) In the event that NetGateway: (1) issues or distributes shares of NetGateway Common Stock (or securities exchangeable for or convertible into or carrying rights to acquire shares of NetGateway Common Stock) to the holders of all or substantially all of the then outstanding NetGateway Common Stock by way of stock dividend or other distribution; or (2) issues or distributes rights, options or warrants to the holders of all or substantially all of the then outstanding shares of NetGateway Common Stock entitling them to subscribe for or to purchase shares of NetGateway Common Stock (or securities exchangeable for or convertible into or carrying rights to acquire shares of NetGateway Common Stock); or (3) issues or distributes to the holders of all or substantially all of the then outstanding shares of NetGateway Common Stock (A) shares or securities of NetGateway of any class other than NetGateway Common Stock (other than shares convertible into or exchangeable for or carrying rights to acquire shares of NetGateway Common Stock), or (B) rights, options or warrants other than those referred to in subsection 2.6(a)(ii) above; then NetGateway shall cause the Corporation to simultaneously issue or distribute the equivalent on a per share basis of such rights, options, securities or shares to holders of the Exchangeable Shares and the Corporation shall issue or distribute such rights, options, securities or shares simultaneously to holders of the Exchangeable Shares. (2) In the event that NetGateway: (1) subdivides, redivides or changes the then outstanding shares of NetGateway Common Stock into a greater number of shares of NetGateway Common Stock; or (2) reduces, combines or consolidates or changes the then outstanding shares of NetGateway Common Stock into a lesser number of shares of NetGateway Common Stock; or (3) reclassifies or otherwise changes the shares of NetGateway Common Stock or effects an amalgamation, merger, reorganization or other transaction affecting the shares of NetGateway Common Stock; then NetGateway shall simultaneously cause the Corporation to make the same or an equivalent change to, or in the rights of holders of, the Exchangeable Shares and the Corporation shall make the same or an equivalent change to, or in the rights of the holders of, the Exchangeable Shares. (3) NetGateway will ensure that the record date for any event referred to in subsection 2.6(a) or 2.6(b) above, or (if no record date is applicable for such event) the effective date for any such event, is not less than 10 Business Days after the date on which such event is declared or announced by NetGateway (with simultaneous notice thereof to be given by NetGateway to the Corporation). 1.11 Tender Offers, etc. In the event that a tender offer, share exchange offer, issuer bid, take-over bid or similar transaction with respect to NetGateway Common Stock (an "Offer") is proposed by NetGateway or is proposed to NetGateway or its shareholders and is recommended by the board of directors of NetGateway, or is otherwise effected or to be effected with the consent or approval of the board of directors of NetGateway, NetGateway shall take all such actions and do all such things as are necessary or desirable to enable and permit holders of Exchangeable Shares to participate in such Offer to the same extent and on an equivalent basis as the holders of shares of NetGateway Common Stock, without discrimination. 1.12 Ownership of Outstanding Shares. Without the prior approval of the Corporation and the prior approval of the holders of the Exchangeable Shares given by Special Resolution, NetGateway covenants and agrees that, as long as any outstanding Exchangeable Shares are owned by any person or entity other than NetGateway or any of its Subsidiaries, NetGateway will be and remain the direct or indirect beneficial owner of all issued and outstanding shares in the capital of the Corporation and all outstanding securities of the Corporation carrying or otherwise entitled to voting rights in any circumstances, in each case other than the Exchangeable Shares. 1.13 Copies of Annual Financial Statements. NetGateway shall mail or caused to be mailed (or otherwise communicate in the same manner as NetGateway utilizes in communications to holders of NetGateway Common Stock) to each of the holders of Exchangeable Shares copies of all annual financial statements that are distributed to holders of shares of NetGateway Common Stock at the same time as such annual financial statements are first sent to holders of shares of NetGateway Common Stock. 1.14 Other Materials. Immediately after receipt by NetGateway or any shareholder of NetGateway of any material sent or given generally to the holders of NetGateway Common Stock by or on behalf of a third party including, without limitation, dissident proxy and information circulars (and related information and material) and tender and exchange offer circulars (and related information and material), NetGateway shall use its best efforts to obtain and deliver to the holders of Exchangeable Shares copies thereof as soon as possible thereafter. 1.15 Due Performance. On and after the date hereof, NetGateway shall duly and timely perform all of its obligations that may arise upon the exercise of NetGateway's rights under the Exchangeable Share Provisions. ARTICLE 3 REPRESENTATIONS AND WARRANTIES 1.16 Representations and Warranties of NetGateway. NetGateway hereby represents and warrants that: (1) NetGateway is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada and has the corporate power and authority to enter into and perform its obligations under this Agreement; (2) the execution, delivery and performance by NetGateway of this Agreement: (1) have been duly authorized by all necessary corporate action on the part of NetGateway; (2) do not (or would not with the giving of notice, the lapse of time or the happening of any other event or condition) result in a breach or a violation of, or conflict with, any of the terms or provisions of its constating documents or by-laws or any contracts or instruments to which it is a party or pursuant to which any of its assets or property may be affected; and (3) will not result in the violation of any law; (3) this Agreement has been duly executed and delivered by NetGateway and constitutes a legal, valid and binding obligation of NetGateway, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization and other laws of general application limiting the enforcement of creditors' rights generally and to the fact that specific performance is an equitable remedy available only in the discretion of the court; and (4) the shares of NetGateway Common Stock (or other shares or securities into which NetGateway Common Stock may be reclassified or changed as contemplated by Section 2.6 hereof) to be issued and delivered hereunder, including for greater certainty, pursuant to the Exchangeable Share Provisions, shall, at the time of their issuance to the holders of Exchangeable Shares, be validly created, allotted and issued as fully paid and non-assessable shares and shall be issued to such holders free and clear of any Encumbrances. 