Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER: 0-26109
_________________
NETTAXI.COM
(Exact name of registrant as specified in its charter)
_________________
NEVADA 82-0486102
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1696 DELL AVENUE, CAMPBELL, CA 95008
(Address of Principal Executive Offices Including Zip Code)
(408) 374-1168
(Registrant's telephone number, including area code)
_________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of February 28, 2001, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $6,871,860 (based upon the closing
price for shares of the registrant's common stock as reported by the O-T-C
Bulletin Board on that date). Shares of common stock held by each officer,
director, and holder of 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 28, 2001, the registrant had 43,049,486 shares of common stock,
$.001 par value per share, outstanding.
2
NETTAXI.COM
FORM 10-K
TABLE OF CONTENTS
PART I
- --------
ITEM 1. Description of Business 4
ITEM 1A. Risk Factors 22
ITEM 2. Properties 34
ITEM 3. Legal Proceedings 34
ITEM 4 . Submission Of Matters To A Vote Of Security Holders 36
PART II
- --------
ITEM 5. Market For The Registrant's Common Stock
And Related Stockholder Matters 37
ITEM 6. Selected Consolidated Financial Data 40
ITEM 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations 41
ITEM 7A. Quantitative And Qualitative Disclosures
About Market Risk 52
ITEM 8. Financial Statements And Supplementary Data 52
ITEM 9. Changes In And Disagreements With Accountants
On Accounting And Financial Disclosure 52
PART III
- --------
ITEM 10. Directors And Executive Officers Of The Registrant 53
ITEM 11. Executive Compensation 58
ITEM 12. Security Ownership Of Certain Beneficial Owners
And Management 65
ITEM 13. Certain Relationships And Related Transactions 67
PART IV
- --------
ITEM 14. Exhibits, Financial Statement Schedules,
And Reports On Form 8-K 71
3
PART I
This Form 10-K contains forward-looking statements. These forward-looking
statements are subject to significant risks and uncertainties, including
information included under Items 1 and 1A of this Form 10-K, which may cause
actual results to differ materially from those discussed in such forward-looking
statements. The forward-looking statements within this Form 10-K are identified
by words such as "believes," "anticipates," "expects," "intends," "may," "will"
and other similar expressions regarding our intent, belief and current
expectations. However, these words are not the exclusive means of identifying
such statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances and
statements made in the future tense are forward-looking statements. Readers are
cautioned that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors, many of which are
beyond our control. We undertake no obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances occurring subsequent to the filing of this Form
10-K with the Securities and Exchange Commission. Readers are urged to carefully
review and consider the various disclosures made by us in this Form 10-K,
including those set forth under "Risk Factors" in Item 1A.
ITEM 1. DESCRIPTION OF BUSINESS
OUR BUSINESS
Nettaxi.com is an Internet marketing portal that provides a range of
content and Internet based services for consumers and businesses. Our web site
at www.nettaxi.com serves as a gathering place for people with shared topics of
interest, as well as an entry point, referred to as a portal, to the Internet.
Through our web site, we provide content addressing a large number of targeted
categories. The content is organized into affinity categories such as news,
sports, entertainment, health, politics, finances, lifestyle, and other areas of
interest. Visitors to our web site are provided with comprehensive information
and content. Subscribers to our web site, which we call citizens, are also
provided with access to enhanced content such as broadband video clips, email
accounts and personal web pages. We have developed a diversified revenue model
under which we provide our citizens with access to web site hosting services and
a broad range of content, and we provide affiliated businesses with access to a
large population of Internet users for advertising and promotional purposes.
In 2000, we focused our efforts on improving the quality of content
available on our web site, implementing our web site hosting services and
reducing our operating costs by eliminating many of the services which were not
profitable.
4
We have devoted significant resources to developing our content and our
services, including developing an infrastructure and building a management team.
We have also focused on developing consumer loyalty and subsequently increasing
our overall level of traffic and citizenship. While we have incurred losses of
approximately $27,687,800 since our site was launched in October 1997, traffic
to our site has increased consistently. In December 1998, we had 60,000
registered citizens. As of December 31, 2000, there were over 800,000 registered
citizens in our community and we had a membership base of 1.8 million.
We have also enjoyed increases in traffic on our web site which is
documented by PC Data Online and their measurements of unique visitors to our
web site comparing all Internet properties. PC Data Online is an independent
research firm which produces comprehensive lists of the top web sites on the
Internet on a monthly and weekly basis. Our site had over 1,760,000 unique
visitors during the month of December 1999, causing PC Data Online to rank us as
281st among all Internet properties for the month. As a result of an aggressive
marketing campaign we conducted during the month of December 2000, PC Data
Online ranked nettaxi.com as the 94th most visited site on the Internet. We had
6,800,000 unique visitors to our web site in December 2000. In the two months
that followed, we curtailed much of our marketing efforts due to changes in the
Internet industry and, as a result, our ranking by PC Data Online fell to 636
for the month of February 2001. In March 2001, we again launched a redesigned
marketing program. By March 24, 2001 PC Data Online had ranked us as the 213th
most visited site on the Internet with 1,176,000 unique visitors for the week.
INDUSTRY BACKGROUND
The Internet is a significant medium for global communications. Millions
of people around the world use the Internet to send and receive information, for
entertainment, current events and to purchase products and services. The
emergence of portals, such as ours, has been an important development on the
Internet. These web sites provide an online location where users of the Internet
can gain access to a wide variety of information quickly. Traditionally, portal
sites have offered free services to users of the Internet including access to
e-mail accounts, message boards, news and entertainment. Through these services,
portals have attempted to develop consumer loyalty with users of the Internet,
while increasing the level of traffic on their web sites.
PORTALS. Portals provide a single online location where users can interact
and find and share pertinent information, products and services related to their
particular interests or needs. Portal sites generally offer free services
including access to e-mail accounts, chat rooms, message boards, news and
entertainment. These features tend to increase user loyalty towards particular
portal web sites. Users with an email account with a particular web site are
likely to repeat visits to the web site on a regular basis to check email and
gather other information. As a result, we believe that users tend to be loyal to
and spend more time online at portal sites.
Booze Allen & Hamilton, in a study titled "The Great Portal Payoff:
Matching Internet Marketing to Consumer Behavior" shows that portals are a
mainstream destination site for Internet users. This study shows that sixty
percent (60%) of all Internet user sessions include a visit to a portal. As the
Internet grows, users seek sources of aggregated and user defined information
and services that portals have historically provided.
5
As a result, portals provide advertisers an attractive means of promoting
their products and services and allow businesses to reach the growing number of
users who will be purchasing goods or services over the Internet in the future.
Portals also offer content providers with an attractive means of disseminating
their content to users with particular interests.
ADVERTISING. The Internet is an attractive medium for advertisers. The
Internet has often allowed advertisers to demographically target their messages
to groups of Internet users with particular interests, in a manner not available
through the means of traditional media. The Internet also allows advertisers a
unique level of interactivity and measurability. Advertisers can use the
Internet to display messages on certain web pages. These messages are referred
to as impressions. Consumers wishing for more information on the advertised
topic can use their computers to click, or click-through, on those impressions
and move through to other web pages which provide the information sought. Using
the Internet, advertisers can change their advertisements frequently in response
to market factors, current events and consumer feedback. Advertisers can also
track the effectiveness of their advertising messages by receiving reports of
the number of advertising impressions delivered to consumers and the
corresponding number of times that consumers click on those impressions and move
through to the advertised web page.
To date, Internet advertising has primarily taken the form of banner
advertisements, which are comprised of advertising messages displayed on a
portion of a web page viewed by visitors to the site. Like traditional media
advertising banners are typically priced by advertisers who pay for exposures to
potential consumers. However, this approach, which is called impression-based
advertising, does not take full advantage of the Internet's direct marketing
potential, resulting in low consumer click-through rates, the rate at which
consumers click on advertisements to move to the advertised web sites.
Advertisers, therefore are paying for exposure to many viewers who are not
interested in the product or service advertised. According to the Internet
Advertising Bureau (IAD), banner ads accounted for half of all Internet
advertising in the second quarter of 2000, while click through rates (CTR's) for
banner ads fell more than 40 percent between October 1999 and October 2000. We
believe advertiser's are considering alternatives to banner advertising. We also
believe that advertisers will focus on more targeted marketing opportunities as
they recognize they can offer a level of targetability, interactivity and
measurability not generally available in other media.
CONTENT. The Internet offers content providers significant and attractive
economic mechanisms that combine cost advantages with practices that are
conducive to revenue generation or premiums. Significantly, the Internet
provides information dissemination at a materially lower cost than do other
forms of media, notably, both printed paper and private networks. The Internet
also offers the potential for easier access to content, which can expand market
coverage. We believe that by using the capabilities of the Internet to enrich
the convenience, utility, time, or entertainment value of content, Internet
content providers can garner significant and even premium revenues.
6
CURRENT MARKETING PLANS & PROGRAMS
We have focused our efforts on marketing, improving the quality of content
and hosting services available on our web site, and reducing our operating costs
by eliminating many of the services which were not profitable. In this regard,
we have developed a number of new promotions designed to generate new sources of
revenue and build customer loyalty. Some of the powerful business tools and
resources that are part of our solution include:
BROADBAND CONTENT. We are continually seeking to develop relationships
with content publishers to assist in generating revenue through distribution,
branding, awareness, and promotions. In 2000 we added sources of new content
that allow users to view videos covering music, sports and other subjects.
Users are required to register as citizens of our web site prior to viewing the
content. Advertisements are also displayed to users while progressing through
the registration process.
DIRECT MARKETING. Jupiter Communications forecasts email marketing will be
a $7.3 billion business by 2005, a boost from $164 million in 1999. The volume
of messages will swell to 268 billion promotional email messages by 2005.
We have been collecting registrations for all our citizens since 1998 and
maintaining a large, accurate, opt-in database that allows targeted
communications based upon gender, age, income, interest and many other
demographic variables. We have a consulting services agreement with Annuncio
Software, Inc. under which they are to provide us with access to their direct
email marketing system. We believe, the campaign management system, Annuncio, is
one of the most sophisticated direct email marketing systems available today.
We will incorporate our direct email marketing capability into promotional
offers from companies that we affiliate with, daily emails to registered players
of our Internet games, and communications to generate additional activity and
transactions with our customer base.
TARGETED AFFINITY CATEGORIES. We have organized information on our web site
into an extensive network of communities with a wide variety of themes,
including entertainment, government, home living, sports, finance, society and
culture. Users interested in particular themes can access those themes quickly
and easily. This creates marketing opportunities for media companies, Internet
service providers, and Internet content companies.
IMPROVED SEARCH METHODOLOGY. We had developed a metasearch engine that
enabled users to search multiple sites simultaneously and return the results to
one web page. This feature drove users to our web site, but did not generate
sufficient revenue. We have revised our search methodology to enhance the
revenue generated from our search services. Our current search methodology uses
context driven searches where advertisers purchase their placement in the search
engine. For example, a user of our web site may choose the subject "music" to
search. After the choice is made, the results of the search are presented in a
list on a new web page. Advertisers pay for premium placement at the top of the
list. This allows advertisers to bid for product placement on our web site and
increases revenue generated from our search services.
SEASONAL PROMOTIONS. During 2000, we successfully implemented seasonal
promotions designed to drive Internet users to our e-commerce affiliates. For
example, in December 2000 we launched a promotion for Storerunner Network, Inc.
Storerunner.com placed advertisements for products it was selling as part of a
holiday sale on our web site. Users of our web site could click on the
Storerunner advertisements and move to the Storerunner.com web site and purchase
the products. Our agreement provided that we receive revenue for each user that
accessed the Storerunner.com site from our web site. Although this promotion
successfully increased the amount of traffic on our site, we discontinued
further services with Storerunner.com after they filed for protection under
Chapter 11 of the United States Bankruptcy Code in February 2001.
7
CITIZEN SERVICES. During 2000, we revised the scope of services offered to
users of our web site to eliminate many of the free services which were
available. Currently, users are offered access to free services such as email
accounts and a limited variety of content such as video clips or sweepstakes
offerings. Nevertheless, we have expanded the range of services available to
users that subscribe to our web site. Such subscribers are provided with web
site hosting services, personal home pages, access to an expanded variety of
video clips, and permission based promotional offers. These services are
provided in exchange for a monthly subscription fee. The minimum subscription
fee is currently $19.95.
NETTAXI'S 3D WORLD. In March 2000 we launched a new area within our web
site pursuant to an agreement with ActiveWorlds. Users that visit our web site,
download the appropriate software and pay a monthly fee can access a series of
web pages complete with three dimensional graphics. The graphics are designed so
that the area has the look and feel of an urban environment. Users are offered
the opportunity to design a personalized Avatar. An Avatar is a three
dimensional figure that represents the identity of the user. This Avatar can
then walk through the urban environment and engage in online chat with other
Avatars. Businesses can set up storefronts within the urban environment and
advertise products on billboards within the urban environment. We believe this
experience will change the way people chat online.
OUR STRATEGY
We are now poised to build on our early success and implement a growth
strategy that leverages our infrastructure, marketing expertise, traffic and
brand. In 2001, we intend to focus our marketing efforts on generating multiple
sources of revenue while enhancing our advertising products and services. Key
elements of our strategic growth plan are listed below.
EXPAND SUBSCRIBER ACQUISITION PROGRAM
We intend to embark on aggressive programs to expand our citizen base,
which we believe will increase our advertising revenues. We also plan to design
programs tailored to increasing the number of paying subscribers to our web
site. To this end, we may offer discounted subscription rates to new subscribers
and offer new subscribers access to music, video, and other entertainment
content unavailable to users that do not subscribe to our web site. We believe
these efforts will increase our revenues from subscription fees for our premium
account services. The program will include a concerted effort to refine our
offering of products and services to expand demand and an aggressive marketing
campaign to create real excitement about our site. We hope to raise additional
capital for brand development and expansion of our operations.
8
DEVELOP OUR INFRASTRUCTURE; BUILD PREMIUM CONTENT
Over the next 12 months, we are looking to further develop our managerial
and technical infrastructure, enhance the quality and depth of our content by
developing new relationships with premium content providers and improve the
quantity and quality of our broadband content. We expect these improvements will
create several distinct revenues streams for us from the following sources:
- Subscription fees paid by end users for access to broadband and enhanced
content; and
- Advertising revenues paid by advertisers seeking exposure to Internet
users accessing our broadband and enhanced content.
INCREASE ADVERTISING REVENUES
To date, our revenues have been derived principally from the sale of
advertisements. We intend to increase our advertising revenue by focusing on a
number of key strategies, including:
- expanding the quantity and quality of content available on our web site
in order to increase interest in and traffic on our web site and increase the
number of searches conducted on our web site;
- expanding our advertising customer base;
- increasing the cost of advertising placement charged to our advertising
customers through enhanced targeting and rich media programs;
- further improving the sophistication of our search methodology;
- increasing the average size and length of our advertising contracts;
- increasing the number of our direct sales representatives; and
- continuing to invest in improving advertising serving and advertising
targeting technology.
GAIN SIGNIFICANT MARKET SHARE AND CONSOLIDATE COMPETITORS
We hope to gain significant market share and consolidate our competitive
position by acquiring strategic online community companies and continue an
aggressive plan of infrastructure expansion. In May 1999 we acquired Plus Net,
Inc., a California corporation which operated a portal site with a range of
Internet related tools, including a robust search engine and e-commerce
capabilities which supported consumer buying opportunities and programs designed
to prevent credit card fraud. The Plus Net merger also provided us with access
to a pool of approximately 1,000,000 potential subscribers and provided us with
an opportunity to substantially increase the citizenship base within our portal.
We are currently in the process of acquiring the assets of LookUpGuide.com, a
California corporation, and broadband portal design and development company. In
March 2001, we entered into an Asset Purchase Agreement with LookupGuide.com
pursuant to which we will issue 2,200,000 shares of common stock in exchange for
the assets of LookupGuide.com upon completion of the transaction. We have not
completed this transaction and there can be no assurance that we will complete
this transaction. We believe these acquisitions will accelerate our research and
development efforts, and will enrich the Internet experience of our subscribers.
9
BUSINESS SERVICES
OUR WEB SITE
Our web site at www.nettaxi.com is designed to appear as a virtual urban
environment. Information on our web site is divided into topic areas which we
refer to as affinity groups. We refer the registered users of our web site as
citizens. Our web site provides access to information on news, sports,
entertainment and other areas of interest. Citizens also have access to Internet
related services such as personal home pages, chat services and free e-mail
accounts.
When users first arrive at www.nettaxi.com, they view the broad urban
environment, where they find hyperlinks to the information categories we
provide, such as:
- Member services, registration, and web hosting;
- Community information links such as message boards;
- Information sorted by topical areas of interest; and
- Content such as movies, sports clips and other broadband content.
Upon selecting one of the links, for example entertainment, a web page
containing articles and information about entertainment appears along with an
extensive list of categories, or more specific search topics, such as music and
television. Choosing the more specific search topic will further focus your
search to uncover more specific information.
APPLICATIONS AND FEATURES
We offer a wide range of applications and features to our citizens through
our web site, including the following:
OUR SEARCH ENGINE. Users of our web site can access our specially
configured search engine, which we refer to as our taxi, located in all areas
and levels of our web site. Users may use the search engine by typing in a
search topic such as sports, and they are quickly presented with a list of
hyperlinks to web pages carrying sports related information. Advertisers on our
site compete for placement in the search results by paying fees to us. The
advertisers that pay the highest fees are brought to the top of the list of
search results. We believe our search engine provides greater value to our
users since it presents small, manageable groups of choices in response to a
search, as opposed to an overwhelming volume of listings turned up by many other
search engines.
E-MAIL SERVICES. Our e-mail services allow users to access their accounts,
through both Post Office Protocol, POP, and the Internet, IMAP. POP e-mail is
the type most commonly used by Internet service providers. Its primary advantage
for users is that messages are sent and received quickly and with more privacy,
because they do not stay resident on a server for any length of time. Its
greatest disadvantage is that e-mail messages, once delivered to a user, are
generally no longer available for download again, so that a user who downloads
e-mail to a home computer, for example, will generally not be able to download
the same mail at a later time to another computer, such as one at work. IMAP, or
web-based e-mail, most commonly used by portal services, allows users to
retrieve e-mail messages from any location that offers access to the Internet
and a specific web site. Sending and receiving messages may be a bit slower than
POP services, but messages are stored on a server, can be retrieved multiple
times, and remain available until they are either specifically deleted by the
user, or a set amount of time has passed.
10
Our e-mail service also allows subscribers to our premium services to offer
a free web-based email service with a unique domain name, such as me@you.com,
giving the domain name free promotion with every email sent. There is no
software for the user to download and we provide all mail and maintenance with
no added inconvenience to the webmaster. The look and feel can be customized to
look like the subscriber's home page.
CONTENT
A key component of our current and future plans is the continued
development of relationships with providers of premium content in a variety of
categories. The purpose of these relationships is not to directly generate
revenue, but rather to enhance the quantity and quality of information and
content on our web site. We believe that enhanced information and content may
lead to increased visitors to our site as well as increased subscriptions to our
services. During 2000, we had formal relationships with the five premium content
providers described below. The companies listed below provide substantially all
of the content on our web site that is currently provided by outside parties.
The providers are listed in order by the amount of content they provide to us.
- SCREAMINGMEDIA. In April 2000 we entered into a license agreement with
ScreamingMedia, an aggregator of a broad range of content such as current
events, daily horoscopes, world news, travel, medicine and health for
syndication to Internet portals and destination sites. The term of the agreement
is one year and automatically renews for successive one year periods unless
terminated. We pay a monthly license fee of $5,000 for use of ScreamingMedia's
content. ScreamingMedia currently provides the majority of our outside party
content.
- ACTIVEWORLDS. In March 2001 we launched a new area within our web site
pursuant to an agreement we entered into in August 2000 with ActiveWorlds.com,
Inc., a Delaware corporation. Users that visit our web site, download the
appropriate software and pay a monthly fee can access a series of web pages
complete with three dimensional graphics. The graphics are designed so that the
area has the look and feel of an urban environment. Users are offered the
opportunity to design a personalized Avatar. An Avatar is a three dimensional
figure that represents the identity of the user. This Avatar can they walk
through the urban environment and engage in online chat with other Avatars.
Businesses can set up storefronts within the urban environment and advertise
products on billboards within the urban environment. We believe this experience
will change the way people chat online. We are to receive a portion of the fees
collected by ActiveWorlds from users of our site that subscribe to the service.
The agreement has term of one year and automatically renews for successive
periods of one year unless terminated prior to the extension.
11
- NETOPIA, INC. In March 1999, we entered into a nonexclusive agreement
with Netopia, a provider of next generation products including web site services
and high-speed connectivity to the Internet, under which Netopia provides us
with technology that enhances our ability to provide services to our
subscribers. The term of the agreement is two years. This agreement is an
expense sharing agreement and generates less than one percent of our revenues.
- SOLUTIONS MEDIA, INC. In November 1999, we entered into a non-exclusive
agreement with Solutions Media, Inc., the operator of the web site,
SpinRecords.com to co-brand its content, which includes digital audio/video
music files in the MP3 format, which SpinRecords.com has licensed from
independent artists. This audio and video content was downloadable by our
subscribers from SpinRecords.com. The term of this agreement was one year with
an option to renew the agreement for successive periods of one year. We received
50% ad revenue for banner advertisements shown on these co-branded content pages
from Solutions Media, Inc. We also received 5% of gross sales from our citizens
who purchase licensed content or merchandise from these co-branded web pages.
This agreement had a term of one year, and accounted for approximately 13% of
our revenue in 2000. We do not expect this relationship to continue in 2001
because Solutions Media, Inc. is no longer in business.
- STORERUNNER.COM. In September 2000, we entered into an agreement with
StoreRunner Network, Inc. under which we placed Storerunner advertisements on
our web site and were to be compensated based on the number of visitors to our
site that visited the Storerunner site. This agreement resulted in increased
traffic on our web site and was part of the reason PC Data Online ranked
nettaxi.com as the 94th most visited site on the Internet in December 2000.
Although, this promotion was very successful, we have discontinued further
services with Storerunner.com after they filed for protection under Chapter 11
of the United States Bankruptcy Code in February 2001.
Under our agreements, we provide co-branding services to the content
providers listed above. The content included on our web site is branded with
the logo and similar brand features of the relevant providers. We also increase
the traffic to their own web sites by linking our sites so that end users can
easily move from our web site to theirs. We are also working to identify and
develop a selection of relationships with providers of proprietary information
content, particularly individuals and organizations with archives and databases
that could be easily rendered into digital format. We believe that a carefully
developed selection of such databases, would act as a powerful attraction to the
type and volume of subscribers that our advertisers find desirable.
WEB SITE HOSTING SERVICES
One of the key features that we offer our registered users is our web site
hosting services. Using these services, we currently host the web sites of over
300 individuals or businesses. These services generally fall into two
categories. First, we host web pages for subscribers to our web site for a
monthly fee. The minimum fee for these services is currently $19.95 per month.
Subscribers to these services are provided with storage space and bandwidth to
support their web sites. The fee increases depending on the amount of bandwidth
and storage space used by the subscriber.
12
Second, we provide Internet hosting and connectivity for larger corporate
customers. These services involve our maintenance of the servers which host the
web sites of these customers. For example, we have an agreement with White Sand
Communications, Inc. pursuant to which we host its web site servers and provide
support for the overall operation of the servers. Our services are delivered
through Alchemy Communications at its Internet data center located in Los
Angeles, California. Customers pay monthly fees for the professional services
utilized, one-time installation fees, and monthly connectivity charges. These
hosting revenues are recognized in the period the services were provided.
In conjunction with these services, our customers are able to purchase
advertising packages within their communities to help market web sites, as well
as email tools that will provide them the capability to direct market to their
customer base. Our subscribers also provide personal or entrepreneurial and
commercial content that is available on our web site. We offer paying
subscribers 25 megabytes of server space to use for a home page and e-mail. In
addition, subscribers have access to free, easy-to-use web site design software
to build their web home page, and they can designate the community and street
where they would like to have their home page located. We are currently
developing technologies that we believe will improve the quality of the hosting
services we provide.
SUBSCRIBER SERVICE PLANS AND ASSISTANCE
In order to provide subscribers with choices that suit their individual
needs, we offer both free and premium accounts, on a tiered basis similar to the
way that cable systems do. Premium accounts are configured from a large menu of
options, to attract subscribers and address the needs and desires of particular
segments of online users. In each case, subscribers are provided with free,
easy-to-use software for designing and building their web page, tips and
techniques for making their web sites attractive and exciting to visit, and our
search engine to drive traffic to their web site.
We also adhere to the principle that providing excellent customer service
is integral to attracting and, more importantly, retaining subscribers. To that
end, we have focused on development of a customer service organization keenly
focused on satisfying demand and creating customer loyalty.
BASIC FREE CITIZEN ACCOUNT. Like most portals, we offer a free basic
service package, which we call the free citizen account, to attract a large
number of subscribers. This account offers the following package of features
and services:
- E-mail service for one personal e-mail account; and
- Access to chat sessions, message boards, and shopping, as well as premium
content such as broadband video clips, news information and other information.
PREMIUM ACCOUNTS. Our premium accounts are especially attractive. Citizens
can build premium accounts from a menu of options, allowing them the ability to
pick and choose which items they are interested in. Options can be added for
additional fees. In addition to the services which are provided to free service
account subscribers, premium account holders are provided with the following
options:
13
- E-mail service for unlimited e-mail accounts, each with a distinct
@nettaxi.com address or a unique domain and customized look and feel;
- Disk space for web page hosting; and
- Access to advertising and banner ads, and other cross-promotional
opportunities.
One of the key features that we offer premium account subscribers is our
web site hosting services. Using these services, we currently host the web
sites of over 300 individuals or businesses. We host web pages for subscribers
to our web site for a monthly fee. The minimum fee for these services is
currently $19.95 per month. The fee increases depending on the amount of
bandwidth and memory used by the subscriber.
Premium subscribers are provided with professional web site services to
assist with the design and launch of a web site as well as easy-to-use software
for updating the site at any time. In addition, subscribers are provided with
special tips and techniques for making their web sites attractive and exciting
to visit, as well as mechanisms to drive traffic to their web site, including
our search engine and strategically placed, highly visible links to the site
from other desirable web sites on the Internet. Subscribers wishing to have
their own domain are charged a one-time fee to register the domain for a
two-year period.
CUSTOMER ASSISTANCE. In order to maintain nettaxi.com as a portal that
truly serves its subscribers and reflects their interests and needs, we invite
and encourage subscribers and visitors to send in their comments and
suggestions. We track visitor and subscriber activities, and carefully monitor
the nature and content of their comments, as part of our strategy for continuing
product refinement and development.
Regardless of the type of account selected, subscribers have access to free
online help at any time by simply clicking on our Help icon and by visiting the
message boards, where they can review information posted by other subscribers,
or post a query of their own. Subscribers can also find information on billing
matters, special promotions, upcoming events, etc., quickly and easily on the
Nettaxi.com home page.
If they are unable to find what they are looking for, or if the information
they find is confusing, subscribers can submit queries, to which we will
actively and promptly respond with appropriate information or guidance. We are
also establishing and deploying subscriber-to-subscriber support services, which
are provided by online volunteers in exchange for free account upgrades or other
premiums.
14
INTERNET TRAINING CD-ROM
We had developed a CD-ROM product, called "Nettaxi.com; The Experience",
which was a comprehensive, interactive training tool that enabled new and
intermediate users of computers to learn about and begin using the many powerful
capabilities and features of the Internet. The CD-ROM product was also designed
to direct people to our web site once they began using the Internet. During
2000 we ceased distribution of our the CD-ROM product due to the substantial
costs associated with its maintenance, development and distribution.
CUSTOMERS
ADVERTISING CUSTOMERS. In 2000 we attracted both mass market consumer
product companies as well as technology-related businesses advertising on the
Internet. Due to our advantages as an Internet marketing portal, we believe that
we are well positioned to capture a portion of the growing number of consumer
product and service companies seeking to advertise on the Internet.
Currently, advertisers and advertising agencies enter into short-term
agreements, on average one to two months, pursuant to which they receive a
guaranteed number of impressions for a fixed fee. If the guaranteed number of
impressions is not delivered, the term of the agreements are extended until the
impressions can be delivered. Advertising on our site currently consists of
banner-style advertisements that are prominently displayed at the top of pages
on a rotating basis throughout the web pages in our web site. From each banner
advertisement, viewers can hyperlink directly to the advertiser's own web site,
thus providing the advertiser an opportunity to directly interact with an
interested customer. Our standard cost per thousand impressions depends upon a
number of factors including the location of the advertisement, its size and the
extent to which it is targeted for a particular audience. Discounts from
standard cost per thousand impressions rates may be provided for higher volume,
longer-term advertising contracts.
We have also implemented a search methodology to enhance the advertising
revenue generated from our search services. Our current search methodology uses
context driven searches where advertisers purchase their placement in the search
engine. For example, a user of our web site may choose the subject "music" to
search. After the choice is made, the results of the search are presented in a
list on a new web page. Advertisers pay for premium placement at the top of the
list. This allows advertisers to bid for product placement on our web site and
increases revenue generated from our search services.
We have entered into an agreement with GoTo.com, under which we use its
search services to provide recommended web sites based upon a listing of the top
search categories and user defined keywords. We are to receive a percentage of
the revenue generated from users of our site using the search services. The
agreement has a one year term commencing in September 2000 and automatically
renews for periods of one year unless terminated.
In April 2000 we placed the advertising of Hearme.com on our web site
pursuant to an Online Advertising Insertion Order. Under the agreement, we
received between $18.00 and $25.00 per million impressions delivered. A portion
of the revenue received from this agreement was reciprocal revenue. This
agreement accounted for 10% of our revenue in 2000. The agreement had a term of
three months.
15
In July 1999, we entered into an Advertising Impression Network Contract
with White Sand Communications, Inc. White Sand Communications engaged us to
deliver banner advertising, sponsorship advertising and exit traffic
advertising. The term of the agreement was initially six months and thereafter
continued on a month-to-month basis. White Sand Communications pays us a minimum
monthly guaranteed payment for exclusive use of banner advertising impressions.
This agreement accounted for 6% of our revenue in 1999.
WEB SITE HOSTING CUSTOMERS. In 2000, we focused on the development of our
web site hosting services. We currently host the web sites of over 300
individuals and businesses. These services generally fall into two categories.
First, we host web pages for subscribers to our web site for a monthly fee. The
minimum fee for these services is currently $19.95 per month. Subscribers to
these services are provided with storage space and bandwidth to support their
web sites. The fee increases depending on the amount of bandwidth and memory
used by the subscriber. We also provide Internet hosting and connectivity for
larger corporate customers. These services involve our maintenance of the
servers which host the web sites of these customers. For the twelve months
ended December 31, 2000, web hosting revenues accounted for 40% of total
revenues.
In August 1999, we entered into a Data Center Service Agreement with White
Sand Communications, Inc. We provide White Sand Communications with space in
our Data Center and provide support for the overall operation of the their web
servers. The fee for this agreement is a monthly recurring fee which includes
charges for use and occupancy of the Data Center, connectively fee, power
charges, and where applicable, technical support and system administration fees.
The term of this agreement is one year. This agreement accounted for 11% of
our revenue in 2000 and 4% of our revenue in 1999.
In July 1999, we entered into a Data Center Service Agreement with Babenet,
Ltd, a California corporation. We provide Babenet with space in our Data Center
for their web servers and provide support for the overall operation of the their
web servers. The fee for this agreement is a monthly recurring fee which
includes charges for use and occupancy of the Data Center, connectively fee,
power charges, and where applicable, technical support and system administration
fees. The term of this agreement is one year and continues on a monthly basis
thereafter. This agreement accounted for 20% of our revenue in 2000.
ADVERTISING SALES AND DESIGN
We seek to distinguish ourselves from our competition through the creation
of advertising and sponsorship opportunities that are designed to build brand
loyalty for our corporate sponsors by seamlessly integrating their advertising
messages into our content. Sponsorship programs involve other business
advertising particular programs on web pages within our web site which are
branded with both our brand features and the brand features of the advertiser.
We have used sponsorship programs to advertise holiday sales of particular types
of merchandise. This is distinguished from advertising opportunities in which
business display general messages about their products or services on our web
site.
16
Through our close relationship with our subscribers, we have the ability to
deliver advertising to specific targets within our site's theme content areas,
allowing advertisers to single out and effectively deliver their messages to
their respective target audiences. For example, an advertiser can target its
message solely to women with an interest in recreation and sports. We believe
that such sophisticated targeting is a critical element for capturing worldwide
advertising budgets for the Internet. In the next twelve months, we intend to
expand the amount and type of demographic information our site collects from our
members, which will allow us to offer specific data to our advertising clients.
In 2001 we intend to enter into arrangements with a number of third-party
advertising sales representatives pursuant to short-term agreements that in
general may be terminated by either party, without notice or penalty. The sales
organization would consult regularly with advertisers and agencies on design and
placement of their web-based advertising, provide customers with advertising
measurement analysis and focus on providing a high level of customer service and
satisfaction.
During 2001, we also intend to implement special software on our web site
in the immediate future. The software allows us to track a user surfing through
the overall web site, follow the user's patterns of activity, present ads that
are targeted and relevant to the user's interests, and recommend particular
products or services, based on the user's activity profile. In addition, the
software will be able to track the particular banner and other advertising to
which the user has been exposed while visiting our site. This will provide us
with a record of the number and type of advertisement views accessed by users
over a specified period of time, useful for determining rates for outside
advertisers wishing to have a presence on our web site. It will also provide us
with the opportunity to rotate the particular ads it presents to a user to keep
the ads fresh and appropriate in context. Eventually, we hope to expand our
activity tracking functions to include serving content to users based on their
preferences. The result will be content that is customized for a user,
automatically and seamlessly.
We have also licensed advertisement management software from Accipiter
Technology, and written some custom code to extend the software's capabilities.
The software tracks how many ads are served on the web site, which areas and
which pages to which they were served, and how many people have clicked on them.
The software allows us to manage advertisement selection and placement by
providing an accurate advertisement count on both a real-time and a
compiled-over-a-specified-time basis, information crucial to billing an
advertiser. The software also provides advertisers with the ability to audit
their advertisement performance on our web site on a real-time basis. We provide
a user identification and password to the advertiser, who can then come onto the
web site and track their ads at any time.
SALES AND MARKETING
In 2000, we committed approximately $5.9 million to sales and marketing
activities, including offline and online media advertising. Our sales and
marketing efforts are focused on:
17
- Generating additional traffic to our site;
- Building and defining a desirable online destination for consumers and
businesses; and
- Creating and enhancing our brand within the Internet and online
industries.
Among the key elements of our sales and marketing strategy are the following:
ADVERTISING PROGRAMS. We plan to invest in online advertising to drive
traffic to our site by placing advertisements on selected high volume sites, as
well as purchasing targeted keywords on several popular search engines such as
Yahoo!, Excite, Lycos, and others. We also plan to advertise in traditional
media such as print, radio and broadcast, on a selective, highly targeted basis,
to increase the awareness of our site.
PUBLIC RELATIONS SUPPORT. By virtue of its broad appeal and focus, we
anticipate that a targeted public relations campaign will yield material results
in building both national and targeted local and regional awareness for Nettaxi.
We do not currently have an agreement with a national public relations
professional, but are seeking to enter into an arrangement with a suitable
public relations company in 2001.
OPERATING INFRASTRUCTURE
At this time, the basic components of our technology infrastructure are in
place and operational. Our UNIX-based electronic network for Nettaxi.com
operates on a one terabyte Ethernet backbone, with two Cisco Systems Ethernet
switches that prevent collisions on the network. Traffic direction for the web
servers is handled by Arrowpoint's CS-100, which tracks server load conditions
in real time and sends traffic to the most appropriate server to spread around
and balance the load. The network is comprised primarily of Sun Microsystems
high-capacity servers, and include a mix of Enterprise 450s, Ultra 1, and Ultra
5 models, all running the newest version of Sun's Solaris operating environment
for network systems. These servers collectively provide approximately 1.6
terabytes of hard drive space for subscriber capacities.
In addition, the network currently includes NT servers to handle
registration and selected other database functions, using Microsoft's SQL
database software.
Our electronic network is located at Alchemy Communications in Los Angeles,
California. We have a Gigabit Data Services Agreement with Alchemy
Communications pursuant to which they provide a secure location for our network
servers, multiple high-speed Internet connections, and access to 24-hour-a-day,
7-day-a-week technical support personnel and services. Alchemy Communications
also provides critically important routing, redundancy, streaming media and
maintenance services for the network and its Internet connections, as well as a
back-up power supply capable of continuing network operations for up to a week
in the event of a power failure. We pay monthly fees for the services and the
agreement has a term of 1 year.
COMPETITION
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially-available software. We
currently or potentially compete with a number of other companies for users,
advertisers and electronic commerce marketers, including a number of large
online communities and services that have expertise in developing online
commerce, and a number of other small services, including those that serve
specialty markets.
18
Other companies that offer web site hosting, email, and content services
include MegaGo.com, theglobe.com, Yahoo!, Xoom, Homestead.com, WBS.net,
Angelfire, Fortune City, Lycos and Talk City and, in the future, Internet
communities may be developed or acquired by companies currently operating
Internet directories, search engines, shareware archives, content sites,
Internet Service Providers and other entities, which may have more resources
than ours.
In addition, we currently and in the future face competition from
traditional media companies, a number of which, including CBS, Fox and NBC, have
recently made significant acquisitions or investments in Internet companies.
Furthermore, we compete for users and advertisers with other content
providers and with thousands of web sites operated by individuals, the
government and educational institutions. Such providers and sites include AOL,
Angelfire, CNET, CNN/Time Warner, Excite, Hotmail, Infoseek, Lycos, Microsoft,
Netscape, Switchboard, Xoom, ESPN.com, ZDNet.com and Yahoo!
We believe that the following are the principal competitive factors for
companies seeking to create online communities on the Internet:
- community cohesion and interaction;
- customer service;
- brand recognition;
- web site convenience and accessibility;
- price;
- quality of search tools; and
- system reliability.
We also compete with companies in the online commerce market. This market
is new, rapidly evolving and intensely competitive. Current and new competitors
can launch new web sites at relatively low cost. The products and services that
might be offered through our site will compete with other retailers and direct
marketers, some of which may specifically target our potential customers. We
anticipate that we will compete with various mail-order and web-based retailers;
various traditional retailers, either in their physical or online stores;
various online service providers that offers products of interest to our
potential customers, including AOL, Microsoft, and other providers mentioned
above;.