1.17 Representations and Warranties of the Corporation. The Corporation hereby represents and warrants that: (1) the Corporation is a corporation incorporated and existing under the laws of the Province of Alberta and has the corporate power and authority to enter into and perform its obligations under this Agreement; (2) the execution, delivery and performance by the Corporation of this Agreement: (1) have been duly authorized by all necessary corporate action on the part of the Corporation; (2) do not (or would not with the giving of notice, the lapse of time or the happening of any other event or condition) result in a breach or a violation of, or conflict with, any of the terms or provisions of its constating documents or by-laws or any contracts or instruments to which it is a party or pursuant to which any of its assets or property may be affected; and (3) will not result in the violation of any law; and (3) this Agreement has been duly executed and delivered by the Corporation and constitutes a legal, valid and binding obligation of the Corporation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization and other laws of general application limiting the enforcement of creditors' rights generally and to the fact that specific performance is an equitable remedy available only in the discretion of the court. ARTICLE 4 NETGATEWAY SUCCESSORS 1.18 Certain Requirements in Respect of Combination, etc. If NetGateway shall enter into any transaction (whether by way of reconstruction, reorganization, consolidation, merger, transfer, sale, lease or otherwise) whereby all or substantially all of its undertaking, property and assets would become the property of any other person or, in the case of a merger, of the continuing company resulting therefrom, it shall ensure that such other person or continuing company (the "NetGateway Successor"), by operation of law, becomes, without more, bound by the terms and provisions of this Agreement or, if not so bound, executes, prior to or contemporaneously with the consummation of such transaction, an agreement supplemental hereto and such other instruments (if any) as are necessary or advisable to evidence the assumption by the NetGateway Successor of liability for all monies payable and property deliverable hereunder, the covenant of such NetGateway Successor to pay and deliver or cause to be delivered the same and its agreement to observe and perform all the covenants and obligations of NetGateway under this Agreement. 1.19 Vesting of Powers in Successor. In the event that Section 4.1 hereof applies, then, upon the NetGateway Successor becoming bound by the terms of this Agreement by the operation of law or by the execution of an agreement supplemental hereto, the NetGateway Successor shall possess and from time to time may exercise each and every right and power of NetGateway under this Agreement in the name of NetGateway or otherwise and any act or proceeding by any provision of this Agreement required to be done or performed by the board of directors of NetGateway or any officers of NetGateway may be done and performed with like force and effect by the directors or officers of such NetGateway Successor. 1.20 Subsidiaries. Nothing herein shall be construed as preventing the amalgamation or merger or combination of any subsidiary of NetGateway with or into NetGateway or the winding-up, liquidation or dissolution of any subsidiary of NetGateway provided that all of the assets of such subsidiary are transferred to NetGateway or another subsidiary of NetGateway, and any such transactions are expressly permitted by this Article 4. ARTICLE 5 LIQUIDATION CALL RIGHT 1.21 NetGateway shall have the overriding right (the "Liquidation Call Right"), in the event of and notwithstanding the proposed liquidation, dissolution or winding-up of the Corporation pursuant to Article 5 of the Exchangeable Share Provisions, to purchase from all but not less than all of the holders (other than NetGateway and any Subsidiary thereof) of Exchangeable Shares on the Liquidation Date all but not less than all of the Exchangeable Shares held by each such holder on payment by NetGateway to the holder of the Exchangeable Share Price applicable on the last Business Day prior to the Liquidation Date (the "Liquidation Call Purchase Price"), which, as provided in this Section 5.1, shall be fully paid and satisfied by the delivery by or on behalf of NetGateway of the Exchangeable Share Consideration representing the Liquidation Call Purchase Price. In the event of the exercise of the Liquidation Call Right by NetGateway, each holder shall be obligated to sell all the Exchangeable Shares held by the holder to NetGateway on the Liquidation Date on payment by NetGateway to the holder of the Liquidation Call Purchase Price for each such share. In connection with payment of the Exchangeable Share Consideration representing the total Liquidation Call Purchase Price, NetGateway shall be entitled to liquidate some of the NetGateway Common Stock that would otherwise be deliverable to the particular holder of Exchangeable Shares in order to fund any statutory withholding tax obligation. 1.22 To exercise the Liquidation Call Right, NetGateway must notify the holders of Exchangeable Shares and the Corporation of NetGateway's intention to exercise such right at least 30 days before the Liquidation Date in the case of a voluntary liquidation, dissolution or winding-up of the Corporation and at least five Business Days before the Liquidation Date in the case of an involuntary liquidation, dissolution or winding-up of the Corporation. The Corporation will notify the holders of Exchangeable Shares as to whether or not NetGateway has exercised the Liquidation Call Right forthwith after the expiry of the date by which the same may be exercised by NetGateway. If NetGateway exercises the Liquidation Call Right, NetGateway will, on the Liquidation Date, purchase and the holders will sell all of the Exchangeable Shares then outstanding for a price per share equal to the Liquidation Call Purchase Price and all obligations of the Corporation under Section 5.1 of the Exchangeable Share Provisions shall terminate. 1.23 For the purposes of completing the purchase of the Exchangeable Shares pursuant to the Liquidation Call Right, NetGateway shall, at its option, deposit or cause to be deposited, on or before the Liquidation Date, the Exchangeable Share Consideration representing the total Liquidation Call Purchase Price with the Corporation or in a custodial account with any chartered bank or trust company in Canada. Provided that such Exchangeable Share Consideration has been so deposited, on and after the Liquidation Date, the rights of each holder of Exchangeable Shares will be limited to receiving such holder's proportionate part of the total Liquidation Call Purchase Price payable by NetGateway without interest upon presentation and surrender by the holder of certificates representing the Exchangeable Shares held by such holder and the holder shall on and after the Liquidation Date be considered and deemed for all purposes to be the holder of the NetGateway Common Stock delivered to it. Upon surrender to the Corporation of a certificate or certificates representing Exchangeable Shares, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the Business Corporations Act (Alberta) and the by-laws of the Corporation and such additional documents and instruments as the Corporation may reasonably require, the holder of such surrendered certificate or certificates shall be entitled to receive in exchange therefor, and the Corporation on behalf of NetGateway shall deliver to such holder, the Exchangeable Share Consideration to which the holder is entitled. If NetGateway does not exercise the Liquidation Call Right in the manner described above, on the Liquidation Date the holders of the Exchangeable Shares will be entitled to receive in exchange therefor the liquidation price otherwise payable by the Corporation in connection with the liquidation, dissolution or winding-up of the Corporation pursuant to Article 5 of the Exchangeable Share Provisions. ARTICLE 6 REDEMPTION CALL RIGHT 1.24 NetGateway shall have the overriding right (the "Redemption Call Right"), notwithstanding the proposed redemption of the Exchangeable Shares by the Corporation pursuant to Article 7 of the Exchangeable Share Provisions, to purchase from all but not less than all of the holders (other than NetGateway or any Subsidiary thereof) of Exchangeable Shares on the Automatic Redemption Date all but not less than all of the Exchangeable Shares held by each such holder on payment by NetGateway to the holder of the Exchangeable Share Price applicable on the last Business Day prior to the Automatic Redemption Date (the "Redemption Call Purchase Price") which, as provided in this Section 6.1, shall be fully paid and satisfied by the delivery by or on behalf of NetGateway of the Exchangeable Share Consideration representing the Redemption Call Purchase Price. In the event of the exercise of the Redemption Call Right by NetGateway, each holder shall be obligated to sell all the Exchangeable Shares held by the holder to NetGateway on the Automatic Redemption Date on payment by NetGateway to the holder of the Redemption Call Purchase Price for each such share. In connection with payment of the Exchangeable Share Consideration representing the total Redemption Call Purchase Price, NetGateway shall be entitled to liquidate some of the NetGateway Common Stock that would be otherwise deliverable to the particular holder of Exchangeable Shares in order to fund any statutory withholding tax obligation. 1.25 To exercise the Redemption Call Right, NetGateway must notify the holders of Exchangeable Shares and the Corporation of NetGateway's intention to exercise such right at least 65 days before the Automatic Redemption Date. The Corporation will notify the holders of the Exchangeable Shares as to whether or not NetGateway has exercised the Redemption Call Right forthwith after the date by which the same may be exercised by NetGateway. If NetGateway exercises the Redemption Call Right, NetGateway will, on the Automatic Redemption Date, purchase and the holders will sell all of the Exchangeable Shares then outstanding for a price per share equal to the Redemption Call Purchase Price and all of the obligations of the Corporation under Section 7.1 of the Exchangeable Share Provisions shall terminate. 1.26 For the purposes of completing the purchase of the Exchangeable Shares pursuant to the Redemption Call Right, NetGateway shall, at its option, deposit or cause to be deposited, on or before the Automatic Redemption Date, the Exchangeable Share Consideration representing the total Redemption Call Purchase Price with the Corporation or in a custodial account with any chartered bank or trust company in Canada. Provided that such Exchangeable Share Consideration has been so deposited, on and after the Automatic Redemption Date the rights of each holder of Exchangeable Shares will be limited to receiving such holder's proportionate part of the total Redemption Call Purchase Price payable by NetGateway upon presentation and surrender by the holder of certificates representing the Exchangeable Shares held by such holder and the holder shall on and after the Automatic Redemption Date be considered and deemed for all purposes to be the holder of the NetGateway Common Stock delivered to such holder. Upon surrender to the Corporation of a certificate or certificates representing Exchangeable Shares, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the Business Corporations Act (Alberta) and the by-laws of the Corporation and such additional documents and instruments as the Corporation may reasonably require, the holder of such surrendered certificate or certificates shall be entitled to receive in exchange therefor, and the Corporation on behalf of NetGateway shall deliver to such holder, the Exchangeable Share Consideration to which the holder is entitled. If NetGateway does not exercise the Redemption Call Right in the manner described above, on the Automatic Redemption Date the holders of the Exchangeable Shares will be entitled to receive in exchange therefor the redemption price otherwise payable by the Corporation in connection with the redemption of the Exchangeable Shares pursuant to Article 7 of the Exchangeable Share Provisions. ARTICLE 7 DEEMED REPRESENTATION, WARRANTY AND ACKNOWLEDGMENT 1.27 Upon the issuance of any shares of NetGateway Common Stock to a holder of Exchangeable Shares and provided that such shares of NetGateway Common Stock have not been registered under the United States Securities Act of 1933, as amended, such holder shall be deemed to represent and warrant to NetGateway that it is acquiring the shares of NetGateway Common Stock for its own account for investment and not with a view to or in connection with any distribution or resale thereof. 1.28 Each holder of Exchangeable Shares shall be deemed to acknowledge that neither the Exchangeable Shares nor the shares of NetGateway Common Stock issuable in exchange therefor have been registered under the United States Securities Act of 1933, as amended, and that the Exchangeable Shares and the NetGateway Common Stock may be offered and sold by the holder thereof in the United States of America or to citizens or residents thereof only if such Exchangeable Shares or NetGateway Common Stock, as the case may be, have been registered under the United States Securities Act of 1933, as amended, or unless an exemption from registration is available. ARTICLE 8 GENERAL 1.29 Term. This Agreement shall come into force and be effective as of the date hereof and shall terminate and be of no further force and effect at such time as no Exchangeable Shares (or securities or rights convertible into or exchangeable for or carrying rights to acquire Exchangeable Shares) are held by any party other than NetGateway and any of its Subsidiaries. 1.30 Changes in Capital of NetGateway and the Corporation. At all times after the occurrence of any event effected pursuant to Section 2.6 or 2.7 hereof, as a result of which either NetGateway Common Stock or the Exchangeable Shares or both are in any way changed, this Agreement shall forthwith be amended and modified as necessary in order that it shall apply with full force and effect, mutatis mutandis, to all new securities into which NetGateway Common Stock or the Exchangeable Shares or both are so changed and the parties hereto shall execute and deliver an agreement in writing giving effect to and evidencing such necessary amendments and modifications. 1.31 Severability. If any provision of this Agreement is held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remainder of this Agreement shall not in any way be affected or impaired thereby and this Agreement shall be carried out as nearly as possible in accordance with its original terms and conditions. 1.32 Ministerial Amendments. The parties to this Agreement may in writing, at any time and from time to time, without the approval of the holders of the Exchangeable Shares, amend or modify this Agreement for the purposes of: (1) adding to the covenants of either or both parties for the protection of the holders of the Exchangeable Shares; (2) making such amendments or modifications not inconsistent with this Agreement as may be necessary or desirable with respect to matters or questions which, in the opinion of the board of directors of each of the Corporation and NetGateway, it may be expedient to make, provided that each such boards of directors shall be of the opinion that such amendments or modifications will not be prejudicial to the interests of the holders of the Exchangeable Shares; or (3) making such changes or corrections which, on the advice of counsel to the Corporation and NetGateway, are required for the purpose of curing or correcting any ambiguity or defect or inconsistent provision or clerical omission or mistake or manifest error, provided that the boards of directors of each of the Corporation and NetGateway shall be of the opinion that such changes or corrections will not be prejudicial to the interests of the holders of the Exchangeable Shares. 