We believe that the following are the principal competitive factors in the
online commerce market:
- brand recognition;
- quality of site content;
19
- merchandise selection;
- convenience;
- price;
- customer service; and
- reliability and speed of fulfillment.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition in other business
and Internet markets and significantly greater financial, marketing, technical
and other resources than us. In addition, other online services may be acquired
by, receive investments from or enter into other commercial relationships with
larger, well-established and well-financed companies as use of the Internet and
other online services increases. Therefore, our competitors with other revenue
sources may be able to devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to web site and systems development than us or may try to attract
traffic by offering services for free. Increased competition may result in
reduced operating margins, loss of market share and diminished value of our
brand.
INTELLECTUAL PROPERTY
We currently have pending applications before the United States Patent and
Trademark Office for trademark and service mark protection for "Nettaxi" and
"NetroNews". If these applications are approved, protection will be available
for the periods prescribed by law.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with our suppliers in order to limit access to and disclosure of our
proprietary information. There can be no assurance that these contractual
arrangements or the other steps taken by us to protect our intellectual property
will prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies. While we intend to
pursue registration of our trademarks and service marks in the U.S. and
internationally, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are made
available online.
20
We also rely on technologies that we license from third parties, such as
the suppliers of key database technology, the operating system and specific
hardware components for our products and services. These licenses extend for
terms ranging from one year to perpetuity and are subject to satisfaction of
conditions laid out in the specific licensing agreements. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of such technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at all.
As a result, any such claim could have a material adverse effect upon our
business, results of operations and financial condition.
GOVERNMENT REGULATION
Our company, operations and products and services are all subject to
regulations set forth by various federal, state and local regulatory agencies.
We take measures to ensure our compliance with all such regulations as
promulgated by these agencies from time to time. The Federal Communications
Commission sets standards and regulations regarding communications and related
equipment.
There are currently few laws and regulations directly applicable to the
Internet. It is possible that a number of laws and regulations may be adopted
with respect to the Internet covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. The growth of the market for online commerce may prompt
calls for more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. Tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in online commerce, and new state tax regulations may subject
us to additional state sales and income taxes.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for our products and services or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on our business, results of operations and financial condition. In
addition, because our services are accessible worldwide and we facilitate sales
of goods to users worldwide, other jurisdictions may claim that we are required
to qualify to do business as a foreign corporation in a particular state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business, results of operations and financial condition.
21
EMPLOYEES
As of December 31, 2000, we had 19 employees, including:
- 1 in customer support;
- 3 in product development;
- 10 in sales, marketing and business development; and
- 5 in administration.
We believe that our future success will depend in part on our continued
ability to attract, integrate, retain and motivate highly qualified technical
and managerial personnel, and upon the continued service of our senior
management and key technical personnel. The competition for qualified personnel
in our industry and geographical location is intense, and there can be no
assurance that we will be successful in attracting, integrating, retaining and
motivating a sufficient number of qualified personnel to conduct our business in
the future. From time to time, we also engage independent contractors to support
our research and development, marketing, sales and support and administrative
organizations. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider our relations
with our employees to be good.
ITEM 1A. RISK FACTORS
Our business, financial condition or results of operations could be
materially and adversely affected by any of the following risks.
WE HAVE A LIMITED OPERATING HISTORY, HAVE INCURRED LOSSES SINCE INCEPTION, AND
EXPECT LOSSES FOR THE FORESEEABLE FUTURE.
We were incorporated in October 1997. Accordingly, we have only a limited
operating history upon which you can evaluate our business and prospects. Since
our inception, we have incurred net losses, resulting primarily from costs
related to developing our web site, attracting users to our web site and
establishing the Nettaxi.com brand. At December 31, 2000, we had an accumulated
deficit of $27,687,800. Losses have continued to grow faster than our revenues
during our limited operating history. This trend is reflective of our continued
investments in technology and sales and marketing efforts to grow the business.
Because of our plans to continue to invest heavily in marketing and promotion,
to hire additional employees, and to enhance our web site and operating
infrastructure, we expect to incur significant net losses for the foreseeable
future. We believe these expenditures are necessary to strengthen our brand
recognition, attract more users to our web site and generate greater online
revenues. If our revenue growth is slower than we anticipate or our operating
expenses exceed our expectations, our losses will be significantly greater. We
may never achieve profitability.
22
WE REQUIRE FURTHER CAPITAL TO PURSUE OUR BUSINESS OBJECTIVES.
We currently believe that we have sufficient cash to fund our current
operations through December 2002. However, to fully execute our business plan,
we will be required to seek additional capital. We expect to generate a portion
of the necessary cash flow through advertising and hosting revenues, but will
also need to obtain capital through other sources such as equity or debt
financing. We cannot assure you that we will be able to achieve and sustain
positive cash flow or profitability or that we will have other sources available
to provide the financial resources necessary to continue our operations. No
assurances can be given that we will be able to obtain such additional
resources. If we are unsuccessful in generating anticipated resources from one
or more of the anticipated sources, and unable to replace the shortfall with
resources from another source, we may be able to extend the period for which
available resources would be adequate by deferring the creation or satisfaction
of various commitments, deferring the introduction of various services or entry
into various markets, and otherwise scaling back operations. If we are unable
to generate the required resources, our ability to meet our obligations and to
continue our operations would be adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE.
As of February 28, 2001, 18,091,516 shares of our common stock were
immediately eligible for sale in the public market without restriction or
further restriction under the Securities Act of 1933, unless purchased by or
issued to any "affiliate" of ours, as that term is defined in Rule 144
promulgated under that Act. Additionally, we have filed a registration statement
on Form S-8 (File No. 333-32678) to register 6,300,000 shares of common stock
issuable upon exercise of options granted or to be granted under our 1998 and
1999 stock option plans. As a result, shares issued upon exercise of stock
options are eligible for resale in the public market without restriction. We
also intend to file a registration statement on Form S-8 to register the
additional 5,600,000 shares of common stock under our 1999 Stock Option Plan, as
amended. We have also filed a registration statement on Form S-1 (File No.
333-36826), declared effective by the Securities and Exchange Commission on June
12, 2000 registering 32,730,849 shares issued and issuable pursuant to recent
private placement transactions. Additionally, we have filed a registration
statement on Form S-1 (File No. 333-38538), declared effective by the Securities
and Exchange Commission on September 21, 2000, registering 4,219,692 shares of
common stock issued and issuable pursuant to recent private placement
transactions. As of February 28, 2001 approximately 7 million additional shares
of common stock were eligible for sale under Rule 144. If our stockholders sell
substantial amounts of our common stock under Rule 144 or pursuant to the
aforementioned registration statements, the market price of our common stock
could be adversely affected and our ability to raise additional capital at that
time through the sale of our securities could be impaired.
FUTURE EXERCISE OF WARRANTS OR ISSUANCES OF SECURITIES MAY SIGNIFICANTLY DILUTE
YOUR HOLDINGS.
There are currently warrants to purchase 18,650,816 shares of our common
stock outstanding and exercisable over the next four to five years having
exercise prices ranging from $1.50 to $12.38, subject to adjustment. The shares
underlying all of these warrants have been registered pursuant to our
registration statements on Form S-1 filed with the Securities and Exchange
Commission. There are also warrants to purchase 350,000 shares of our common
stock outstanding having an exercise price of $0.35 per share. If the holders of
our outstanding warrants and other convertible securities were to exercise their
rights, purchasers of our common stock could experience substantial dilution of
their investment.
23
It is likely that we will need to raise additional funds in the future in
order to execute our business plan. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of
our stockholders will be reduced, stockholders may experience additional
dilution and such securities may have rights, preferences and privileges senior
to those of our common stock. This may make an investment in our common stock
less attractive to other investors, thereby weakening the trading market for our
common stock.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES FREQUENTLY ENCOUNTERED BY EARLY
STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS.
Due to our limited operating history, we are subject to many of the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets, such as e-commerce. Among other things, we are faced
with the need to establish our credibility with customers, advertising, content
providers, and companies offering e-commerce products and services, and such
parties are often understandably reluctant to do business with companies that
have not had an opportunity to establish a track record of performance and
accountability. For example, our ability to enter into exclusive relationships
to provide content over the Internet will be dependent on our ability to
demonstrate that we can handle high volumes of traffic through our site.
Similarly, early stage companies must devote substantial time and resources to
recruiting qualified senior management and employees at all levels, and must
also make significant investments to establish brand recognition. If we are
unable to overcome some of these obstacles, we may be unable to achieve our
business goals and raise sufficient capital to expand our business.
OUR REVENUE GROWTH IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE GROWTH AND WE
CANNOT ACCURATELY PREDICT OUR FUTURE REVENUES.
We had revenues of approximately $9,418,400, $5,032,800 and $258,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. While our
growth rate has been strong, it is unlikely that revenue will continue to grow
at this rate in the future and our performance during these periods should not
be taken as being indicative of future trends. In addition, approximately
24
$1,285,000 of the revenues for the year ended December 31, 1999 were derived
from credit card transaction processing fees, a revenue stream that has declined
significantly and that we do not believe will be material in future periods. In
the year 2000, we generated approximately $2,200,000 in revenue from reciprocal
advertising transactions. We anticipate that these arrangements will not be
significant in the future. Accurate predictions regarding our revenues in the
future are difficult and should be considered in light of our limited operating
history and rapid changes in the ever evolving Internet market. For example, our
ability to generate revenues in the future is dependent in part on the success
of our capital-raising efforts and the investments that we intend to make in
sales and marketing, infrastructure, and content development. Our revenues for
the foreseeable future will remain primarily dependent on the number of
customers that we are able to attract to our web site, and secondarily on web
hosting, sponsorship and advertising revenues. We cannot forecast with any
degree of certainty the number of visitors to our web site, the number of
visitors who will become customers, or the amount of sponsorship and advertising
revenues. Similarly, we cannot provide any guarantees regarding the revenues
that will be generated from e-commerce products and services that we intend to
make available on our site.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, THEREBY INCREASING
THE VOLATILITY OF OUR STOCK PRICE
We anticipate that our operating results will fluctuate significantly from
quarter to quarter. These fluctuations may be due to seasonal and cyclical
patterns that have emerged in Internet related spending. For example, the use of
our web site is somewhat lower during periods of the year during the first and
third calendar quarters because of the summer vacation period and post winter
holiday season slowdown. This results in lower revenues for us during periods of
the year. Quarterly results may also vary because it is difficult to predict the
long-term revenue growth of our business. If investments in marketing and
content development are delayed, we may experience corresponding delays in
anticipated revenues from such investments, thereby leading to uneven quarterly
results. Because of these factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of investors
in future periods, then our stock price may decline.
OUR PLANNED ONLINE AND TRADITIONAL MARKETING CAMPAIGNS MAY NOT ATTRACT
SUFFICIENT ADDITIONAL VISITORS TO OUR WEB SITE.
We plan to pursue aggressive marketing campaigns online and in traditional
media to promote the Nettaxi.com brand and attract an increasing number of
visitors to our web site. We believe that maintaining and strengthening the
Nettaxi.com brand will be critical to the success of our business. This
investment in increased marketing carries with it significant risks, including
the following:
- Our advertisements may not properly convey the Nettaxi.com brand
image, or may even detract from our image. Advertising in print and broadcast
media is expensive and is often typically difficult to modify quickly in order
to take into account feedback that may indicate that we have failed to convey
the optimal message. If our advertisements fail to positively promote our brand
and image, the damage to our business may be long-lasting and costly to repair.
25
- Even if we succeed in creating the right messages for our promotional
campaigns, these advertisements may fail to attract new visitors to our web site
at levels commensurate with their costs. We may fail to choose the optimal mix
of television, radio, print and other media to cost effectively deliver our
message. Moreover, if these efforts are unsuccessful, we will face difficult
and costly choices in deciding whether and how to redirect our marketing
dollars.
WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT
SPONSORSHIP AND ADVERTISING REVENUES.
To date, we have relied principally on outside advertising agencies to
develop sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal sales organization. Our internal sales team
currently has ten members. We will need to substantially increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected by our inability to attract sponsorship and
advertising revenues.
OUR PROJECTED BROADBAND SERVICES AND ENHANCED CONTENT MAY NOT BE LAUNCHED ON A
TIMELY BASIS AND MAY NOT GENERATE THE ANTICIPATED LEVEL OF REVENUES
Our strategic growth plan calls for development and implementation of
broadband services and enhanced content for our subscribers. The availability
of many of these tools is dependent on our ability to enter into satisfactory
contractual relationships with parties offering related content and services
which can be made available to our subscribers, as well as relationships with
parties seeking to make online sales to our subscribers and other visitors to
our web site. To date, our revenues from broadband services and enhanced
content have not been material, and we have yet to launch a number of the
services that we hope to provide to our subscribers. We may not be able to
commence those services on a timely basis, and there can be no assurance that
the services will generate the anticipated amount of revenues.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE BROADBAND SERVICES
MARKET, WHICH IS UNCERTAIN
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Internet as an effective medium for the distribution
and viewing of broadband content. The use of the Internet for these services is
a recent phenomenon. Demand for recently introduced services and products over
the Internet and online services is subject to a high level of uncertainty. For
example, the distribution and viewing of broadband content over the Internet is
at an early stage and buyers may be unwilling to shift their purchasing from
traditional vendors of such content to online vendors. If the demand for
broadband services does not develop or increase rapidly, this could have a
material adverse effect on our results of operations.
26
WE RELY HEAVILY ON THIRD PARTIES FOR DEVELOPMENT OF SOFTWARE AND CONTENT AND FOR
ESSENTIAL BUSINESS OPERATIONS AND MAY BE ADVERSELY AFFECTED BY OUR FAILURE TO
MAINTAIN SATISFACTORY RELATIONSHIPS WITH SUCH PARTIES.
We depend on third parties for important aspects of our business,
including:
- Internet access;
- development of software for new web site features;
- content; and
- telecommunications.
We have limited control over these third parties, and we are not their only
client. We may not be able to maintain satisfactory relationships with any of
them on acceptable commercial terms, and there is no guarantee that we will be
able to renew these agreements at all. Further, we cannot be sure that the
quality of products and services that they provide may remain at the levels
needed to enable us to conduct our business effectively.
WE ARE HEAVILY RELIANT ON THIRD PARTIES TO HOUSE AND SERVICE OUR WEB SITE AND
ARE VULNERABLE TO POSSIBLE DAMAGE TO OUR OPERATING SYSTEMS.
We maintain substantially all of our computer systems at our Campbell,
California site and the Los Angeles, California site of Alchemy Communications.
We are heavily reliant on the ability of Alchemy Communications to house and
service our web site. This system's continuing and uninterrupted performance is
critical to our success. Growth in the number of users accessing our web site
may strain its capacity, and we rely on Alchemy Communications to upgrade our
system's capacity in the face of this growth. Alchemy Communications also
provides our connection to the Internet. Sustained or repeated system failures
or interruptions of our web site connection services would reduce the
attractiveness of our web site to customers and advertisers, and could therefore
have a material and adverse effect on our business due to loss of membership and
advertising revenues.
In addition, our operations are dependent in part on our ability to protect
our operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins or other similar events.
Furthermore, our servers are vulnerable to computer viruses, break-ins and
similar disruptive problems. The occurrence of any of these events could result
in interruptions, delays or cessations in service to our users and result in a
decrease in the number of visitors to our site.
WE PLAN TO GROW RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT.
Our business plan contemplates a period of significant expansion. In order
to execute our business plan, we must grow significantly. This growth will
strain our personnel, management systems and resources. To manage our growth,
we must implement operational and financial systems and controls and recruit,
train and manage new employees. We cannot be sure that we will be able to
integrate new executives and other employees into our organization effectively.
In addition, there will be significant administrative burdens placed on our
management team as a result of our status as a public company. If we do not
manage growth effectively, we will not be able to achieve our financial and
business goals.
27
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS.
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Robert A. Rositano, Jr., our Chief Executive Officer, and Dean Rositano, our
President and Chief Operating Officer. The loss of the services of any of our
executive officers could materially and adversely affect our business due to
their experience with our business plan and the disruption in the conduct of our
day-to-day operations. Additionally, we believe we will need to attract, retain
and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and our target market is intense. We may be unable to retain
our key employees or attract, assimilate and retain other highly qualified
employees in the future.
INTENSE COMPETITION FROM OTHER INTERNET-BASED BUSINESSES MAY REDUCE OUR MARGINS
AND MARKET SHARE AND CAUSE OUR STOCK PRICE TO DECLINE.
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software.
Competition could result in price reductions for our products and services,
reduced margins or loss of market share. Consolidation within the online
commerce industry may also increase competition.
We currently or potentially compete with a number of other companies
including a number of large online communities and services that have expertise
in developing online commerce, and a number of other small services, including
those that serve specialty markets. Many of our potential competitors have
longer operating histories, larger customer bases, greater brand recognition in
other business and Internet markets and significantly greater financial,
marketing, technical and other resources than us.
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB
SITES TO INCREASE NUMBERS OF WEB SITE USERS AND INCREASE OUR REVENUES.
We intend to establish numerous strategic relationships with popular web
sites to increase the number of visitors to our web site. There is intense
competition for placements on these sites, and we may not be able to enter into
these relationships on commercially reasonable terms or at all. Even if we
enter into relationships with other web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees
to establish these relationships. Our inability to enter into new distribution
relationships and expand our existing ones could have a material and adverse
effect on our business due to our inability to increase the number of users of
our site.
28
OUR ADVERTISERS ARE EMERGING INTERNET COMPANIES THAT REPRESENT CREDIT RISKS.
Some of our advertisers have limited operating histories, are operating at
a loss, have limited cash reserves or have limited access to capital. If any
significant part of our customer base experiences financial difficulties, is not
commercially successful or is unable to pay our advertising fees for any reason,
our business, operating results and financial condition may be materially and
adversely affected.
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE.
To be successful, we must adapt to rapidly changing Internet technologies
and continually enhance the features and services provided on our web site. We
could incur substantial, unanticipated costs if we need to modify our web site,
software and infrastructure to incorporate new technologies demanded by our
audience. We may use new technologies ineffectively or we may fail to adapt our
web site, transaction-processing systems and network infrastructure to user
requirements or emerging industry standards. If we fail to keep pace with the
technological demands of our web-savvy audience for new services, products and
enhancements, our users may not use our web site and instead use those of our
competitors.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND
PROPRIETARY RIGHTS.
Our Nettaxi.com brand and our web address, www.nettaxi.com, are critical to
our success. We have filed a trademark application for "Nettaxi", among other
trademark applications. We cannot guarantee that any of these trademark
applications will be granted. In addition, we may not be able to prevent third
parties from acquiring web addresses that are confusingly similar to our
addresses, which could harm our business. Also, while we have entered into
confidentiality agreements with our employees, contractors and suppliers in
order to safeguard our trade secrets and other proprietary information, there
can be no assurance that technology will not be misappropriated or that others
may lawfully develop similar technologies.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions
has been a successful strategy used by other Internet companies. We do not have
any present understanding relating to any such acquisition or investment. If we
were to buy a content, service or technology company, the amount of time and
level of resources required to successfully integrate their business operation
could be substantial. The challenges in assimilating their people and
organizational structure, and in encountering potential unforeseen technical
issues in integrating their content, service or technology into ours, could
cause significant delays in executing other key areas of our business plan.