1.33 Meeting to Consider Amendments. the Corporation, at the request of NetGateway, shall call a meeting or meetings of the holders of the Exchangeable Shares for the purpose of considering any proposed amendment or modification requiring approval of such shareholders. Any such meeting or meetings shall be called and held in accordance with the by-laws of the Corporation, the Exchangeable Share Provisions and all applicable laws. 1.34 Amendments Only in Writing. No amendment to or modification or waiver of any of the provisions of this Agreement otherwise permitted hereunder shall be effective unless made in writing and signed by both of the parties hereto. 1.35 Execution of Supplemental Agreements. From time to time the parties hereto may, subject to the provisions of these presents, and they shall, when so directed by these presents, execute and deliver (by their proper officers, if applicable) agreements or other instruments supplemental hereto, which thereafter shall form part hereof, for any one or more of the following purposes: (1) evidencing the succession of any NetGateway Successors to NetGateway and the covenants of and obligations assumed by each such NetGateway Successor in accordance with the provisions of Article 4; (2) making any additions to, deletions from or alterations of the provisions of this Agreement which, will not be prejudicial to the interests of the holders of Exchangeable Shares or are necessary or advisable in order to incorporate, reflect or comply with any legislation, the provisions of which apply to the parties hereto or this Agreement; and (3) for any other purposes not inconsistent with the provisions of this Agreement including, without limitation, to make or evidence any amendment or modification to this Agreement as contemplated hereby, provided that, the rights of the holders of Exchangeable Shares will not be prejudiced thereby. 1.36 Inurement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and the holders, from time to time, of Exchangeable Shares and each of their respective heirs, successors and assigns. No transfer of any Exchangeable Shares shall be recognized or binding upon the Corporation or NetGateway unless and until the transferee of such Exchangeable Shares has executed and become a party to this Agreement, as amended. Certificates evidencing the Exchangeable Shares shall contain or have affixed thereto a legend in form and on terms satisfactory to the Board of Directors of the Corporation with respect to the terms of this Support Agreement, and stating that the shares represented by the said certificates are subject to the provisions of this agreement and that such shares are not transferrable on the books of the Corporation except in compliance with the terms of this Support Agreement and the Exchangeable Share Provisions. 1.37 Notices to Parties. All notices and other communications between the parties shall be in writing and shall be deemed to have been given if delivered personally or by confirmed telecopy to the parties at the following addresses (or at such other address for either such party as shall be specified in like notice): (1) if to Rosenvall at: With a copy to: Tingle & Associates Suite 1250 Standard Life Building 639 - 5 Avenue S.W. Calgary, Alberta T2P 0M9 Attention: Bryce C. Tingle Facsimile: (403) 571-8008 (2) if to MacDonald at: o With a copy to: Tingle & Associates Suite 1250 Standard Life Building 639 - 5 Avenue S.W. Calgary, Alberta T2P 0M9 Attention: Bryce C. Tingle Facsimile: (403) 571-8008 (3) if to McKinlay at: o With a copy to: Tingle & Associates Suite 1250 Standard Life Building 639 - 5 Avenue S.W. Calgary, Alberta T2P 0M9 Attention: Bryce C. Tingle Facsimile: (403) 571-8008 (d) if to the Corporation or NetGateway, addressed to: NetGateway, Inc. 300 Oceangate, 5th Floor Long Beach, CA 90802 Attn: Don Corliss, Jr., President Fax: (562) 308 0021 With a copy to: Nida & Maloney, P.C. 800 Anacapa Street Santa Barbara, CA 93101 Attn: C. Thomas Hopkins, Esq. Fax: (805) 568 1955 Any notice or other communication given personally shall be deemed to have been given and received upon delivery thereof and if given by telecopy shall be deemed to have been given and received on the date of confirmed receipt thereof unless such day is not a Business Day in which case it shall be deemed to have been given and received upon the immediately following Business Day. 1.38 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. 1.39 Jurisdiction. This Agreement shall be construed and enforced in accordance with the laws of the Province of Alberta and the laws of Canada applicable therein. 1.40 Attornment. NetGateway agrees that any action or proceeding arising out of or relating to this Agreement may be instituted in the courts of Alberta, waives any objection which it may have now or hereafter to the venue of any such action or proceeding, irrevocably submits to the jurisdiction of the said courts in any such action or proceeding, agrees to be bound by any judgment of the said courts and not to seek, and hereby waives, any review of the merits of any such judgment by the courts of any other jurisdiction and hereby appoints the Corporation at its registered office in the Province of Alberta as NetGateway's attorney for service of process. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. NETGATEWAY, INC. STORESONLINE.COM LTD. Per: ______________________________ Per: ______________________________ ____________________________________ Witness DAVID ROSENVALL ____________________________________ Witness JORDI MacDONALD ____________________________________ Witness CLINT McKINLAY Exhibit J NIDA & MALONEY A PROFESSIONAL CORPORATION ATTORNEYS AT LAW 800 Anacapa Street Santa Barbara, California 93101 PHONE 805-568-1151 FAX 805-568-1955 Los Angeles Office 379 West 190th Street, Suite 530 Los Angeles, California 90148 PHONE 310-532-5082 FAX 310-533-8878 January 13, 1999 David Rosenvall Jordi MacDonald Clint McKinlay Shawn Abbot Dan Freedman Cani Services Inc. Gerald W. Moore Ed Warner 26 Rocky Ridge Landing NW Calgary, Alberta Canada T3G 4E5 Ladies and Gentlemen: We have acted as counsel to NetGateway, Inc., a Nevada corporation (the "Company"), in connection with the Stock Purchase Agreement dated as of November 1, 1998 (the "STOCK PURCHASE AGREEMENT"), by and between NetGateway StoresOnline.com Ltd., an Alberta corporation, and all the shareholders of Spartan Multimedia, Inc., and Alberta corporation, and the transactions contemplated thereby. Capitalized terms used but not defined herein shall have the respective meanings given to such terms in the Stock Purchase Agreement. We have also examined and relied upon the accuracy of original, certified, conformed, photographic or telecopied copies of such records, agreements, certificates of government officials and of officers of the Company, and other documents, and have made such other investigations as we have deemed necessary or appropriate as a basis for such opinion. In all such examinations, we have assumed the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals, and the conformity to such original documents of all copies submitted to us as certified, conformed, photographic or telecopied copies and, as to certificates and telephonic confirmations given by public officials, we have assumed the same to have been properly given and to be accurate. As to any matters of fact bearing upon such opinion, we have relied solely upon the accuracy of the statements, representations and warranties made in the Agreement, and certificates of the Company and of governmental officials, and we have made no independent investigation or inquiry with respect to such factual matters. With your consent, and for purposes of the opinion set forth below, we have assumed the accuracy of the following matters, but we have not made any independent investigation or inquiry with respect thereto and we render no opinion on such matters: (i) Each party to the Stock Purchase Agreement (other than the Company) have duly and validly authorized, executed and delivered the Stock Purchase Agreement. (ii) The Stock Purchase Agreement constitutes the legal, valid and binding obligation of each party to Stock Purchase Agreement (other than the Company), enforceable against such party in accordance with the terms of the Stock Purchase Agreement, except as may be limited by (a) bankruptcy, insolvency, reorganization, receivership, fraudulent conveyance, preferential transfer, moratorium or other similar laws or court decisions affecting the rights and remedies of creditors generally, or (b) general principles of equity (regardless of whether considered in a proceeding at law or in equity). (iii) Each party to the Stock Purchase Agreement (other than the Company) has obtained any and all consents, permits and approvals required by or from any and all federal, state, local or foreign governmental agencies and authorities in connection with the transactions contemplated thereby, to the extent necessary for the legality, validity, binding effect or enforceability against such party of the Stock Purchase Agreement, and all such consents, permits and approvals are in full force and effect. (iv) There are no understandings, agreements, actions, prceedings, orders, rulings or judgments to which any party to the Stock Purchase Agreement is a party or by which any such party or the assets of any such party are bound or affected, and there are no other facts, in each case other than as set forth or expressed in the Stock Purchase Agreement, that would enlarge, diminish or otherwise modify or affect the right, title, interest, obligations or liabilities of any such party under or in connection with the Stock Purchase Agreement and which would have an effect on the opinion set forth below. Based upon the foregoing and subject to the matters and qualifications hereinafter set forth, we are of the opinion that: 1. The Company has full power and authority to execute and deliver the Stock Purchase Agreement, to perform its obligations thereunder and to consummate the transactions contemplated thereby. 2. The Stock Purchase Agreement has been duly and validly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Stock Purchase Agreement is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including without limitation (i) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (ii) concepts of materiality, reasonableness, good faith and fair dealing. 3. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada, and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its Assets and Properties. The opinion set forth above is subject to the following additional qualifications: (a) We express no opinion as to any laws other than the laws of the State of California and the federal laws of the United States of America, and we express no opinion as to the laws, regulations or ordinances of any county or municipality or governmental subdivision or agency of the State of California. (b) We express no opinion with respect to the need for any consent or approval of, the giving of notice to, the registration with, or the taking of any action with respect to, any Governmental or Regulatory Authority which may be required by reason of the business activities of any party to the Stock Purchase Agreement. (c) We express no opinion as to (i) the effectiveness of any indemnity provision contained in the Stock Purchase Agreement which is contrary to public policy considerations, (ii) the effectiveness of any provision in the Stock Purchase Agreement which purports to release a party from liability for its own wrongful or negligent acts, (iii) the effectiveness of any waiver in the Stock Purchase Agreement of any statutory right or of any broadly or vaguely stated rights or unknown future rights, or any waiver which is contrary to public policy considerations, (iv) the effectiveness of any waiver of a right to trial by jury or of the right to file any counterclaim, (v) the effectiveness of any provision establishing or waiving jurisdiction or venue, (vi) the effectiveness of any provision in the Stock Purchase Agreement which provides that it may be amended or varied, or any provision thereof waived, only by an instrument in writing, (vii) any provision requiring the payment of any amount, or providing for the release or extinguishment of any right, to the extent that such provision is deemed to constitute or result in a penalty or forfeiture, (viii) the severability of any provision of any of the Stock Purchase Agreement, (ix) any provision authorizing or permitting any person to act in a manner which is not in good faith, diligent or commercially reasonable, (x) any provision in the Stock Purchase Agreement which is inconsistent with any other provision in the Stock Purchase Agreement or is ambiguous, and (xi) any federal, state or provincial securities or "blue sky" laws, or any federal, state or provincial laws relating to community property, tax, antitrust, safety, health, environmental matters, hazardous or toxic materials, national security, foreign persons, or endangered species. (d) We express no opinion as to (i) the specific remedy that any court, other governmental authority or arbitrator may grant, impose or render, and (ii) the availability of equitable remedies (including, without limitation, specific performance, injunctive relief and the exercise of any powers-of-attorney) for the enforcement of any provisions of the Stock Purchase Agreement. The availability or enforceability of particular remedies, or waivers contained in or in respect of the Stock Purchase Agreement, may be limited or rendered unenforceable by applicable law, but such law does not, in our opinion, make the remedies afforded by the Stock Purchase Agreement (taken as whole) inadequate for the ultimate practical realization of the benefits intended to be provided thereby. (e) We express no opinion as to any provision which constitutes (i) a waiver of illegality as a defense to performance or of any other defense to performance that cannot, as a matter of law, be effectively waived, (ii) a waiver or limitation of rights to seek protection under federal or state bankruptcy, insolvency, reorganization or other similar laws or (iii) a waiver or limitation of any parties rights to seek indemnification from or other recourse against a party that has breached its fiduciary duties or other obligations, committed fraud or otherwise made some misrepresentation. (f) The opinion set forth above is given only as of the date hereof and we disavow any undertaking or obligation to advise you of any changes in law or any facts or circumstances that may hereafter occur or come to our attention that could affect such opinion. (g) We have assumed that there has not been any mutual mistake of fact or misunderstanding, fraud, duress or undue influence on the part of any party to the Stock Purchase Agreement in connection with the execution and delivery thereof. (h) We have assumed that the parties to the Stock Purchase Agreement have complied and will comply with any covenants of good faith and fair dealing. (i) Our opinion expressed in numbered PARAGRAPH 2 includes our opinion that the choice of governing law provisions set forth in the Stock Purchase Agreement are enforceable; PROVIDED, HOWEVER, we express no opinion as to whether or not such choice of governing law provisions would be enforced by a federal, state or provincial court located outside of the State of California. At the request of our clients, this opinion is being provided to you pursuant to SECTION 7.07 of the Stock Purchase Agreement, and this opinion may not be relied upon by any other Person or for any purpose