This could include delays in integrating other content, services or technology
into our communities, or moving forward on other business development
relationships, as management and employees, both of which are time constrained,
may be distracted. In addition, the key personnel of the acquired company may
decide not to work for us, which could result in the loss of key technical or
business knowledge to us. Furthermore, in making an acquisition, we may have to
incur debt or issue equity securities to finance the acquisition, the issuance
of which could be dilutive to our existing shareholders.
29
WE ARE VULNERABLE TO ADDITIONAL TAX OBLIGATIONS THAT COULD BE IMPOSED ON ONLINE
COMMERCE TRANSACTIONS.
We do not expect to collect sales or other similar taxes in respect of
transactions engaged in by customers on our web site. However, various states
or foreign countries may seek to impose sales tax obligations on us and other
e-commerce and direct marketing companies. A number of proposals have been made
at the state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce and cause purchasing through our
web site to be less attractive to customers as compared to traditional retail
purchasing. Further, states have attempted to impose sales taxes on catalog
sales from businesses such as ours. A successful assertion by one or more
states that we should have collected or be collecting sales taxes on the sale of
products could have a material and adverse effect on our business due to the
imposition of fines or penalties or the requirement that we pay for the
uncollected taxes.
WE MAY NOT BE ABLE TO TAKE FULL ADVANTAGE OF POTENTIAL TAX BENEFITS FROM OUR NET
OPERATING LOSS CARRYFORWARDS.
At December 31, 2000 we had Federal net operating loss carryforwards
available to reduce future Federal taxable income that aggregated approximately
$25,143,000 for Federal income tax purposes. These benefits will begin to
expire in 2017. Pursuant to a "change in ownership" as defined by the
provisions of the Tax Reform Act of 1986, utilization of our net operating loss
carryforwards may be limited, if a cumulative change of ownership of more than
50% occurs within a three-year period. We have not determined if an ownership
change has occurred. If it has, we may not be able to take full advantage of
potential tax benefits from our net operating loss carry forwards.
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business is highly dependant
on the growth of the internet industry and would be adversely affected if web
usage and e-commerce does not continue to grow. web usage may be inhibited for
a number of reasons, including:
- inadequate Internet infrastructure;
- security concerns;
- inconsistent quality of service;
- unavailability of cost-effective, high-speed service;
- imposition of transactional taxes; or
- limitation of third party service provider's ability and willingness
to invest in new or updated equipment to handle traffic volume.
30
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth, or its performance and
reliability may decline. We are highly dependant on third party service
providers. Any interruption experienced by these service providers may have a
material impact on our business due to our inability to serve our advertising
customers or end users. In addition, web sites, including ours, have experienced
a variety of interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, web usage, including usage of
our web site, could grow slowly or decline. This may have a material impact on
future revenues.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. Our computer systems are
supplied primary power by power companies in California. In addition, the
systems are connected to battery backup systems. This alternative source of
power is provided by our hosting provider and is subject to upkeep and
maintenance. Our current insurance does not provide coverage for any damages our
customers or we may suffer as a result of any interruption in our power supply.
If blackouts interrupt our third party power supply, we would be temporarily
unable to continue operations at our affected facilities. Any such interruption
in our ability to continue operations at our facilities could damage our
reputation and could result in lost revenue, which could have a material adverse
effect on our business, operating results and financial condition.
ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN.
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Also,
technological developments could slow the growth of sponsorships and advertising
on the Internet. For example, widespread use of filter software programs that
limit access to advertising on our web site from the Internet user's browser
could reduce advertising on the Internet. Our business, financial condition and
operating results would be adversely affected if the market for Internet
advertising fails to further develop due to the loss of anticipated revenues.
31
BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF E-COMMERCE AND WEB
ADVERTISING AND SUBJECT US TO LIABILITY.
The need to securely transmit confidential information, such as credit card
and other personal information, over the Internet has been a significant barrier
to e-commerce and communications over the web. Any well-publicized compromise
of security could deter more people from using the web or from using it to
conduct transactions that involve transmitting confidential information, such as
purchases of goods or services. Furthermore, decreased traffic and e-commerce
sales as a result of general security concerns could cause advertisers to reduce
their amount of online spending. To the extent that our activities or the
activities of third party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
disrupt our business, damage our reputation and expose us to a risk of loss or
litigation and possible liability. We could be liable for claims based on
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. Claims could also be based on other misuses of personal
information, such as for unauthorized marketing purposes. We may need to spend
a great deal of money and use other resources to protect against the threat of
security breaches or to alleviate problems caused by security breaches.
WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH
OUR WEB SITE.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or based on other theories relating to the information we
publish on our web site. These types of claims have been brought, sometimes
successfully, against Internet companies as well as print publications in the
past. Based on links we provide to other web sites, we could also be subjected
to claims based upon online content we do not control that is accessible from
our web site. Claims may also be based on statements made and actions taken as
a result of participation in our chat rooms or as a result of materials posted
by members on bulletin boards at our web site. We also offer e-mail services,
which may subject us to potential risks, such as:
- liabilities or claims resulting from unsolicited e-mail;
- lost or misdirected messages;
- illegal or fraudulent use of e-mail; or
- interruptions or delays in e-mail service.
These claims could result in substantial costs and a diversion of our
management's attention and resources.
Efforts to regulate or eliminate the use of mechanisms which automatically
collect information on users of our web site may interfere with our ability to
target our marketing efforts and tailor our web site offerings to the tastes of
our users.
Web sites typically place a tracking program on a user's hard drive without
the user's knowledge or consent. These programs automatically collect data on
anyone visiting a web site. web site operators use these mechanisms for a
variety of purposes, including the collection of data derived from users'
Internet activity. Most currently available web browsers allow users to elect
to remove these mechanisms at any time or to prevent such information from being
stored on their hard drive. In addition, some commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of these
tracking mechanisms. Any reduction or limitation in the use of this software
could limit the effectiveness of our sales and marketing efforts.
32
WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES SURROUNDING THE INTERNET.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could have a material and adverse effect on our
business, results of operations and financial condition due to increased costs
of doing business. Laws and regulations directly applicable to Internet
communications, commerce and advertising are becoming more prevalent. The law
governing the Internet, however, remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws governing intellectual property, copyright, privacy,
obscenity, libel and taxation apply to the Internet. In addition, the growth
and development of e-commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad. We also may be subject
to future regulation not specifically related to the Internet, including laws
affecting direct marketers.
WE COULD INCUR MONETARY DAMAGES FROM LITIGATION ARISING OUT OF OUR BUSINESS
ACTIVITIES.
On July 9, 1999, we were named as one of several defendants in a lawsuit
filed by four disaffected shareholders in Simply Interactive, Inc. The lawsuit
arises out of a series of events relating to certain assets our operating
company, Nettaxi Online Communities, purchased from SSN Properties in October
1997. The complaint alleges that we owed, and either intentionally or
negligently breached, fiduciary duties to the plaintiffs. The suit also claims
that we either intentionally or negligently interfered with the plaintiffs'
contract or prospective advantage. A Case Management Conference is currently
scheduled for April 13, 2001 at which time the parties must represent to the
court whether or not this matter is ready to be set for trial. While our
officers and directors believe that the suit is without merit, we cannot provide
you with any assurances that we will prevail in this dispute. If the plaintiffs
successfully prosecute any of their claims against us, the resulting monetary
damages and reduction in our working capital could significantly harm our
business.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION OF US DIFFICULT.
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. Our articles of
incorporation provide that our board of directors may issue preferred stock
without stockholder approval. The issuance of preferred stock could make it
more difficult for a third party to acquire us. All of the foregoing could
adversely affect prevailing market prices for our common stock.
33
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS IS TYPICAL OF INTERNET
COMPANIES.
The market price of our common stock has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to
volatility. The trading prices of many technology and Internet-related
companies' stocks have decreased substantially within the last 52 weeks. The
market downturn and adjustment for the high valuations for internet companies
may not return to the levels of late 1999 and early 2000. We cannot assure you
that our stock will trade at the same levels of other Internet stocks or that
Internet stocks in general will regain their prior market prices. The per share
closing price of our common stock in 2000 ranged from a high of $8.09 as of
March 13, 2000 to a low of $0.14 as of December 29, 2001. In addition, an active
public market for our common stock may not continue.
Factors that could cause such volatility may include, among other things:
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations;
- conditions or trends in the Internet industry; and
- changes in the market valuations of other Internet companies.
ITEM 2. PROPERTIES
Our headquarters are currently located in a leased facility in Campbell,
California, consisting of approximately 8,600 square feet of office space to
accommodate management, operations, and research and development functions,
which is under a lease that expires at the end of April 2002. We are currently
evaluating our need for the current accommodations and believe that the current
market conditions will allow the Company to either renew the current lease space
or find additional space if needed.
ITEM 3. LEGAL PROCEEDINGS
On July 9, 1999, after our public announcement of the filing of our
registration statement on Form S-1, (Registration No. 333-78129) four
disaffected shareholders in Simply Interactive, Inc., led by Ronald Ventre,
filed an action in the Santa Clara County Superior Court against Warren J.
Kaplan, Frank McGrath, Bruno Henry, Alan K. Fetzer, Robert Divenere, Robert A.
Rositano, Sr., Robert A. Rositano, Jr., Dean Rositano, Glenn Goelz, Nettaxi.com,
Nettaxi Online Communities, Inc., SSN Properties, LLC and others. In August
1999 this claim was consolidated with another claim filed by Carlo Bruno, et
al., on September 17, 1998. The case number is CV 783127.
Mr. Kaplan was formerly the chief executive officer and a director of
Simply Interactive. He also became a member of SSN Properties and is currently
the chief operating officer of AboveNet Communications, Inc. Mr. McGrath was a
director of Simply Interactive. He also became a member of SSN Properties and
is currently a vice president of MCI WorldCom. Messrs. Henry, Fetzer, and
DiVenere were all former officers of Simply Interactive, and Mr. Henry also
served as a director of Simply Interactive. Robert A. Rositano, Sr. was a
director of Simply Interactive and became the managing member of SSN Properties.
He currently owns more than 5% of the outstanding shares of our common stock
following a distribution by SSN Properties to its members in March 1999. Robert
A. Rositano, Jr. was formerly an executive vice president of Simply Interactive
and served as a director until May 1996. He is currently chief executive
officer, secretary and a director of Nettaxi. Dean Rositano was formerly an
executive vice president of Simply Interactive and served as a director until
May 1996. He is currently president, chief operating officer and a director of
Nettaxi. Mr. Goelz was the chief financial officer of Simply Interactive from
August 1996 to July 1997 and was our chief financial officer from April 1999 to
April 2000. All individual defendants held shares, or options to purchase
shares, of Simply Interactive.
34
Distinctions can be made between the claims that the Ventre group is
pursuing against us and the other defendants. As to us, the suit claims that we
owed, and either intentionally or negligently breached, fiduciary duties to the
Ventre group. The suit also claims that we either intentionally or negligently
interfered with the Ventre group's contract or prospective advantage. The
Ventre group is seeking the following relief against us:
- an unstated amount of compensatory and special damages in the sum of
their investments in Simply Interactive, plus prejudgment interest;
- an accounting of profits;
- punitive damages; and
- costs of suit, including attorney fees as permitted by law.
The Ventre group's claims against the other defendants, while not clear,
include all of the claims described above with respect to us as well as other
claims of ineffective management, waste of assets and similar claims. In
addition to the relief described above with respect to us, the Ventre group
seeks the following from the other defendants:
- declaratory relief concerning the validity of the election of the
board of directors of Simply Interactive; and
- orders for the inspection of corporate records in, and the holding of
shareholder meetings for, Simply Interactive.
The factual basis for the proceedings as alleged by the Ventre group can be
summarized as follows. The Ventre group alleges that between February and April
1996, they made a series of investments in Simply Interactive and thereby became
minority shareholders. Thereafter, according to the complaint, the board of
directors of Simply Interactive, without due diligence and disclosure to the
minority shareholders, increased the debts and expenses of Simply Interactive.
The Ventre group then alleges that the defendants raised capital through the
sale of $5.5 million principal amount of convertible notes, secured by all the
assets and properties of Simply Interactive, to three of the defendants, that
the minority shareholders were not given notice of the proposed financing and an
opportunity to participate, and that the entire transaction is void or voidable
because the board of directors of Simply Interactive was improperly constituted
at the time. The Ventre group goes on to allege that SSN Properties, which
acquired the notes from the original purchaser, foreclosed on the assets of
Simply Interactive without reason in August 1997. Finally, the complaint
alleges that the assets formerly used by Simply Interactive were transferred to
us through a series of transactions in violation of fiduciary obligations owed
by the defendants to the minority shareholders of Simply Interactive.
35
Our officers and directors believe that the Ventre group's claims are
without merit and that significant issues of proof exist with regard to the
relevant facts as alleged in the complaint. For example, the individual
defendants have advised that the issuance of the notes followed numerous failed
attempts to raise additional funds from outside sources, and that foreclosure
occurred only after Simply Interactive's default in its obligations to make
required interest payments. Moreover, while the complaint does include us as
defendants with respect to the allegations arising out of the events described
above, our current operating company, Nettaxi Online Communities, was not
launched until September 1997.
In fact, Nettaxi Online Communities did purchase certain assets from SSN
Properties in October 1997, including the original Internet the City CD-ROM
product; a domain name; furniture, fixtures, and equipment; plus other assets
which have since been abandoned. However, the assets acquired by Nettaxi Online
Communities from SSN Properties at that time represented less than 50% of the
value of the foreclosed assets. As described in the notes to our financial
statements, the aggregate value of the assets acquired by Nettaxi Online
Communities from SSN Properties was $2,000,000, which amount was verified by an
independent appraiser.
In 1998, we experienced several significant functional problems with
portions of a purchased technology program, namely the web to database software
application, due to those components incompatability with subsequent releases of
upgraded versions of its operating system. Following attempts to make these
components of the acquired technology compatible, we decided, in December 1998,
not to spend additional monies on these components but to replace them. We wrote
off the unamortized portion of this impaired technology that reduced the value
of the assets by approximately $700,000. As of December 31, 2000, the
unamortized cost of the remaining assets purchased from SSN Properties as a
percentage of our total assets was less than 5%. Moreover, the role of these
assets, which were intended to be revenue-generating products in Simply
Interactive's business model, is substantially different for us in that we view
them primarily as a tool to drive traffic to our site and not necessarily as an
independent revenue source. It should also be noted that our business model for
an online community is substantially different than Simply Interactive's
objective of licensing, distribution, and sale of the CD-ROM product and
marketing and sales of the impaired software application described above.
A Case Management Conference is currently scheduled for April 13, 2001 at
which time the parties must represent to the court whether or not this matter is
ready to be set for trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
36
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the NASD O-T-C Market Bulletin Board
under the trading symbol "NTXY" since October 12, 1998. Prior to that date, our
common stock was not actively traded in the public market. The following table
sets forth, for the periods indicated, the high and low bid prices for our
common stock as reported by various Bulletin Board market makers. The
quotations do not reflect adjustments for retail mark-ups, mark-downs, or
commissions and may not necessarily represent actual transactions.
Period Low Bid High Bid
- ------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 1998:
Fourth Quarter (October 12 - December 31, 1998) $ 4.375 $ 8.875
FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter (January 1 - March 31, 1999) $ 6.187 $18.750
Second Quarter (April 1 - June 30, 1999) $11.500 $34.500
Third Quarter (July 1 - September 30, 1999) $ 7.375 $16.500
Fourth Quarter (October 1 - December 31, 1999) $ 1.843 $ 7.875
FISCAL YEAR ENDED DECEMBER 31, 2000:
First Quarter (January 1 - March 31, 2000) $ 1.406 $ 9.062
Second Quarter (April 1 - June 30, 2000) $ 0.940 $ 5.968
Third Quarter (July 1 - September 30, 2000) $ 0.420 $ 1.420
Fourth Quarter (October 1 - December 31, 2000) $ 0.125 $ 0.520
FISCAL YEAR ENDING DECEMBER 31, 2001
First Quarter (January 1 - March 16, 2001) $ 0.130 $ 0.240
On March 16, 2001, the high and low bid prices per share for our common
stock on the Bulletin Board were $0.240 and $0.180, respectively. As of
February 28, 2001, there were 434 stockholders of record who held shares of our
common stock
DIVIDEND POLICY
To date, no dividends have been declared or paid on any of our capital
stock. We currently intend to retain earnings, if any, to fund the development
and growth of our business and do not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants and other convertible securities granted
by the Company during the year ended December 31, 2000. Also included is the
consideration, if any, received by the Company for such shares and options and
information relating to the section of the Securities Act of 1933, or rule of
the Securities and Exchange Commission under which exemption
from registration was claimed.
37
(1) In January 2000, we issued options to purchase up to 1,508,800 shares of
common stock under our 1999 stock option plan to three current and one former
member of our board of directors who were not employees of the Company, 5
officers and 23 key employees with an exercise price of $2.44 per share, which
was not less than the fair market value of the shares on the date of grant. The
issuances were made in reliance on Section 4(2) of the Securities Act of 1933
and/or Rule 701 promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate the
investments, and who represented to the Company that the shares were being
acquired for investment.
(2) In January, 2000, the Company issued options to purchase 230,000 shares
of common stock to 8 vendors and consultants, with an exercise price of $2.44
per share. These issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Rule 701 promulgated under the Securities Act of
1933 and were made without general solicitation or advertising. The purchasers
were sophisticated investors with access to all relevant information necessary
to evaluate these investments, and who represented to the Company that the
shares were being acquired for investment.
(3) In February 2000 we issued 6,250 shares of common stock, having a value of
$9,700, to PPC Racing in settlement of cancellation of a letter of intent to
provide sponsorship. The issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and was made without general solicitation or advertising. The purchaser
was a sophisticated investor with access to all relevant information necessary
to evaluate these investments, and who represented to the Company that the
shares were being acquired for investment.
(4) In February 2000 we issued 175,000 shares of Common Stock to Sinclair
Davis Trading Corp. in exchange for consulting services. The issuance was made
in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
(5) In February 2000 we issued approximately 15.4 million shares of Common
Stock and warrants to purchase up to an equal number of shares of common stock
in exchange for approximately $23 million. The issuances were made in reliance
on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated
under the Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were accredited investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
38
(6) In February, 2000, the Company issued options to purchase 150,000 shares
of common stock to Fontanelle, LLC, with an exercise price of $1.88 per share.
These issuances were made in reliance on Section 4(2) of the Securities Act of
1933 and/or Rule 701 promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(7) In February 2000, we issued options to purchase up to 1,850,800 shares
of common stock under our 1999 stock option plan to, 5 officers and 17 key
employees with an exercise price of $1.44 per share, which was not less than the
fair market value of the shares on the date of grant. The issuances were made
in reliance on Section 4(2) of the Securities Act of 1933 and/or Rule 701
promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate the investments, and
who represented to the Company that the shares were being acquired for
investment.
(8) In March and April 2000, the Company issued warrants to purchase 389,491
shares of common stock and 778,982 shares of common stock to 2 vendors, with an
exercise price of $2.76 per share in exchange for the conversion of certain
accounts payable. The issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and was made without general solicitation or advertising. The purchaser
was a sophisticated investor with access to all relevant information necessary
to evaluate these investments, and who represented to the Company that the
shares were being acquired for investment.