other than in connection with the transactions contemplated by the Stock Purchase Agreement without, in each instance, our prior written consent. Very truly yours, /s/ NIDA & MALONEY, P.C. ------------------------------- NIDA & MALONEY, P.C. Exhibit L REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Registration Rights Agreement") is made as of November 30, 1998, by and between NetGateway, Inc., a Nevada corporation (the "Company"), and the Selling Stockholders identified on Schedule 1 hereto (each a "Holder" and collectively, the "Holders"). A. The Selling Stockholders are parties to the Stock Purchase Agreement with the Company and StoresOnline.com Ltd., an Alberta corporation ("StoresOnline"), of even date herewith (the "Agreement"), pursuant to which the Selling Stockholders have purchased shares of Exchangeable Shares of StoresOnline which are exchangeable for shares of common stock ("Common Stock") of the Company; and B. The Company has agreed to grant to the Selling Stockholders registration rights in respect of its Common Stock. NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS: 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 Definition. The following terms shall have the meanings indicated (all terms not otherwise defined herein shall have the meaning ascribed thereto in the Stock Purchase Agreement): (a) The term the "Act" shall mean the Securities Act of 1933, as amended, and the term the "1934 Act" shall mean the Securities Exchange Act of 1934, as amended; (b) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document; (c) The term "Registrable Securities" means the Common Stock issuable or issued upon exchange of the Exchangeable Shares; (d) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities; (e) The term "Form S-3 " means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the Securities and Exchange Commission (the "SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. 1.2 S-3 Demand Rights. (a) If, not earlier than two years following the Closing Date, the Holders of at least fifty percent (50%) of the Registrable Securities then outstanding request, in writing, that the Company file a registration statement under the Act covering the registration of at least fifty percent (50%) of the Registrable Securities then outstanding, then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 1.2(b) below effect, as soon as practicable, and in any event shall use its best efforts to effect within one hundred twenty (120) days of the receipt of such request, the registration under the Act on Form S-3 of all Registrable Securities which the Holders request to be registered within ten (10) days of the mailing of such notice by the Company in accordance with Section 2.5. (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a) above. The underwriter or underwriters will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any Holder to include his or her Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.4(e) below) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder. (c) In addition, the Holders of a majority of Registrable Securities shall be entitled to make two additional written demands that the Company file an S-3 registration statement covering a number of Registrable Securities all in accordance with the other provisions of this Section 1.2; provided, however, that the Holders shall be solely responsible for all costs and expenses related to such additional demand registrations. (d) The Company is obligated to effect only three (3) such registrations pursuant to this Section 1.2. (e) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders. 1.3 Piggyback Rights. If (but without any obligation to do so) the Company proposes to register any of its Common Stock under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company employee benefits plan, or a registration relating to corporate reorganization or other transactions under Rule 145 of the Act) the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within ten (10) days after mailing of such notice by the Company in accordance with Section 2.5 hereof, the Company shall, subject to the provisions of Section 1.7 hereof, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 1.4 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best reasonable efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening, of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances then existing. 1.5 Expenses of Demand Registration. All expenses, other than underwriting discounts and commissions incurred in connection with the registration, filing or qualification pursuant to Section 1.2 hereof, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 hereof (a) following the first such registration or (b) if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all Participating Holders, shall bear such expenses). 1.6 Expenses of Piggyback Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 1.3 hereof for each Holder (which right may be assigned as provided in Section 1.11 below), including (without limitation) all registration, filing and qualification fees, printers and accounting fees relating or apportionable thereto and the fees and disbursements of one counsel for the selling Holders selected by them, but excluding underwriting discounts and commissions relating to Registrable Securities. 1.7 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 hereof to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling Holders according to the total amount of securities entitled to be included therein owned by each selling Holder or in such other proportions as shall mutually be agreed to by such selling Holders) but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below twenty percent (20%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities, in which case the selling Holders may be excluded if the underwriters make the determination described above and no other shareholder's securities are included or (ii) notwithstanding (i) above, any shares being sold by a shareholder exercising a demand registration right similar to that granted in Section 1.2 hereof be excluded from such offering. For purposes of the preceding parenthetical concerning, apportionment, for any selling Holder which is a Holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons, shall be deemed to be a single "Selling Holder," any pro rata reduction with respect to such "Selling Holder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "Selling Holder," as defined in this sentence. 1.8 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.9 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages or liabilities, joint or several) to which they may become subject under the Act, or the 1934 Act, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, or any rule or regulation promulgated under the Act, or the 1934 Act; and the Company will pay to each such Holder, underwriter or controlling person any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, or the 1934 Act, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.9(b), in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability (action if such settlement is effected without the consent of the Holder, which consent shall not unreasonably withheld); provided, that, in no event shall any indemnity under this subsection 1.9(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party a written notice of the commencement thereof, the indemnifying party shall have the right to participate in and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense therewith counsel mutually satisfactory to the parties; provided, however, that any indemnified parties (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to indemnified party otherwise than under this Section 1.9. (d) The obligations of the Company and Holders under this Section 1 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.10 Assignment Of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities who, after such assignment or transfer, holds at least 50,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided the Company is, within thirty (30) days, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is, in the written opinion of counsel to the Company reasonably acceptable to the Holder, not restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings as of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 1. 1.11 Amendment of Registration Rights. Any provision of this Section 1 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver to this Registration Rights Agreement shall be binding upon each holder of any Registrable Securities then outstanding and the Company. 2. MISCELLANEOUS. 2.1 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Registration Rights Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Series B Preferred Stock of the Company held by the Investor or any Common Stock of the Company issued upon conversion thereof). Nothing in this Registration Rights Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Registration Rights Agreement, except as expressly provided in this Registration Rights Agreement. 2.2 Governing. This Registration Rights Agreement shall be governed by and construed under the laws of the State of California. 2.3 Counterparts. This Registration Rights Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2.4 Titles and Subtitles. The titles and subtitles used in this Registration Rights Agreement are used for convenience only and are not to be considered in construing or interpreting this Registration Rights Agreement. 2.5 Notices. Unless otherwise provided, any notice required or permitted under this Registration Rights Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or four days after deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 2.6 Severability. If one or more provisions of this Registration Rights Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Registration Rights Agreement and the balance of this Registration Rights Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first above written. NETGATEWAY, INC., a Nevada corporation By: ____________________________________ Name: Title: Address: 300 Oceangate, 5th Floor Long Beach, CA 90802 SELLING STOCKHOLDERS ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ EX-10.14 18 AMENDMENT STOCK PURCHASE AGREEMENT Exhibit 10.14 AMENDMENT TO THE STOCK PURCHASE AGREEMENT THIS AGREEMENT made the ______ day of February, 1999 BETWEEN: STORESONLINE.CQM, LTD., a corporation incorporated under the laws of the Province of Alberta (hereinafter called "Purchaser") OF THE FIRST PART - and - NETGATEWAY, INC., a corporation incorporated under the laws of the State of Nevada (hereinafter called "Netgateway") OF THE SECOND PART - and - The persons listed on the signing page hereto (hereinafter referred to as the "Selling Stockholders") OF THE THIRD PART WHEREAS the parties entered into a Stock Purchase Agreement dated as of November 1, 1998 (the "Stock Purchase Agreement") and are desirous of amending the same; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Section 1.02 of the Stock Purchase Agreement is hereby replaced with the following: "1.02 Purchase Price. The aggregate purchase price for the Shares is $2,600,000 dollars (the "Purchase Price") which shall be payable by the Purchaser's delivery of 371,429 Shares of the Purchaser's Class "B" Common Stock (the "Exchangeable Shares"), which shall be exchangeable into Netgateway Common Stock ("Netgateway Shares") in accordance with the Purchaser's Articles of Incorporation set forth as Exhibit "A" hereto. All the amounts set forth herein shall refer to United States Dollars unless otherwise indicated. 2. Section 1,03 and Schedule I of the Stock Purchase Agreement are hereby amended such that the number of Exchangeable Shares referred to therein is increased to reflect the increase in the total number of' Exchangeable Shares set out in Section 1.02 above. Where a portion of the Exchangeable Shares is referred to that portion shall be increased by the same percentage by which the total number of Exchangeable Shares have been increased. 3. Section 1 .03 (c) is eliminated in its entirety. 4. Sections 9.01 and 9.02 of the Stock Purchase Agreement are hereby amended such that the fair market value of the Exchangeable Shares is deemed to be $7.00 USD. 5. Section 9.03 of the Stock Purchase Agreement is amended to remove the phrase "the lesser of the ADP or" so it reads "the aggregate fair market value of the Shares, which shall be deemed to be the Purchase Price." 6. Section 10.01 of the Stock Purchase Agreement is amended to eliminate the definition "ADP" in its entirety. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officer of each party hereto as at the date first above written, PURCHASER: STORESONLINE.COM LTD., an Alberta corporation By: /s/ Donald M. Corliss, Jr. ------------------------------------ Name: Donald M. Corliss, Jr. Title: President NETGATEWAY: NETGATEWAY, INC., a Nevada corporation By: /s/ Donald M. Corliss, Jr. ------------------------------------ Name: Donald M. Corliss, Jr. Title: President SELLING STOCKHOLDERS: /s/ David Rosenvall ---------------------------------------- David Rosenvall /s/ Jordi MacDonald ---------------------------------------- Jordi MacDonald /s/ Clint McKinlay ---------------------------------------- Clint McKinlay /s/ Shawn Abbot ---------------------------------------- Shawn Abbot /s/ Dan Freedman ---------------------------------------- Dan Freedman /s/ Cani Services Inc. ---------------------------------------- Cani Services Inc. /s/ Gerald W. Moore ---------------------------------------- Gerald W. Moore /s/ Ed Warner ---------------------------------------- Ed Warner 3 EX-10.15 19 FINANCIAL CONSULTING AGREEMENT Exhibit 10.15 CRUTTENDEN ROTH INCORPORATED 24 CORPORATE PLAZA NEWPORT BEACH, CALIFORNIA 92660 CONSULTING AGREEMENT ______, 1999 Netgateway, Inc. 300 Oceangate, Suite 500 Long Beach, California 90802 Attn: Mr. Keith Freadhoff Chairman of the Board and Chief Executive Officer Dear Sirs: This will confirm the arrangements, terms and conditions pursuant to which Cruttenden Roth Incorporated (the "Consultant") has been retained to serve as consultant and advisor to Netgateway, Inc., a Delaware corporation (the "Company"'), for the term set forth in Section 3 below. The undersigned hereby agree to the following terms and conditions: 1. ENGAGEMENT. The Company hereby retains the Consultant to perform consulting and advisory services, and the Consultant hereby accepts such retention and agrees to do and perform consulting and advisory services, upon the terms and conditions set forth herein. 2. DUTIES OF THE CONSULTANT. (a) CONSULTING SERVICES. The Consultant will provide such general financial consulting services and advice pertaining to the Company's business affairs (as further set forth below), as and when the Company may from time to time reasonably request upon reasonable notice. Without limiting the generality of the foregoing, the Consultant will assist the Company in developing, studying and evaluating financing and capital structure, mergers and acquisitions activity and corporate financing proposals, prepare reports and studies thereon when advisable, and assist in negotiations and discussions pertaining thereto. (b) FINANCING. The Consultant will assist and represent the Company in obtaining both short and long-term financing, when so requested by the Company in the Company's sole discretion. The Consultant will be entitled to additional compensation under such terms as may be agreed to by the parties in connection therewith. (c) WALL STREET LIAISON. The Consultant will, when appropriate, arrange meetings between representatives of the Company and individuals and financial institutions in the investment community, such as security analysts, portfolio managers and market makers. The services described in this Section 2 shall be rendered by the Consultant in consultation with the Company at such time and place and in such manner (whether by conference, telephone, letter or otherwise) as the Consultant and the Company may reasonably determine. 