(9) From March, 2000 to December, 2000, the Company pursuant to its 1999
Stock Option Plan, issued options to purchase 192,000 shares of common stock to
its employees, with exercise prices ranging from $0.37 to $6.812 per share.
These issuances were made in reliance on Section 4(2) of the Securities Act of
1933 and/or Rule 701 promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(10) In July 2000 we issued 80,000 shares of Common Stock to James Stubler
in exchange for consulting services. The issuance was made in reliance on
Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under
the Securities Act of 1933 and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
(11) In July 2000 we issued 100,000 shares of Common Stock to Newport
Capital Consultants, Inc. in exchange for consulting services. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and was made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate these investments,
and who represented to the Company that the shares were being acquired for
investment.
39
(12) In August 2000 we issued 250,000 shares of Common Stock to Robert
Shatles in exchange for consulting services. The issuance was made in reliance
on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated
under the Securities Act of 1933 and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
(13) In September 2000 we issued 75,000 shares of Common Stock to Sinclair
Davis Trading Corp. in consideration of our failure to execute on the demand
registration rights exercised by Sinclair Davis in a timely manner. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(14) In October 2000 we issued warrants to purchase up to 350,000 shares of
Common Stock to Mr. Michael Gardner in exchange for consulting services. The
exercise price for the warrants is $0.35 per share. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SUMMARY FINANCIAL DATA
Set forth below are summary statements of operations data for the period
from October 23, 1997, date of incorporation, to December 31, 1997 and for the
years ended December 31, 1998, 1999 and 2000, and summary balance sheet data as
of December 31, 1997, 1998, 1999 and 2000. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", appearing elsewhere in this Form.
- ------------------------------------------- ----------- ------------ ------------ -------------
1997 1998 1999 2000
- ------------------------------------------- ----------- ------------ ------------ -------------
- ------------------------------------------- ----------- ------------ ------------ -------------
STATEMENT OF OPERATIONS DATA(1):
- ------------------------------------------- ----------- ------------ ------------ -------------
Net revenues $ 144,900 $ 258,000 $ 5,032,800 $ 9,418,400
- ------------------------------------------- ----------- ------------ ------------ -------------
Gross profit $ 57,500 $ 18,200 $ 1,029,000 $ 2,110,700
- ------------------------------------------- ----------- ------------ ------------ -------------
Loss from operations $ (142,100) $(3,082,300) $(9,402,500) $(10,367,900)
- ------------------------------------------- ----------- ------------ ------------ -------------
Net loss $ (159,700) $(3,113,600) $(9,880,400) $(14,351,400)
- ------------------------------------------- ----------- ------------ ------------ -------------
Net loss available to common shareholders $ (327,200) $(3,127,900) $(9,880,400) $(14,351,400)
- ------------------------------------------- ----------- ------------ ------------ -------------
Basic loss per share $ (0.06) $ (0.32) $ (0.46) $ (0.36)
- ------------------------------------------- ----------- ------------ ------------ -------------
Diluted loss per share $ (0.06) $ (0.32) $ (0.46) $ (0.36)
- ------------------------------------------- ----------- ------------ ------------ -------------
WEIGHTED-AVERAGE COMMON SHARES:
- ------------------------------------------- ----------- ------------ ------------ -------------
Basic outstanding shares 5,483,500 9,724,781 21,274,203 39,381,211
- ------------------------------------------- ----------- ------------ ------------ -------------
Diluted outstanding shares 5,483,500 9,724,781 21,274,203 39,381,211
- ------------------------------------------- ----------- ------------ ------------ -------------
- ------------------------------------------- ----------- ------------ ------------ -------------
Balance Sheet Data:
- ------------------------------------------- ----------- ------------ ------------ -------------
Working capital (Deficiency) $ (222,900) $ 300,400 $(2,053,000) $ 14,144,500
- ------------------------------------------- ----------- ------------ ------------ -------------
Total Assets $2,082,300 $ 1,652,700 $ 6,031,200 $ 18,123,600
- ------------------------------------------- ----------- ------------ ------------ -------------
Long-term Liabilities $ 773,500 $ 5,400 $ 3,200,000 $ 0
- ------------------------------------------- ----------- ------------ ------------ -------------
Total stockholders' equity (Deficiency) $ 973,400 $ 1,332,100 $(2,000,300) $ 16,563,300
- ------------------------------------------- ----------- ------------ ------------ -------------
(1) We have not given effect to the possible liability arising from the
litigation with the Ventre group described in the section of this annual report
entitled, Legal Proceedings. At this time, in the opinion of management, there
are no pending claims, the outcome of which is expected to result in a material
adverse effect on our financial position.
40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding the
company's expectations, beliefs, intentions or future strategies that are
signified by the words "expects", "anticipates", "intends", "believes", or
similar language. These forward-looking statements involve risks, uncertainties
and other factors. All forward-looking statements included in this document are
based on information available to the company on the date hereof and speak only
as of the date hereof. The factors discussed below under "Risk Factors" and
elsewhere in this Annual Report on Form 10-K are among those factors that in
some cases have affected the company's results and could cause the actual
results to differ materially from those projected in the forward-looking
statements. The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto.
OVERVIEW
Nettaxi.com is an Internet marketing portal that provides a wide range of
content and Internet based services for consumers and businesses. Our web site
at www.nettaxi.com serves as a gathering place for people with shared topics of
interest, as well as an entry point, referred to as a portal, to the Internet.
Through our web site, we provide content addressing a large number of targeted
categories The content is organized into affinity categories such as news,
sports, entertainment, health, politics, finances, lifestyle, and other areas of
interest. Visitors to our web site are provided with comprehensive information
and content. Subscribers to our web site, which we call citizens, are also
provided with access to enhanced content such as broadband video clips, email
accounts and personal web pages. We have developed a diversified revenue model
under which we provide our citizens with access to web site hosting services and
a broad range of content, and we provide affiliated businesses with access to a
large population of Internet users for advertising and promotional purposes.
41
In 2000, we focused our efforts on improving the quality of content
available on our web site, implementing our web site hosting services and
reducing our operating costs by eliminating many of the services which were not
profitable. During the year we developed a number of new promotions designed to
generate new sources of revenue.
In the third quarter of 1999, we began providing web site hosting and
Internet connectivity services for corporate customers. Our services are
delivered through a state-of-the-art Internet data center located in Southern
California using a high-performance Internet backbone network. Customers pay
monthly fees for the professional services utilized, one-time installation fees,
and connectivity charges. These "hosting" revenues are recognized in the period
the services are provided. The loss or reduction of revenue from this customer
may have a material impact on total net revenues.
The Company also receives other revenues from premium account membership
subscriptions. Our membership programs offer premium services for a monthly
fee, providing additional services such as unlimited personal e-mail accounts
for family or friends, unlimited Nettaxi Site Builder web pages, themed web page
templates, a personal event calendar, discussion groups, and options to
customize personal homepages with pictures, colors and content.
In May 1999, we completed the merger with Plus Net, Inc., a California
corporation, which has allowed us to provide our users with a web based e-mail
program and a robust meta search engine. Plus Net also has an e-commerce
processing engine that enables the acceptance and processing of online credit
card transactions. We believe this merger also enhanced our electronic commerce
and advertising opportunities. As a result of this merger, we received revenues
from credit card processing fees during the first half of 1999, with minimal
revenues being earned in the third quarter of 1999. The contract through which
these fees have been derived terminated in December 1999 and we anticipate that
revenues of this type will be minimal in the foreseeable future.
In February 2000, we completed our private placement, which raised
approximately $23 million in exchange for issuance of the Company's common stock
and warrants, to purchase shares of our common, which, if fully exercised by all
investors, will result in an additional $62 million in equity funding to
Nettaxi.com. The acquisition of this new capital will provide Nettaxi.com the
ability to become a more aggressive competitor in the community portal arena.
The Company plans to use the funds raised to increase our ability to develop new
community content and commerce relationships, and enhance each Nettaxi.com
citizen's experience within our communities. This funding will also facilitate
potential acquisitions, mergers, and other strategic partnerships which fit into
the company's overall long-term business strategy.
To date, we have entered into business and technology license arrangements
in order to build our web site community, provide community-specific content,
generate additional traffic, and provide our subscribers with additional
products and services, including e-commerce tools. During the fourth quarter
ended September 30, 2000, we entered into a contract with Screaming Media to
provide content for users of our website. We expect this new content to increase
brand awareness to our web site. We also entered into a contract with Annuncio
Software, Inc. to enhance our marketing efforts for direct marketing to our
citizens that may enhance their time spent online with other products and
services for purchase.
42
We intend to continue to investigate potential acquisitions and to seek
additional relationships with content providers that fall within the scope of
our business strategy, and will serve to increase our subscriber base and
overall site traffic. Acquisitions carry numerous risks and uncertainties and
we cannot guarantee that we will be able to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future.
RESULTS OF OPERATIONS; COMPARISON OF THE TWELVE MONTHS ENDED DECEMBER 31, 2000
AND 1999
NET REVENUES. Net revenues for the year ended December 31, 2000 increased
87% to approximately $9.4 million from $5.0 million for the year ended December
31, 1999. The absolute dollar increase is the result of an increase in revenues
from the corporate web hosting and the increase in advertising revenues.
Advertising revenues included third party revenues from both traditional and
internet related advertisers which also includes reciprocal arrangements. For
the year ended December 31, 2000, four customers each accounted for greater than
10% of total net revenues for a total of approximately $5.1 million or 54% of
the total revenues. These customers, Babenet, SpinRecords.com, Whitesand
Communications, and Hearme.com, accounted for 20%, 13%, 11% and 10%,
respectively of our total revenues. For the year ended December 31, 1999, one
customer, Whitesand Communications, accounted for greater than 10% of total net
revenues. The loss of any one of all of these customers could have a material
adverse affect on our revenue.
ADVERTISING REVENUES. Advertising revenues for the year ended December 31,
2000 and 1999 were approximately $5.7 million and approximately $2.7 million,
respectively, which represented 60% and 53%, respectively, of total net
revenues. The year over year increase in absolute dollars resulted from an
increase in reciprocal advertising transactions and increases in the number of
advertisers as well as the increase in average contract commitments of these
advertisers as a result of increased web traffic to our web site.Reciprocal
advertising arrangements are exchanges of similar services between the Company
and the advertisers. These arrangements accounted for approximately 28% and 7%
of total revenues for the twelve months ended December 31, 2000 and 1999,
respectively. Reciprocal arrangements for the twelve months ended December 31,
2000 are the result of the Company's strategy in developing strategic
relationships with other advertisers or service providers for non-cash media
advertising.
TRANSACTION PROCESSING FEES. There were no transaction processing fees for
the year ended December 31, 2000. Transaction processing fees were approximately
$1.29 million for the year ended December 31, 1999, which represented 26%, of
total net revenues. Transactions fees consisted of revenue derived from credit
card evaluations and from the processing of on-line credit card transactions.
The 1999 revenue is attributable to the merger with Plus Net, Inc. in May 1999.
The contract through which these fees have been derived terminated in December,
1999 and we do not expect revenues of this type to be significant in future
periods.
HOSTING REVENUES. Our hosting revenues were approximately $3.7 million and
$945,000 for the years ended December 31, 2000 and 1999, respectively, which
represented 40% and 19%, of total net revenues, respectively. For the year
ended December 31, 2000, we recognized hosting revenues for the twelve
43
months as compared to only six months in the year ended December 31, 1999. In
the third quarter of 1999, we began providing internet hosting and connectivity
services for corporate customers. Our services are delivered through a
state-of-the-art Internet data center located in Southern California using a
high-performance Internet backbone network. Customers pay monthly fees for the
professional services utilized, one-time installation fees, and monthly
connectivity charges. These "hosting" revenues were recognized in the period the
services were provided. The Company has experienced strong revenue growth in the
internet web hosting for corporate customers, but does not expect this growth to
continue at the current rate, or that the Company will sustain profitability
from this business segment. Additionally, the Company cannot assure that it can
increase the number of corporate customers or maintain the current customer
base. As previously described, two web-hosting customers accounted for more than
10% of total net revenues for the twelve months ended December 31, 2000.
COST OF OPERATIONS. Cost of operations were approximately $7.3 million and $4.0
million for the years ended December 31, 2000 and 1999, respectively. Cost of
operations increased 83%, Approximately 85% of the increase is the result of
additional expenses related to costs for co-location (Internet connection
charges) expenses. In the third quarter of 1999, we began providing Internet
connectivity services to corporate customers and required purchases of
additional bandwidth to service these customers. These costs are expected to
continue to increase as our web traffic increases and our corporate customer
require additional bandwidth for our "citizens". For the year ended December 31,
2000, we recognized hosting expenses for twelve months as compared to only six
months in the year ended December 31, 1999. Approximately 11% of the increase is
related to increased depreciation expense for capital purchased in 1999.
Approximately 6% of the increase is related to the costs for consultants to
improve our website. Separately, during the third quarter ended September 30,
2000, we also initiated cost effective measurement tools to limit the use of
unauthorized excessive bandwidth or charging the individual users for the use of
additional bandwidth. These cost measures resulted in cost savings to the
Company in the third and fourth quarter of year 2000. We cannot be assured that
these cost saving measures will continue to result in substantial savings or any
savings at all.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were
approximately $5.9 million and $4.8 million for the twelve month periods ended
December 31, 2000 and 1999, respectively. Sales and marketing expenses consisted
primarily of advertising, including co-branding and reciprocal, salaries of our
sales and marketing personnel and related costs, marketing, and promotion costs.
Approximately $1.9 million of the net increase is the result of the redirected
marketing approach for brand awareness implemented in the third quarter of 2000.
This consisted of using reciprocal online advertising arrangements to increase
brand awareness rather than the traditional print and media marketing approach.
The Company recorded reciprocal advertising expenses in relation to the
reciprocal advertising revenues of $2.2 million for the year ended December 31,
2000 compared to approximately $0.3 million for the year ended December 31,
1999. The Company utilizes reciprocal advertising arrangements as an inexpensive
advertising media for increasing brand awareness. There can be no assurance that
these increased expenditures will result in increased visitors to our web site
or additional revenues in the future. This increase was offset by a reduction of
approximately $0.8 million reduction in spending on traditional marketing media
expenditures.
44
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1.6 million and $2.2 million for the twelve months ended December 31, 2000 and
1999, respectively. The 28% decrease was primarily attributable to the lower
utilization of consultants by the Company and decrease in average number of
technical personnel during the year 2000. Approximately $0.6 million of the
decrease was related to the lower utilization of consultants and $0.2 million of
the decrease was related to the decrease in recruiting fees paid to hire new
employees. The above two costs were offset by an approximately $0.3 million
increase which was related to increased depreciation expense for capital
equipment. The Company has experienced a difficulty in its ability to recruit
and retain technical personnel as a result of the current economic prosperity
and high cost of living in Silicon Valley and expects this condition to have a
continuous impact on the ability of the Company to retain and hire additional
technical personnel.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5.0 million and $3.5 million for the twelve months ended December 31, 2000
and 1999, respectively. General and administrative costs consisted primarily of
salaries and related costs for executives, administrative, and finance
personnel, as well as legal, accounting and other professional service fees.
Approximately $0.6 million of the increase in general and administrative
expenses were primarily attributable to amortization of deferred compensation
expense related to stock, warrants and options granted during the year to
various consultants for the services. Approximately $0.4 million of the increase
was the result of additional salaries and personnel costs. Approximately $0.4
million of the increase is related to higher insurance costs associated with
being a public company. Also, the increase is the result of legal fees related
to the settlement agreement with the holder of convertible debentures. The
Company also recorded approximately $500,000 provision for uncollectible
accounts receivable. The Company expects that due to the highly volatile market
conditions for internet related and other advertising companies, the provision
for bad debt may be higher in the future. The above increase were offset by the
decrease in expenditures related to the merger with Plus Net.
INTEREST EXPENSE. Net interest expense was $4.0 million and $0.4 million
for the years ended December 31, 2000 and 1999, respectively. For the year 1999
period the net interest expense was primarily due to the convertible promissory
note that was issued on March 31, 1999 and to amortization of deferred interest
related to warrants issued in conjunction with the convertible promissory note,
offset by interest income. For the year 2000 period, the net interest expense
was primarily the result of deemed interest expense related to the convertible
debenture issued on March 31, 1999. We recognized deemed interest expense of
approximately $3.9 million in the second quarter of 2000. This non-cash
interest expense resulted from the implied beneficial conversion feature and the
value of warrants issued in connection with the settlement agreement that we
reached with the holder of the convertible debenture.
INCOME TAXES. At December 31, 2000, we had net operating loss
carryforwards available to reduce future taxable income that aggregate
approximately $25.1 million for Federal income tax purposes. These benefits
begin to expire in 2017. The Company also had a California net operation loss
carryforwards in the amount of $13.4 million which may be applied to future
taxable income until these benefits begin to expire in 2002. Our ability to
utilize the net operating loss carryforwards are dependent upon our ability to
generate taxable income in future periods and may be limited due to restrictions
imposed under Federal and state laws upon change in ownership. The provision for
income taxes for the year ended December 31, 2000 consisted of minimum state
taxes. For the year ended December 31, 1999 we recorded a tax provision which
related to earnings made by PlusNet, Inc. during its fiscal period before our
merger.
45
RESULTS OF OPERATIONS; COMPARISON OF THE TWELVE MONTHS ENDED DECEMBER 31, 1999
AND 1998
NET REVENUES. Net revenues for the year ended December 31, 1999 increased
1,851% to approximately $5.03 million from $258,000 in the year ended December
31, 1998. The absolute dollar increase is the result of the increase in the
number of advertisers and the average contract duration and value (the result of
higher web site traffic to nettaxi.com web pages), an increase in revenues from
the corporate web hosting, transaction processing fee revenue, and to a lesser
extent, increases in our royalties and customization fees associated with the
distribution of our CD ROM product. Barter revenues accounted for approximately
7% of total revenues for the twelve months ended December 31, 1999. One
customer, WhiteSand Communications, Inc., accounted for approximately 17% of the
total revenues in the twelve months ended December 13, 1999, no other customer
accounted for greater than 10% of total revenues. For the year ended December
31, 1998, four customers each accounted accounted for greater than 10% of net
revenues, these customers @dventure, Unique Media (Go4Media), Pioneer
Technologies, and Flycast Communications, accounted for 28%, 21%, 13%, and 12%
of net revenues, respectively.
ADVERTISING REVENUES. Advertising revenues for the year ended December 31,
1999 and 1998 were approximately $2.67 million and approximately $177,000,
respectively, which represented 53% and 69%, respectively, of total net
revenues. The year over year increase in absolute dollars resulted from an
increase in the number of advertisers as well as the increase in average
contract commitments of these advertisers as a result of increased web traffic
to our web site.
TRANSACTION PROCESSING FEES. Transaction processing fees were
approximately $1.29 million for the year ended December 31, 1999, which
represented 26%, of total net revenues. There were no transaction processing
fees in 1998. Transactions fees consist of revenue derived from credit card
evaluations and from the processing of on-line credit card transactions. The
1999 revenue is attributable to the merger with Plus Net, Inc. in May 1999.
The contract through which these fees have been derived terminated in December
1999 and we do not expect revenues of this type to be significant in future
periods.
HOSTING REVENUES. Our hosting revenues were approximately $945,000 for the
year ended December 31, 1999, which represented 19%, of total net revenues.
There were no hosting revenues in 1998. In the third quarter of 1999, the
Company began providing internet hosting and connectivity services for corporate
customers. Our services are delivered through a state-of-the-art Internet data
center located in Southern California using a high-performance Internet backbone
network. Customers pay monthly fees for the professional services utilized,
one-time installation fees, and monthly connectivity charges. These "hosting"
revenues were recognized in the period the services were provided.
COST OF OPERATIONS. Cost of operations were approximately $4.0 million and
$240,000 for the years ended December 31, 1999 and 1998, respectively.
Approximately 93% of the increases for the twelve month period in 1999 over 1998
is the result of increased costs for co-location expenses (Internet connection
charges). Equipment costs and depreciation of equipment, amortization of
intangible assets, and expenses for third party content and development
accounted for the balance of the increase. In the third quarter of 1999, we
began providing Internet connectivity services to corporate customers and
required purchases of additional bandwidth to service these customers. These
costs are expected to continue to increase as our web traffic increases and our
corporate customer require additional bandwidth for our "citizens".
46
SALES AND MARKETING EXPENSES. Sales and marketing expenses consisted
primarily of salaries of our sales and marketing personnel, marketing,
promotion, advertising and related costs. Sales and marketing expenses were
approximately $4.79 million and $746,000 for the twelve month periods ended
December 31, 1999 and 1998, respectively. Approximately $2.8 million of the
increase was related to expansion of our online and print advertising, public
relation and other promotional expenditures, and approximately $0.5 million of
the increase was related to the hiring of 10 additional sales and marketing
personnel and related expenses required to implement our marketing strategy. In
the third quarter of 1999, the Company began to implement aggressive marketing
campaigns online and in traditional media to promote the Nettaxi.com brand and
attract an increasing number of visitors to our web site.
We expect sales and marketing expenses to increase significantly in future
periods. These increases will be principally related to hiring additional sales
and marketing personnel and increased spending on advertising in a variety of
media to increase brand awareness and attract additional visitors to our web
site. There can be no assurance that these increased expenditures will result
in increased visitors to our web site or additional revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately $2.19 million and $635,000 for the twelve month periods ended
December 31, 1999 and 1998, respectively. The absolute dollar increases for both
the twelve month period in 1999 over 1998 primarily attributable to ongoing
updating of the infrastructure and technological development of our web site.
Approximately $0.6 million of the increase includes increased salaries and
associated hiring costs that are a result of the highly competitive nature of
hiring in the internet software marketplace and the hiring of 7 additional
personnel. We experienced substantial costs for engineer consultants during the
twelve month period ended December 31, 1999 and expects these increased costs to
continue as we continue to recruit and retain personnel to meet the research and
development requirements. These costs accounted for approximately $0.7 million
of the net increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consisted primarily of salaries and related costs for our executive,
administrative, and finance personnel, as well as legal, accounting and other
professional service fees. General and administrative expenses were
approximately $3.46 million and $1.05 million for the respective twelve month
periods ended December 31, 1999 and 1998, respectively. Approximately $0.6
million of the increase is related to increases in the salaries of general and
administrative personnel and related costs as the result of the hiring of key
financial personnel in the second quarter of 1999. Approximately $0.6 million of
the increase is the costs associated with the amortization of deferred
compensation expenses, related to the issuance of common stock and options to
consultants. Approximately $0.7 million of the increase is the result of higher
legal and accounting fees associated with cost of being a public company.
Approximately $0.5 million of the increase is the result of costs associated
with the merger with Plus Net, Inc. in 1999. We expect general and
administrative expenses to grow as we hire additional personnel and incur
additional expenses related to the growth of our business and our operation as a
public company.
ASSET IMPAIRMENT. For the year ended December 31, 1998 operating expenses
includes a one time adjustment of $667,000 for asset impairment. Asset
impairment write down was to adjust the carrying amount of portions of the
purchased technology, namely the web to database software application to its net
realizable value. For the period ended December 31, 1999, no asset impairment
write-down was recorded.
47
INTEREST EXPENSE. Net interest expense was approximately $351,100 and
$59,000 for the respective twelve month period ended December 31, 1999 and 1998.
The net interest expense for the twelve month periods ended December 31, 1999
and 1998 related to the convertible promissory note that was issued on March 31,
1999 and to amortization of deferred interest related to warrants issued in
conjunction with the convertible promissory note.
OTHER INCOME. In the twelve months ended December 31, 1998 we realized a
gain of $28,500, from the disposal of capital equipment. No gain was realized
in 1999.
INCOME TAXES. At December 31, 1999, we had net operating loss carry
forwards available to reduce future taxable income that aggregate approximately
$11,200,000 for Federal income tax purposes. These benefits expire through
2019. Pursuant to a "change in ownership" as defined by the provisions of the
Tax Reform Act of 1986, utilization of our net operating loss carry forwards may
be limited if a cumulative change of ownership of more than 50% occurs over a
three-year period.
In the twelve months ended December 31, 1999 we recorded a tax provision
which relates to earnings made by Plus Net, Inc. during its fiscal period
before our merger.
RESULTS OF OPERATIONS; COMPARISON OF THE PERIOD OCTOBER 23, 1997, DATE OF
INCORPORATION, TO DECEMBER 31, 1997 AND THE TWELVE MONTHS ENDED DECEMBER 31,
1998
NET REVENUES. Net revenues for the twelve months ended December 31,
1998 were approximately $258,000 and for the period ended December 31, 1997
approximately $144,900. The revenues for the 1997 period were principally
derived from royalties from the distribution of our CD-ROM tutorial product.
Revenues for the twelve months ended December 31, 1998 reflect the shift from
the initial start-up phase of the Company to the current business model that
derives a majority of its revenue from the sale of banner advertisements.
ADVERTISING REVENUES. Advertising revenues for the twelve months ended
December 31, 1998 were approximately $177,000 or approximately 69% of total
revenues. There were no advertising revenues for the period ended December 31,
1997. The Company began the sale of banner advertising on the Internet in the
third quarter of 1998.
ROYALTY REVENUES. Our royalty revenues were approximately $61,700 for the
twelve months ended December 31, 1998, which represented approximately 24% of
total revenues, and approximately $132,300 for the period ended December 31,
1997, which represented approximately 51% of total revenues. The Company
initially derived its revenues from the distribution of the CD-ROM tutorial
product.
COST OF OPERATIONS. Cost of operations were approximately $239,800 for the
twelve months ended December 31, 1998 and $87,400 for the period ended December
31, 1997. The substantial absolute dollar is the result of increased costs for
co-location expenses (Internet connection charges), software and equipment
costs, and depreciation of equipment as a result of build-out of our web site.
48
SALES AND MARKETING EXPENSES. Sales and marketing expenses consisted
primarily of salaries of our sales and marketing personnel. Sales and marketing
expenses were approximately $745,600 and $3,100 for the twelve month period
ended December 31, 1998 and the period ended December 31, 1997, respectively.
The absolute dollar increase represents the shift from the early research and
development stages of the Company to the current business model as an online
community generating revenues from the sales of advertising that required the
shift in resources to focus on the sales and marketing efforts to promote the
brand awareness of the Company and increased traffic on our web site.
We expect sales and marketing expenses to increase significantly in future
periods. These increases will be principally related to hiring additional sales
and marketing personnel and increased spending on advertising in a variety of
media to increase brand awareness and attract additional visitors to our web
site. There can be no assurance that these increased expenditures will result
in increased visitors to our web site or additional revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately $634,700 and $36,500 for the twelve month period ended December
31, 1998 and the period ended December 31, 1997, respectively. The absolute
dollar increases in research and development expenses were primarily
attributable to ongoing updating of the infrastructure and technological
development of our web site, increased salaries that are a result of the highly
competitive nature of hiring in the Internet software marketplace. We expect
these increased costs to continue as we continue to recruit and retain personnel
to meet the research and development requirements of the Company.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consisted primarily of salaries and related costs for our executive,
administrative, and finance personnel, as well as legal, accounting and other
professional service fees. General and administrative expenses were
approximately $1.05 million and $160,000 for the twelve month period ended
December 31, 1998 and the period ended December 31, 1997, respectively. The
increase in absolute dollars in general and administrative expenses was
primarily due to increases in the number of general and administrative personnel
and the increase in fees for professional services. We expect general and
administrative expenses to grow as we hire additional personnel and incur
additional expenses related to the growth of our business and our operation as a
public company.
ASSET IMPAIRMENT. For the twelve months ended December 31, 1998 operating
expenses includes a one time adjustment of $667,000 for asset impairment. Asset
impairment write down was to adjust the carrying amount of portions of the
purchased technology, namely the web to database software application to its net
realizable value. For the period ended December 31, 1997, no asset impairment
write-down was recorded.
INTEREST INCOME/EXPENSE. Net interest expense for the twelve months ended
December 31, 1998 was approximately $59,000 and $17,000 for the period ended
December 31, 1997. The net interest expense for both periods was related to the
convertible promissory note that was issued on November 1, 1997 which was
converted into shares of common stock in September 1998.
49
INCOME TAXES. The provision for income taxes for the year ended December
31, 1998 and the period ended December 31, 1997 consisted of minimum state
taxes. At December 31, 1998, we had net operating loss carry forwards available
to reduce future taxable income that aggregate approximately $ 1,227,000 for
Federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company had cash and cash equivalents of
approximately $13,900,000, compared to approximately $988,000 at December 31,
1999. Net cash used in operating activities equaled approximately $8.4 million
and $5.37 million for the twelve-month periods ended December 31, 2000 and 1999,
respectively. We had significant negative cash flows from operating activities
for both of the twelve month periods primarily from our net operating losses,
adjusted for non-cash items, and in 1999 an increase in accounts receivable
balances due to the time lag between revenue recognition and the receipt of
payments from advertisers. In 1999, these factors were offset by significant
increases in accounts payable and accrued expenses. Non cash adjustments
included issuance of common stock for services of $1,019,400 and $34,200 for the
years ended December 31,2000 and 1999, respectively and compensation expense
related to options and warrants granted for $615,700 and $211,300 for the years
ended December 31, 2000 and 1999, respectively. Non cash adjustments in the year
ended December 31, 2000 included interest expense related to the settlement
agreement and issuance of warrants related to the convertible note issued in
1999. The total expense in 2000 was approximately $4.6 million compared to
approximately $200,000 in 1999. Non cash adjustments also included bad debt
write-offs of $350,000 and $52,400 for the years ended December 31, 2000 and
1999, respectively.
Net cash used in investing activities was approximately $744,000 and $2.16
million for the twelve month periods ended December 31, 2000 and 1999,
respectively. Substantially all of the cash used in investing activities for
both periods was primarily related to the purchase of capital equipment in
connection with the build out of our web site and infrastructure. The Company
does not have any outstanding orders for capital equipment and believes that the
current capital equipment will sustain the needs for the forthcoming year. The
Company does not plan to spend any significant amount in 2001 for capital
equipment.
Net cash provided by financing activities was approximately $22.0 million
and $8.04 million for the twelve month periods ended December 31, 2000 and 1999,
respectively. Net cash provided by financing activities in 2000 consisted
primarily of net proceeds from the issuance of our common stock in a private
placement offering. Net cash provided by financing activities in 1999 consisted
of both net proceeds from issuance of common stock and issuance of a convertible
promissory note.
50
We incurred net losses of approximately $14.4 million and $9.88 million for
the year ended December 31, 2000, and 1999, respectively. At December 31, 2000,
we had an accumulated deficit of approximately $27.7 million. The net losses and
accumulated deficit resulted from the significant operational, infrastructure
and other costs incurred in the development and marketing of our services and
the fact that revenues failed to keep pace with such costs. As a result of our
expansion plans and our expectation that our operating expenses, especially in
the areas of sales and marketing, will continue to increase significantly, we
expect to incur additional losses from operations for the foreseeable future. To
the extent that increases in our operating expenses precede or are not
subsequently followed by commensurate increases in revenues, or that we are
unable to adjust operating expense levels accordingly, our business, results of
operations and financial condition would be materially and adversely affected.
There can be no assurance that we will ever achieve or sustain profitability or
that our operating losses will not increase in the future.
In February 2000, we completed a private placement of our common stock. As
a result, we raised approximately $23 million in exchange for approximately 15.4
million shares of common stock issued to investors. The investors also received
warrants to purchase up to an equal number of shares of our common stock
exercisable at an exercise price of $4.00 per share.
We currently believe that we have sufficient cash to fund our current
operations through December 2002. However, given our limited resources and our
history of losses from operations, we will need to raise additional funds in
order to fully execute our business plan and fund expansion of our business,
develop new or enhanced services or products, respond to competitive pressures
or to acquire complementary products, businesses or technologies. No assurances
can be given, however, that we will be able to obtain such additional resources.
If we are unsuccessful in generating anticipated resources from one or more of
the anticipated sources, and unable to replace the shortfall with resources from
another source, we may be able to extend the period for which available
resources would be adequate by deferring the creation or satisfaction of various
commitments, deferring the introduction of various services or entry into
various markets, and otherwise scaling back operations. If we are unable to
generate the required resources, our ability to meet our obligations and to
continue our operations would be adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin No. 101, "Revenue Recognition". Staff
Accounting Bulletin No. 101 provides the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. Staff
Accounting Bulletin No. 101 is effective for the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. We believe our current revenue
recognition policies comply with the provisions of Staff Accounting Bulletin No.
101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation (Interpretation) No. 44, "Accounting for Certain Transactions
involving Stock Compensation, an Interpretation of ABP Opinion No. 25", which
became effective July 1, 2000. Interpretation No. 44 clarifies (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a stock compensation plan qualifies as a noncompensatory
plan, (c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. Adoption of the
provisions of the Interpretation had no significant impact on our financial
statements.
51
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Statement of Financial Accounting Standards No.133, as
amended by Statement of Financial Accounting Standards No. 138, establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. Statement of Financial Accounting Standards No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. In June 1999, The FASB
Issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the effective date of FASB Statement No. 133" which
amends SFAS No. 133 to be effective for all fiscal quarters or all fiscal years
beginning after June 15, 2000.
Historically, we have not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, we do not expect
adoption of the new standard to have a material impact on our results from
operations, financial position or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
As of December 31, 2000, we did not have any long term debt obligations.
Therefore, an immediate 10% increase in market interest rates would not have a
material adverse effect on our financial position. We currently do not have any
material market rate risks. We could be exposed to market risk related to any
debt obligations for financing working capital and capital equipment
requirements in the future. Historically, we have financed such requirements
from the issuance of both preferred and common stock. We continue to consider
financing alternatives, which may include the incurrence of long term
indebtedness. Actual capital requirements may vary based upon the timing and
success of the expansion of our operations. We believe that based on the terms
and maturities of any future debt obligations that the market risk would be
minimal.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1997, 1998, 1999 and 2000,
inflation
has not had a significant effect on our results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements, schedules and supplementary data, as listed under
Item 14, appear in a separate section of this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our directors, executive officers and other key employees, and their ages,
as of March 31, 2001 are as follows:
NAME AGE POSITION
- -------------------------- --- -------------------------------------------------
Robert A. Rositano, Jr.(1) 32 Chief Executive Officer, Secretary and Director
- -------------------------- --- -------------------------------------------------
Dean Rositano (1) 29 President, Chief Operating Officer, Interim Chief
Financial Officer and Director
-------------------------------------------------
Robert Speicher 48 Vice President of Sales and Marketing
- -------------------------- --- -------------------------------------------------
Andrew Garroni (2) 45 Director
- -------------------------- --- -------------------------------------------------
(1) Messrs. Robert A. Rositano, Jr. and Dean Rositano are brothers.
(2) Mr. Andrew Garroni is currently the sole member of our Compensation
Committee and our Audit Committee and is not an employee of Nettaxi.com.
Each director holds office until the next annual meeting on the
stockholders and until his successor is elected and qualified. Executive
officers are appointed by and serve at the pleasure of our board of directors.
Set forth below is certain information regarding the business experience
during the last five years of each of the above named persons.
ROBERT A. ROSITANO, JR. Mr. Rositano Jr. co-founded Nettaxi Online
Communities, Inc., a Delaware corporation , in October, 1997. He has served as
Chief Executive Officer and Secretary of Nettaxi since the reorganization with
Swan Valley and prior to that served in the same capacities with Nettaxi Online
Communities from its inception. He has over seven years of experience in the
Internet service provider and Internet industry. In February 1995, he co-founded
Simply Interactive, Inc. , an Internet/intranet software company, and served as
Executive Vice President in the areas of Inside Sales, Customer Service and
Product Development until he co-founded Nettaxi Online Communities. In January
1994, he co-founded Digital Data Express, a company focused on beginner level
Internet users, and served as Chief Executive Officer until February 1995 when
Digital Data Express was acquired by Simply Interactive. From 1992 to 1994, Mr.
Rositano was hired on as the third employee at Netcom On-line Communications in
1992 and served as a senior sales and account manager until 1993.
DEAN ROSITANO. Mr. Rositano co-founded Nettaxi Online Communities in
October, 1997. He has served as President of Nettaxi since the reorganization
with Swan Valley and prior to that served in the same capacities with Nettaxi
Online Communities. He has over seven years of experience in the ISP and
Internet industry. In February 1995, he co-founded Simply Interactive, Inc., an
Internet/intranet software company, and served as Vice President of Technology
until he co-founded Nettaxi Online Communities. While at Simply Interactive, he
assembled a digital production studio and produced the Internet the City CD-ROM
in a three month time frame on three platforms, Windows 3.1, Windows 95, and
Macintosh. In January 1994, he co-founded Digital Data Express and served as
President and Chief Executive Officer until February 1995 when Digital Data
Express was acquired by Simply Interactive. At Digital Data Express, Mr.
Rositano co-produced and directed the world's first Internet training video
"Introduction to the Internet."
53
ROBERT SPEICHER. Robert Speicher joined Nettaxi in October, 1999 to serve
as our Vice President of Sales and Marketing. From November, 1994 through
October, 1999; Speicher was Executive Vice President and General Manager at Wood
Associates, a marketing and promotions company. Prior to that, he served as
President of Plastech Marketing, Inc., a company that introduced biodegradable
polymer technologies to the promotional merchandise industry. He has also served
as Vice President of Sales at Multidate Corporation, a company dedicated to
providing automation solutions for the financial services industry. He earned
his Bachelor's degree from San Diego State University and his MBA from
Pepperdine University.
ANDREW GARRONI. Mr. Garroni has served as a director since completion of
our merger with Plus Net in May 1999. Under the terms of our merger agreement
with Plus Net, Mr. Garroni was appointed as a member of the board of directors.