3. TERM. The term of this Agreement shall commence on the date hereof and continue for a period of two years from the date hereof (the "Term"). 4. COMPENSATION. As compensation in full for the Consultant's services hereunder during the Term, the Company shall pay to the Consultant the sum of $______, which amount shall be paid at the closing of the public offering contemplated by the Underwriting Agreement, dated _______, 1999, between the Company and the Consultant, as representative of the Underwriters identified therein. 5. EXPENSES. The Company shall pay and reimburse the Consultant for all reasonable out-of-pocket expenses incurred by the Consultant and approved in advance in writing by the Company in the performance of its services under this Agreement. 6. RELATIONSHIP. Nothing herein shall constitute the Consultant as an employee or agent of the Company. Except as might hereinafter be expressly agreed, the Consultant shall not have the authority to obligate or commit the Company in any manner whatsoever. 7. CONFIDENTIALITY. Except in the course of the performance of its duties hereunder, and in such case, only upon express written consent of the Company, the Consultant agrees that it shall not disclose any trade secrets, know-how, or other proprietary information not in the public domain learned as a result of this Agreement unless and until such information becomes generally known or is in the public domain. 8. FINDER'S OR BROKER'S FEES. The Company acknowledges and agrees that, with the written agreement and at the request of the Company, the Consultant may act as a finder or financial consultant in various business transactions in which the Company or any of its subsidiaries may be involved, such as mergers, acquisitions, joint ventures or investments and that the Consultant may be entitled to receive a finder's fee or brokerage commission or other rights, profits or payments in connection with such transactions provided, however, that the Company and the Consultant have entered into an agreement prior thereto regarding the services to be performed by and the fee to be paid to the Consultant. 9. PERMITTED ACTIVITIES. Nothing contained in this Agreement shall limit or restrict the right of the Consultant or of any officer, director, shareholder, employee, agent or representative of the Consultant to be a partner, owner, director, officer, employee, agent or representative of, or engage in, any other business, whether of a similar nature or not, or limit or restrict the right of the Consultant to render services of any kind to any other corporation, firm, individual or other entity. 10. ASSIGNMENT AND TERMINATION. This Agreement shall not be assignable by any party except to a successor to all or substantially all of the business of either party without the prior written consent of the other party, which consent may be arbitrarily withheld by the party whose consent is required. 11. NOTICES. All notices hereunder shall be in writing and shall be validly given, made or served if in writing and delivered in person or when received by facsimile transmission, or five days after being sent first class certified or registered mail, postage prepaid or one day after being sent by nationally recognized overnight courier to the party for whom intended at the addresses as set forth above or at such other address as may be provided. 12. GOVERNING LAW; SUBMISSION TO JURISDICTION. This agreement shall be interpreted, construed, governed and enforced according to the laws of the State of California without giving effect to the conflicts of law rules thereof. The Company and the Consultant hereby agree that any action, proceeding or claim against it arising out of, or relating in any way to, this Agreement shall be brought and enforced in the courts of the State of California or of the United States of America in California, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company and the Consultant hereby irrevocably waive any objection to such exclusive jurisdiction or inconvenient forum and also hereby irrevocably waive any right or claim to trial by jury in connection with any such action, proceeding or claim. 13. AMENDMENTS. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by the parties hereto. 14. INDEMNIFICATION. As a consultant for the Company, the Consultant must at times rely upon the information supplied to the Consultant by the Company's officers, directors, agents and employees as to accuracy and completeness. Therefore, the Company agrees to indemnify, hold harmless and defend the Consultant, its directors, officers, employees and agents from and against any and all claims, actions, proceedings, losses, liabilities, costs and expenses (including without limitation, reasonable attorneys' fees) incurred by any of them in connection with or as a result of any inaccuracy, incompleteness or omission of information given to the Consultant in writing by the Company's officers, directors, agents or employees in connection with the rendering of services by the Consultant requested by the Company hereunder. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts which, taken together, shall constitute one and the same instrument, and this Agreement shall become effective when one or more counterparts have been signed by each of the parties. It shall not be necessary in making proof of this Agreement or any counterpart hereof to account for more than one such counterpart. Very truly yours, CRUTTENDEN ROTH INCORPORATED By: Name: Title: AGREED AND ACCEPTED: NETGATEWAY, INC. By: Keith Freadhoff Chairman of the Board, President and Chief Executive Officer EX-23.1 20 CONSENT OF KPMG CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- The Board of Directors NetGateway, Inc.: We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. Our report dated October 23, 1998, except as to note 11, which is as of April 30, 1999, contains an explanatory paragraph that states that the Company's planned principal operations have not commenced and minimal revenues have been generated while the Company develops its technology. Additionally, the Company has a total shareholders' deficit and has continuing financial needs. These matters raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Los Angeles, California May 27, 1999 EX-23.2 21 CONSENT OF WRIGHT FORD YOUNG & CO. EXHIBIT 23.2 WRIGHT FORD YOUNG & CO. CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS, INC. The Members Infobahn Technologies, LLC (d/b/a Digital Genesis): We consent to the inclusion of our report dated April 20, 1999, with respect to the balance sheets of Infobahn Technologies, LLC (d/b/a Digital Genesis) as of December 31, 1997 and 1996, and the related statements of operations, members' equity and cash flows for the years then ended, which report appears in the Form S-1 of Netgateway, Inc. dated May 28, 1999. /s/ WRIGHT FORD YOUNG & CO. - -------------------------------------- WRIGHT FORD YOUNG & CO. Dated: May 26, 1999 EX-23.3 22 CONSENT OF ALLAN HOGESON EXHIBIT 23.3 May 28, 1999 To: Spartan Multimedia, Inc. Dear Sirs: RE: NETGATEWAY, INC. I refer to the prospectus of the above company dated May 28, 1999 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 year ended August 31, 1998. 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 -----END PRIVACY-ENHANCED MESSAGE-----