Mr. Garroni has over 20 years experience in the development and management of
start-up entertainment companies. He currently serves as Executive Producer of
Showtime's movie series "Naked City," a position he has held since January,
1998. From 1990 to September, 1998 he served as President of Axis Films
International, Inc. supplying films to cable television networks such as Home
Box Office, Showtime Networks and DBS providers like Direct TV. He began his
career in New York as a principal partner in the motion picture Production
Company Cinerex Associates, Inc. whose clients included Twentieth Century Fox
and Orion Pictures. While in New York, he helped create Magnum Motion Pictures
and Magnum Entertainment. Mr. Garroni has a Bachelor's degree in Marketing from
Fairleigh Dickinson University.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
EXECUTIVE EMPLOYMENT AGREEMENTS. On August 1, 1998 Nettaxi Online
Communities, Inc. entered into executive employment agreements with Robert
A. Rositano, Jr. and Dean Rositano, and these agreements continued in
effect after the reorganization with Swan Valley Snowmobiles, Inc. Pursuant
to the terms of their individual executive employment agreements, Robert A.
Rositano, Jr. is to perform the duties Chief Executive Officer and serve as
a member of the board of directors, and Dean Rositano is to perform the
duties of President and serve as a member of the board of directors. Each
executive employment agreement provides for an annual base salary which may
be increased by the board of directors, in its discretion. The base salary
also is to increase by ten percent per annum, which increase shall be
cumulative for each year. In August 2000, the base salaries for each
executive were increased to $220,000. Under the executive employment
agreements, each executive is also eligible for annual bonus compensation
in the minimum amount of $50,000 up to a maximum amount equal to the base
salary then payable. The board of directors is to determine the amount of
the annual bonus based upon performance targets established by the board of
directors. In August 2000, each executive received bonus compensation of
$50,000.
54
Under the executive employment agreements, Robert A. Rositano, Jr. and Dean
Rositano each received warrants to purchase up to 883,952 shares of the common
stock of Nettaxi Online Communities. The warrants were to vest over three years
and vesting was accelerated upon the reorganization with Swan Valley. Robert A.
Rositano, Jr. and Dean Rositano each exercised their warrants in September,
1998. They have each been granted registration rights with respect to shares of
common stock issued upon exercise of the warrants and they have each waived any
such rights with respect to this registration statement. Each executive is
eligible to receive three weeks paid vacation for the first year of employment
and four weeks per year thereafter. They are also eligible to participate in the
health, life insurance, medical, retirement and other benefit programs which we
may offer from time to time. Each executive receives a car allowance in an
amount not to exceed $600 per month plus insurance and costs of repair and may
be reimbursed for other reasonable expenses incurred during the course of
performing their duties.
The term of the executive employment agreements is four years and they are
automatically renewed for successive periods of one year unless terminated prior
to such renewal. We may terminate either executive at any time with or without
cause. The term "cause" is defined in the executive employment agreements. If
any executive is terminated without cause, he is to receive severance pay equal
to the base salary for the remainder of the term, minimum bonus plus any pro
rata bonus in excess of the minimum bonus, pre payment of all automobile
allowance for the remaining period of the term and continued coverage for life,
health and disability insurance for the remainder of the term. These amounts
shall be due in one lump sum payment three days following the termination of his
employment without cause. If there is a "change in control" with respect to
Nettaxi, the executives may terminate their executive employment agreements and
be entitled to severance in the amount of three years of annual benefits to be
realized in accordance with the terms of the executive employment agreements,
payable in one lump sum. "Change in control" is defined in the executive
employment agreements as any change of equity such that more than 50% of the
outstanding shares of our outstanding shares are transferred to a third party,
debt ownership such that more than 50% of our outstanding shares are transferred
to a third party, or a sale of 70% or more of our assets.
The executive employment agreements also contain covenants restricting the
disclosure of our confidential information, the solicitation of our employees or
agents and the ability of the executives to engage in competing activities with
us.
In the course of the previous year, as a result of our limited human
resources, both executives have performed other responsibilities not necessarily
within the scope of the definition of their positions under the executive
employment agreements.
55
OTHER EXECUTIVE EMPLOYMENT AGREEMENTS. We have also entered into an
employment agreement with Robert Speicher. The agreement has a term of three
years and automatically renews for successive periods of one year unless
terminated prior to such renewal. We may terminate the executive at any time
with or without cause. The term "cause" is defined in the executive employment
agreement. Mr. Speicher is eligible to receive severance pay if terminated
without cause or if Nettaxi experiences a change in control and the executive
elects to terminate the agreement or is terminated. The severance payment would
be equal to the base salary for the remainder of the term, minimum bonus plus
any pro rata bonus in excess of the minimum bonus and continued coverage for
health and other benefits for the remainder of the term. Additionally, the
vesting of all options to purchase our common stock would be accelerated
immediately. The severance payment would be due in one lump sum three days
following the termination of employment. "Change in control" is defined in the
employment agreements as any change of equity such that more than 50% of our
outstanding shares are transferred to a third party, debt ownership such that
more than 50% of our outstanding shares are transferred to a third party, or a
sale of substantially all of our assets.
The employment agreements also contain covenants regarding the assignment
of inventions, restricting the disclosure of our confidential information, the
solicitation of our employees or agents and the ability of the executive to
engage in competing activities.
Our agreement with Mr. Speicher was entered into as of September 1999.
Under the agreement, he is employed as Vice President of Sales and Marketing and
is expected to perform the duties consistent with the position including the
management and supervision of our sales and marketing operations and duties and
the hiring of personnel. Mr. Speicher receives an annual base salary of
$175,000. He is also eligible for annual bonus compensation in the minimum
amount of $50,000 up to a maximum amount equal to the base salary then payable.
The board of directors is to determine the amount of the annual bonus based upon
performance targets established by the board of directors. He also is to receive
options to purchase up to 250,000 shares of our common stock, which vest over
three years, under our 1998 Stock Option Plan. He receives three weeks paid
vacation for the first year of employment and four weeks per year thereafter. He
is also eligible to participate in the health and other benefit program which we
may offer from time to time.
BOARD COMMITTEES
The Compensation Committee of the board of directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our 1998 Stock Option Plan. There is
currently one member of the Compensation Committee, Mr. Garroni. We are
currently seeking qualified individuals to join our board of directors and serve
on our audit committee.
The Audit Committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the selection of our independent auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. Mr. Garroni is currently the
only member of the audit committee. We are currently seeking qualified
individuals to join our board of directors and serve on our audit committee.
56
The board of directors does not have a nominating committee.
DIRECTORS' COMPENSATION
Directors who are also our employees receive no compensation for serving on
the board of directors. With respect to directors who are not employees, we
intend to reimburse such directors for all travel and other expenses incurred in
connection with attending meetings of the board of directors and any committees
of the board of directors. Non-employee directors are also eligible to receive
grants of non-qualified stock options under our 1998 Stock Option Plan and 1999
Stock Option Plan. We intend to grant our non-employee directors, subject to
shareholder ratification, options to purchase common stock under our stock
option plans to provide us with an effective way to recruit and retain qualified
individuals to serve as members of the board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee or other committee of the board of
directors performing similar functions during the fiscal years ending December
31, 1997 and 1998. Messrs. Robert A. and Dean Rositano are each officers of
Nettaxi and, as members of the board of directors, participated in deliberations
of the board of directors relating to the compensation of our executive
officers. As indicated above, the board of directors established a Compensation
Committee as of May 3, 1999.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors, and persons who own more than ten percent of a class
of our capital stock, to file reports of ownership and changes in their
ownership with the Securities and Exchange Commission. Officers, directors and
greater than ten-percent shareholders are required to furnish us with copies of
all Section 16(a) forms they file.
Based solely on a review of the copies of such forms received by us, or
written representations from certain reporting persons that no Forms 5 were
required for such persons, we believe that, during the last fiscal year, all
filing requirements applicable to our officers, directors and greater than ten
percent beneficial owners were complied with except that reports on Form 4 were
filed late by Messrs. Robert A. Rositano, Jr. and Dean Rositano.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to our Chief Executive
Officer and President, collectively, the "named executives" during the years
ended December 31, 1998, 1999 and 2000:
57
SUMMARY COMPENSATION TABLE (1)
- ------------------------------- ------------------------------ ---------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
- ------------------------------- ------------------------------ ---------------------
NAME AND PRINCIPAL YEAR SALARY ($) BONUS ($) NUMBER OF SECURITIES
POSITION UNDERLYING
WARRANTS/ OPTIONS (#)
- ------------------------------- ------- ---------- --------- ---------------------
- ------------------------------- ------- ---------- --------- ---------------------
Robert A. Rositano, Jr. 1998(2) 95,917 - 1,012,347
Chief Executive Officer ------- ---------- --------- ---------------------
1999 156,550 132,500 600,000
------- ---------- --------- ---------------------
2000 214,933 150,000 640,000
- ------------------------------- ------- ---------- --------- ---------------------
Dean Rositano, 1998(2) 95,917 - 1,012,347
President ------- ---------- --------- ---------------------
1999 156,550 132,500 600,000
------- ---------- --------- ---------------------
2000 214,933 150,000 640,000
- ------------------------------- ------- ---------- --------- ---------------------
Glenn Goelz, Chief Financial 2000 60,230 150,000 280,000
Officer (3)
- ------------------------------- ------- ---------- --------- ---------------------
Robert Speicher, Vice 2000 179,229 50,000 250,000
President of Sales and
Marketing (4)
- ------------------------------- ------- ---------- --------- ---------------------
Brian Stroh, Vice President of 2000 106,746 75,000 136,000
Information Services (5)
- ------------------------------- ------- ---------- --------- ---------------------
(1) The columns for "Other Annual Compensation" "Restricted Stock Awards" "LTP
Payouts" and "All Other Compensation" have been omitted because there is no
compensation required to be reported. No other executive officer received compensation
in excess of $100,000 during this period.
(2) Information regarding the compensation of Messrs. Robert A. and Dean Rositano
earned during 1998 includes services rendered by them while employed by Nettaxi Online
Communities, Inc. prior to the reorganization with Swan Valley Snowmobiles, Inc. and
by Nettaxi following the reorganization with Swan Valley. The salary earned by each of
Messrs. Robert A. and Dean Rositano during 1998 includes $93,000 in cash compensation
and 16,574 shares of common stock issued to each of them in February, 1998 in lieu of
salary earned in 1998 having an ascribed value of $2,198 as determined by the board of
directors.
(3) Mr. Glenn Goelz was hired in 1999, but did not earn in excess of $100,000 in
1999. Mr. Goelz resigned as the Chief Financial Officer and as an employee of
Nettaxi.com on April 28, 2000. The options to purchase our common stock held by Mr.
Goelz expired on July 28, 2000.
(4) Mr. Robert Speicher was hired in 1999, but did not earn in excess of $100,000
in 1999.
(5) Mr. Brian Stroh was hired in 1999, but did not earn in excess of $100,000 in
1999. Mr. Stroh resigned as the Vice President of Information Services and as an
employee of Nettaxi.com on November 9, 2000. Mr. Stroh's options to purchase our
common stock expired on February 9, 2001.
58
WARRANT AND OPTION GRANTS IN LAST YEAR
The following table sets forth information concerning warrants and options
granted to the named executives during 2000.
WARRANT AND OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 2000(1)
- ------------------------------------------------------------------------------------------------
Name NUMBER OF % OF TOTAL Exercise EXPIRATION Potential Realizable Value at
SECURITIES WARRANTS/ Price Per DATE Assumed Annual Rates of Stock
UNDERLYING OPTIONS GRANTED Share Price Appreciation for Option
WARRANTS/ TO EMPLOYEES IN ($/Sh) Term (7)
OPTIONS 2000 -------------------------
GRANTED (#) 5% 10%
- -------------- ----------- ---------------- ---------- ---------- ----------- ------------
Robert A. 64,000 1.4% 2.44 1/2006 $53,109.34 $120,486.97
Rositano, Jr.
(2)
----------- ---------------- ---------- ---------- ----------- ------------
64,000 1.4% 2.44 1/2007 $63,572.80 $148,151.66
----------- ---------------- ---------- ---------- ----------- ------------
64,000 1.4% 2.44 1/2008 $74,559.44 $178,582.83
----------- ---------------- ---------- ---------- ----------- ------------
64,000 1.4% 2.44 1/2009 $86,095.41 $212,057.11
----------- ---------------- ---------- ---------- ----------- ------------
96,000 2.1% 1.44 1/2006 $47,014.82 $106,660.59
----------- ---------------- ---------- ---------- ----------- ------------
96,000 2.1% 1.44 1/2007 $56,277.56 $131,150.65
----------- ---------------- ---------- ---------- ----------- ------------
96,000 2.1% 1.44 1/2008 $66,003.44 $158,089.72
----------- ---------------- ---------- ---------- ----------- ------------
96,000 2.1% 1.44 1/2009 $76,215.61 $187,722.69
- -------------- ----------- ---------------- ---------- ---------- ----------- ------------
Dean 64,000 1.4% 2.44 1/2006 $53,109.34 $120,486.97
Rositano (3)
----------- ---------------- ---------- ---------- ----------- ------------
64,000 1.4% 2.44 1/2007 $63,572.80 $148,151.66
----------- ---------------- ---------- ---------- ----------- ------------
64,000 1.4% 2.44 1/2008 $74,559.44 $178,582.83
----------- ---------------- ---------- ---------- ----------- ------------
64,000 1.4% 2.44 1/2009 $86,095.41 $212,057.11
----------- ---------------- ---------- ---------- ----------- ------------
96,000 2.1% 1.44 1/2006 $47,014.82 $106,660.59
----------- ---------------- ---------- ---------- ----------- ------------
96,000 2.1% 1.44 1/2007 $56,277.56 $131,150.65
----------- ---------------- ---------- ---------- ----------- ------------
96,000 2.1% 1.44 1/2008 $66,003.44 $158,089.72
----------- ---------------- ---------- ---------- ----------- ------------
96,000 2.1% 1.44 1/2009 $76,215.61 $187,722.69
- -------------- ----------- ---------------- ---------- ---------- ----------- ------------
Glenn Goelz 112,000 2.4% 2.44 7/2000 $ 0.00 $ 0.00
(4)
- -------------- ----------- ---------------- ---------- ---------- ----------- ------------
168,000 3.6% 1.44 7/2000 $ 0.00 $ 0.00
- -------------- ----------- ---------------- ---------- ---------- ----------- ------------
Robert 25,000 0.5% 2.44 1/2006 $20,745.83 $ 47,065.22
Speicher (5)
25,000 0.5% 2.44 1/2007 $24,833.13 $ 57,871.74
----------- ---------------- ---------- ---------- ----------- ------------
25,000 0.5% 2.44 1/2008 $29,124.78 $ 69,758.92
----------- ---------------- ---------- ---------- ----------- ------------
25,000 0.5% 2.44 1/2009 $33,631.02 $ 82,834.81
----------- ---------------- ---------- ---------- ----------- ------------
37,500 0.8% 1.44 1/2006 $18,365.16 $ 41,664.29
----------- ---------------- ---------- ---------- ----------- ------------
37,500 0.8% 1.44 1/2007 $21,983.42 $ 51,230.72
----------- ---------------- ---------- ---------- ----------- ------------
37,500 0.8% 1.44 1/2008 $25,782.59 $ 61,753.80
----------- ---------------- ---------- ---------- ----------- ------------
37,500 0.8% 1.44 1/2009 $29,771.72 $ 73,329.18
- -------------- ----------- ---------------- ---------- ---------- ----------- ------------
Brian Stroh 3,000 0.1% 2.44 1/2006 $ 2,489.50 $ 5,647.83
(6)
3,000 0.1% 2.44 1/2007 $ 2,979.98 $ 6,944.61
----------- ---------------- ---------- ---------- ----------- ------------
3,000 0.1% 2.44 1/2008 $ 3,494.97 $ 8,371.07
----------- ---------------- ---------- ---------- ----------- ------------
3,000 0.1% 2.44 1/2009 $ 4,035.72 $ 9,940.18
----------- ---------------- ---------- ---------- ----------- ------------
31,000 0.7% 1.44 1/2006 $15,181.87 $ 34,442.48
----------- ---------------- ---------- ---------- ----------- ------------
31,000 0.7% 1.44 1/2007 $18,172.96 $ 42,350.73
----------- ---------------- ---------- ---------- ----------- ------------
31,000 0.7% 1.44 1/2008 $21,313.61 $ 51,049.80
----------- ---------------- ---------- ---------- ----------- ------------
31,000 0.7% 1.44 1/2009 $24,611.29 $ 60,618.78
- -------------- ----------- ---------------- ---------- ---------- ----------- ------------
59
(1) No SARs were granted to either of the named executives during 2000. Each warrant and
option represents the right to purchase one share of our common stock. In 2000, we granted
employees options to purchase an aggregate of 4,551,200 shares of our common stock. The options
shown may terminate before their expiration dates if the optionee's status as an employee is
terminated or upon the optionee's death or disability.
(2) Robert A. Rositano, Jr. was granted options to purchase 256,000 and 384,000 shares of
our common stock, respectively, under two option agreements. Under each agreement, the options
expire in four equal installments on the sixth, seventh, eighth and ninth anniversary's of the
grant date of the option. Under the agreements, options to purchase 40,000 shares vest in 12
equal quarterly installments, options to purchase 100,000 shares vest in 12 equal monthly
installments and the remaining shares vest upon our achievement of specific business objectives
which have been established by the board of directors.
(3) Dean Rositano was granted options to purchase 256,000 and 384,000 shares of our common
stock, respectively, under two option agreements. Under each agreement, the options expire in
four equal installments on the sixth, seventh, eighth and ninth anniversary's of the grant date
of the option. Under the agreements, options to purchase 40,000 shares vest in 12 equal
quarterly installments, options to purchase 100,000 shares vest in 12 equal monthly installments
and the remaining shares vest upon our achievement of specific business objectives which have
been established by the board of directors.
(4) Mr. Glenn Goelz was granted options to purchase 112,000 and 168,000 shares of our common
stock, respectively, under two option agreements during 2000. Mr. Goelz resigned as the Chief
Financial Officer and as an employee of Nettaxi.com on April 28, 2000. Therefore, the options to
purchase our common stock held by Mr. Goelz expired on July 28, 2000.
(5) Mr. Robert Speicher was granted options to purchase 100,000 and 150,000 shares of common
stock, respectively, under two option agreements. Under each agreement, the options expire in
four equal installments on the sixth, seventh, eighth and ninth anniversary's of the grant date
of the option. Under the agreements, the options vest in 12 equal quarterly installments
following the date of grant.
(6) Mr. Brian Stroh was granted options to purchase 12,000 and 124,000 shares of common
stock, respectively, under two option agreements. Under each agreement, the options were to
expire in four equal installments on the sixth, seventh, eighth and ninth anniversary's of the
grant date of the option. Mr. Stroh resigned as the Vice President of Information Services and
as an employee of Nettaxi.com on November 9, 2000. Therefore, Mr. Stroh's options to purchase
our common stock expired on February 9, 2001.
(7) The amounts indicated in the columns under the heading "Potential Realizable Value at
Assumed Annual Rates of Stock Price Appreciation for Option Term" Amounts represent hypothetical
gains that could be achieved for the respective warrants and options if exercised at their end
of their respective terms. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission and do not
represent our estimate or projection of the future prices of the common stock. Actual gains, if
any, on any exercises of warrants and options are dependent upon the future performance of our
common stock and overall stock market conditions. The amounts reflected in the table may not
necessarily be achieved.
60
WARRANT AND OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information with respect to the Named
Executives concerning their exercise of warrants during 2000 and exercisable and
unexercisable stock options held by them as of December 31, 2000.
AGGREGATE WARRANT AND OPTION EXERCISES IN 2000 AND YEAR END OPTION VALUES
- ----------------------- ------------ --------- ----------- ------------- ------------ --------------
Shares Value Number of Unexercised Value of Unexercised In-the-Money
NAME Acquired On Realized Options at Year End(#) Options at Year End($) (1)
Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ------------ --------- ----------- ------------- ------------ --------------
Robert A. Rositano, Jr. 0 0.00 231,000 1,049,000 $ 0.00 $ 0.00
- ----------------------- ------------ --------- ----------- ------------- ------------ --------------
Dean Rositano 0 0.00 231,000 1,049,000 $ 0.00 $ 0.00
- ----------------------- ------------ --------- ----------- ------------- ------------ --------------
Glenn Goelz 0 0.00 0 0 $ 0.00 $ 0.00
- ----------------------- ------------ --------- ----------- ------------- ------------ --------------
Robert Speicher 0 0.00 150,462 517,537 $ 0.00 $ 0.00
- ----------------------- ------------ --------- ----------- ------------- ------------ --------------
Brian Stroh 0 0.00 0 0 $ 0.00 $ 0.00
- ----------------------- ------------ --------- ----------- ------------- ------------ --------------
(1) The amounts shown in the columns under the heading "Value of Unexercised In-the-Money Options at
Year End" are based on a per share fair market value of our common stock equal to $0.140 at December 29,
1999, the closing price for our common stock on that date as reported by various market makers for our
common stock on the NASD O-T-C Market Bulletin Board. Neither of the Named Executives have options to
purchase shares of common stock which were in the money at year end.
EMPLOYEE BENEFIT PLANS
1999 STOCK OPTION PLAN. Our 1999 Stock Option Plan was adopted by the board
of directors in January 2000, and amended the plan to increase the number of
shares reserved for issuance under the plan in April, 2000. It will be presented
to our stockholders for ratification at our annual meeting of stockholders to be
held in the summer of 2001. The following description of our 1999 Stock Option
Plan is a summary and qualified in its entirety by the text of the plan, which
is filed as an exhibit to the registration statement of which this prospectus is
a part. The purpose of the 1999 Stock Option Plan is to enhance our
profitability and stockholder value by enabling us to offer stock based
incentives to employees, directors and consultants. The 1999 Stock Option Plan
authorizes the grant of options to purchase shares of common stock to employees,
directors and consultants of Nettaxi and its affiliates. Under the 1999 Stock
Option Plan, we may grant incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986 and non-qualified stock options.
Incentive stock options may only be granted our employees.
61
The number of shares available for options under the 1999 Stock Option Plan
was initially 3,300,000. The board of directors recently amended the plan to
increase the number of shares available for options to 8,900,000. As of December
31, 2000, 8,333 shares had been issued as a result of the exercise of options
previously granted under the 1999 Stock Option Plan, options to purchase up to
3,931,600 shares of common stock had been granted, and options to purchase
4,968,400 shares were available for future grants. The exercise prices of the
outstanding options ranged from $0.37 to $6.812. We have registered the shares
subject to issuance under our 1999 Stock Option Plan, pursuant to our
registration statement filed on Form S-8 (File No. 333-32678).
The 1999 Stock Option Plan is administered by the Compensation Committee of
the board. Subject to the provisions of the 1999 Stock Option Plan, the
Compensation Committee has authority to determine the employees, directors and
consultants of Nettaxi who are to be awarded options and the terms of such
awards, including the number of shares subject to such option, the fair market
value of the common stock subject to options, the exercise price per
share and other terms.
Incentive stock options must have an exercise price equal to at least 100%
of the fair market value of a share on the date of the award and generally
cannot have a duration of more than 10 years. If the grant is to a stockholder
holding more than 10% of our voting stock, the exercise price must be at least
110% of the fair market value on the date of grant. Terms and conditions of
awards are set forth in written agreements between Nettaxi and the respective
option holders. Awards under the 1999 Stock Option Plan may not be made after
the tenth anniversary of the date of its adoption but awards granted before that
date may extend beyond that date.
If the employment with Nettaxi of the holder of an incentive stock option
is terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the 1999 Stock Option Plan, the holder
may exercise the option, to the extent exercisable on the date of termination of
employment, until the earlier of the option's specified expiration date and 90
days after the date of termination. If an option holder dies or becomes
disabled, both incentive and non-qualified stock options may generally be
exercised, to the extent exercisable on the date of death or disability, by the
option holder or the option holder's survivors until the earlier of the option's
specified termination date and one year after the date of death or disability.
Optionees have no rights as stockholders with respect to shares subject to
option prior to the issuance of shares pursuant to the exercise thereof. Options
issued to employees under the 1999 Stock Option Plan shall expire no later than
ten years after the date of grant. An option becomes exercisable at such time
and for such amounts as determined at the discretion of the board of directors
or the Compensation Committee at the time of the grant of the option. An
optionee may exercise a part of the option from the date that part first becomes
exercisable until the option expires. The purchase price for shares to be issued
to an employee upon his exercise of an option is determined by the board of
directors or the Compensation Committee on the date the option is granted. The
purchase price is payable in full in cash, by promissory note, by net exercise
or by delivery of shares of our common stock when the option is exercised. The
1999 Stock Option Plan provides for adjustment as to the number and kinds of
shares covered by the outstanding options and the option price therefor to give
effect to any stock dividend, stock split, stock combination or other
reorganization of or by Nettaxi.
62
1998 STOCK OPTION PLAN. Our 1998 Stock Option Plan was adopted by the
board of directors, and ratified and approved by our stockholders, as of
September 29, 1998. The following description of our 1998 Stock Option Plan is a
summary and qualified in its entirety by the text of the plan, which is filed as
an exhibit to the registration statement of which this prospectus is a part. The
purpose of the 1998 Stock Option Plan is to enhance our profitability and
stockholder value by enabling us to offer stock based incentives to employees,
directors and consultants. The 1998 Stock Option Plan authorizes the grant of
options to purchase shares of common stock to employees, directors and
consultants of Nettaxi and its affiliates. Under the 1998 Stock Option Plan, we
may grant incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 and non-qualified stock options. Incentive stock
options may only be granted our employees.
The number of shares available for options under the 1998 Stock Option Plan
is 3,000,000. As of December 31, 2000, 4,998 shares had been issued as the
result of the exercise of options previously granted under the 1998 Stock Option
Plan, 2,055,000 shares were subject to outstanding options and 940,002 shares
were available for future grants. The exercise prices of the outstanding options
ranged from $0.80 to approximately $44.00. The options under the 1998 Stock
Option Plan vest over varying lengths of time pursuant to various option
agreements that we have entered into with the grantees of such options. We have
registered the shares subject to issuance under our 1998 Stock Option Plan,
pursuant to the Securities Act of 1933, pursuant to our registration statement
on Form S-8 (File No. 333-32678).
The 1998 Stock Option Plan is administered by the Compensation Committee of
the board. Subject to the provisions of the 1998 Stock Option Plan, the
Compensation Committee has authority to determine the employees, directors and
consultants of Nettaxi who are to be awarded options and the terms of such
awards, including the number of shares subject to such option, the fair market
value of the common stock subject to options, the exercise price per share and
other terms.
Incentive stock options must have an exercise price equal to at least 100%
of the fair market value of a share on the date of the award and generally
cannot have a duration of more than 10 years. If the grant is to a stockholder
holding more than 10% of our voting stock, the exercise price must be at least
110% of the fair market value on the date of grant. Terms and conditions of
awards are set forth in written agreements between Nettaxi and the respective
option holders. Awards under the 1998 Stock Option Plan may not be made after
the tenth anniversary of the date of its adoption but awards granted before that
date may extend beyond that date.
If the employment with Nettaxi of the holder of an incentive stock option
is terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the 1998 Stock Option Plan, the holder
may exercise the option, to the extent exercisable on the date of termination of
employment, until the earlier of the option's specified expiration date and 90
days after the date of termination. If an option holder dies or becomes
disabled, both incentive and non-qualified stock options may generally be
exercised, to the extent exercisable on the date of death or disability, by the
option holder or the option holder's survivors until the earlier of the option's
specified termination date and one year after the date of death or disability.
63
Optionees have no rights as stockholders with respect to shares subject to
option prior to the issuance of shares pursuant to the exercise thereof. Options
issued to employees under the 1998 Stock Option Plan shall expire no later than
ten years after the date of grant. An option becomes exercisable at such time
and for such amounts as determined at the discretion of the board of directors
or the Compensation Committee at the time of the grant of the option. An
optionee may exercise a part of the option from the date that part first becomes
exercisable until the option expires. The purchase price for shares to be issued
to an employee upon his exercise of an option is determined by the board of
directors or the Compensation Committee on the date the option is granted. The
purchase price is payable in full in cash, by promissory note, by net exercise
or by delivery of shares of our common stock when the option is exercised. The
1998 Stock Option Plan provides for adjustment as to the number and kinds of
shares covered by the outstanding options and the option price therefor to give
effect to any stock dividend, stock split, stock combination or other
reorganization of or by Nettaxi.
401(K) SAVINGS PLAN. Effective June 1, 1999 we instituted the Nettaxi
401(k) Savings Plan. Eligible employees may begin making deferrals under the
401(k) Savings Plan. The 401(k) Savings Plan is intended to be a qualified plan
under Internal Revenue Code Section 401(a), with a cash or deferred option
governed by Section 401(k) Savings of the Internal Revenue Code. Employees may
elect to defer their eligible current compensation up to the statutorily and
401(k) Savings Plan prescribed limits and have the amount of such deferral
contributed to the 401(k) Savings Plan. Contributions to the 401(k) Savings Plan
are invested in the investment funds described in the 401(k) Savings Plan.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our directors and
officers. These agreements provide, in general, that we shall indemnify and hold
harmless such directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses incurred
in connection with, or in any way arising out of, any claim, action or
proceeding against, or affecting, such directors and officers resulting from,
relating to or in any way arising out of, the service of such persons as our
directors and officers. Our directors and officers are entitled to the benefits
of the limitation of liability provided under our charter documents and the laws
of the State of Nevada.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our common stock as of February 28, 2001 and as adjusted to reflect
the sale of the shares of common stock offered by this prospectus, by each
person, or group of affiliated persons, who we know beneficially owns 5% or more
of our common stock, each of our directors and executive officers, and all of
our directors and executive officers as a group.
64
The percentages of total shares of common stock set forth below assume that
only the indicated person or group has exercised options and warrants which are
exercisable within 60 days of February 28, 2001 and do not reflect the
percentage of common stock which would be calculated if all other holders of
currently exercisable options or warrants had exercised their securities.
Unless otherwise indicated in the paragraphs following the table, the
following individuals have sole vesting and sole investment control with respect
to the shares they beneficially own. Unless otherwise indicated, the address of
each beneficial owner listed below is care of Nettaxi.com, 1696 Dell Avenue,
Campbell, California.
- ---------------------------------------- ------------------- -----------------
NAME OF BENEFICIAL OWNER
- ---------------------------------------- ------------------- -----------------
EXECUTIVE OFFICERS AND DIRECTORS: NUMBER OF SHARES PERCENT OF CLASS
BENEFICIALLY OWNED(1)
- ---------------------------------------- ------------------- -----------------
Robert A. Rositano, Jr. (2) 1,772,265 4.1%
- ---------------------------------------- ------------------- -----------------
Dean Rositano (3) 2,130,134 4.9%
- ---------------------------------------- ------------------- -----------------
Robert Speicher (4) 232,639 *
- ---------------------------------------- ------------------- -----------------
Andrew Garroni (5) 225,000 *
- ---------------------------------------- ------------------- -----------------
All directors and executive officers as 4,360,038 9.1%
------------------- -----------------
a group (4 Persons)
- ---------------------------------------- ------------------- -----------------
OTHER 5% STOCKHOLDERS:
- ---------------------------------------- ------------------- -----------------
Michael Gardner (6) 2,914,600 6.6%
- ---------------------------------------- ------------------- -----------------
HBK Investments L. P. (7) 3,000,000 6.6%
- ---------------------------------------- ------------------- -----------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock and options on exercisable within 60 days of February 28,
2001 are deemed outstanding. Such shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of each other person.
(2) The number of shares shown for Robert A. Rositano, Jr. includes 348,000
shares of common stock subject to options that are currently exercisable within
60 days of February 28, 2001. Excludes 932,000 shares of common stock subject to
options that will not be exercisable within 60 days of February 28, 2001. Robert
A. and Dean Rositano are brothers.
(3) The number of shares shown for Dean Rositano includes 348,000 shares of
common stock subject to options that are exercisable within 60 days of February
28, 2001. Excludes 932,000 shares of common stock subject to options that will
not be exercisable within 60 days of February 28, 2001. Robert A. and Dean
Rositano are brothers.
65
(4) The number of shares shown for Robert Speicher includes 232,639 shares
of common stock subject to options that are exercisable within 60 days of
February 28, 2001. Excludes 435,361 shares of common stock subject to options
that will not be exercisable within 60 days of February 28, 2001.
(5) The number of shares shown for Andrew Garroni includes 150,000 shares of
common stock subject to options that are currently exercisable.
(6) The shares shown for Mr. Michael Gardner include 1,429,800 shares of
common stock subject to warrants that are currently exercisable. Mr. Gardner's
address is care of Baytree Capital Associates, LLC, 40 Wall Street, 58th floor
New York, NY 10005. We obtained this information from Mr. Gardner's public
filings on Form 13D.
(7) The number of shares shown for HBK Investments L.P. includes 3,000,000
shares of common stock subject to warrants that are exercisable. The shares
shown for HBK Investments L.P. are held in the name of Montrose Investments,
Ltd. HBK Investments L.P. has sole voting and dispositive power over these
shares pursuant to an Investment Management Agreement with Montrose Investments,
Ltd. Accordingly, Montrose has no beneficial ownership of such shares. The
address for HBK Investments L.P. is 300 Crescent Ct. Ste 700, Dallas, Texas
75201. We obtained this information from HBK Investments L.P. public filings on
Form 13G.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following describes transactions to which we were or are a party and in
which any of our directors, officers, or significant stockholders, or members of
the immediate family of any of the foregoing persons, had or has a direct or
indirect material interest.
STOCK TRANSACTIONS BY NETTAXI ONLINE COMMUNITIES, INC.
On February 12, 1998, Robert A. and Dean Rositano each were issued 66,297
shares of Nettaxi Online Communities common stock in lieu of salary compensation
earned by them between October 1997 and January 1998 in the amount of $11,667.
In March 1998, Robert A. and Dean Rositano each were issued warrants to
purchase 88,395 shares of Nettaxi Online Communities common stock. On August 1,
1998, they were each issued warrants to purchase 883,952 shares of Nettaxi
Online Communities common stock pursuant to the executive employment agreements.
All the warrants issued to Robert A. and Dean Rositano each were exercised in
September 1998.
During 1998, Robert A. and Dean Rositano transferred 129,435 and 137,012
shares, respectively, of Nettaxi Online Communities common stock by gift to
individuals.
All the shares of Nettaxi Online Communities common stock held by Robert A.
and Dean Rositano and their donees were converted into shares of our common
stock in the reorganization with Swan Valley Snowmobiles, Inc. described below.
66
SSN PROPERTIES, LLC. In October 1997, Nettaxi Online Communities purchased
the assets of Simply Interactive, Inc. from SSN Properties LLC pursuant to an
asset purchase agreement. The purchase price for the assets was $2,000,000.
$1,020,000 was paid pursuant to a convertible interest bearing promissory note
and the remainder of the purchase price was paid by the issuance of 2,475,066
shares of Nettaxi Online Communities common stock. In September 1998, SSN
Properties converted its promissory note with accrued interest in exchange for
2,792,763 shares of Nettaxi Online Communities common stock. In September, 1998
Nettaxi Online Communities also issued 176,790 shares of its Nettaxi Online
Communities common stock to SSN Properties in exchange for the cancellation of a
$70,000 accounts payable to SSN Properties. All the shares of Nettaxi Online
Communities common stock held by SSN Properties were converted into shares of
our common stock in the reorganization with Swan Valley Snowmobiles, Inc.
described below. In April, 1999 a pro rata distribution of the shares of common
stock held by SSN Properties was made to all of its members. Robert Rositano,
Sr., father of Robert A, and Dean Rositano, is a managing member of SSN
Properties.
REORGANIZATION WITH SWAN VALLEY SNOWMOBILES, INC.
In September 1998, Nettaxi Online Communities entered into the
reorganization with Swan Valley with a non-operating public company, Swan Valley
Snowmobiles, Inc., a Nevada corporation incorporated in October 1995. From its
incorporation, Swan Valley engaged in the business of snowmobile repair. During
the first half of 1997, Swan Valley determined that this line of business was no
longer feasible and discontinued its operations. Under the terms of the
reorganization, the Nettaxi Online Communities stockholders received
approximately 2.53 shares of common stock of Swan Valley in exchange for each of
their shares of Nettaxi Online Communities common stock, and Nettaxi Online
Communities became a wholly-owned subsidiary of Swan Valley. An aggregate of
12,000,000 shares were issued to the former Nettaxi Online Communities
stockholders in the reorganization with Swan Valley and the Nettaxi Online
Communities stockholders owned approximately 85% of Swan Valley immediately
after the reorganization. As part of the reorganization, all of the executive
officers and directors of Swan Valley resigned and the executive officers and
directors of Nettaxi Online Communities became the executive officers and
directors of Swan Valley which changed its name to Nettaxi, Inc. (and later
changed its name to Nettaxi.com) Immediately prior to the reorganization, Swan
Valley completed a limited public offering of its common stock which yielded
gross proceeds of $1,000,000 that was available to Nettaxi once the
reorganization was completed.
OTHER AGREEMENTS
In October 1998, each of Robert A. Rositano and Dean Rositano were granted
options to purchase up to 40,000 shares of our common stock under the 1998 Stock
Option Plan. As described above, we have entered into employment agreements and
other compensation arrangements with our officers.
67
As described above, in September 1999, we granted Mr. Robert Speicher, our
Vice President of Sales and Marketing options to purchase up to 250,000 shares
of common stock in accordance with our 1998 Stock Option Plan. The exercise
price for the options is equal to their fair market value on the date of grant.
Options to purchase up to 6,944 shares were immediately vested on the date of
grant and the remaining options vest in 12 equal quarterly installments.
As described above, in August 1999 each of Robert A. Rositano, Jr. and Dean
Rositano were granted options to purchase up to 600,000 shares of our common
stock under the 1998 Stock Option Plan. The exercise price for the options is
equal to 110% of their fair market value on the date of grant. Options to
purchase 100,000 shares vest in 12 monthly installments and options to purchase
the remaining 500,000 shares vest upon our achievement of specific business
objectives which have been established by the board of directors.
In January 2000, each of Robert A. Rositano and Dean Rositano were granted
options to purchase up to 256,000 shares of our common stock under our 1999
Stock Option Plan. The exercise price for these options was not less than 100%
of the fair market value on the date of grant. The right to purchase 40,000 of
these shares vests in 12 equal quarterly installments. The right to exercise
16,000 of the shares vests in 12 equal monthly installments. The right to
purchase the remaining shares vests upon our achievement of certain business
objectives.
In January 2000, we granted Robert Speicher options to purchase up to
100,000 shares of common stock under our 1999 Stock Option Plan. The exercise
price for these options was not less than the fair market value on the date of
grant. The right to purchase the shares vests in 12 equal quarterly
installments.
In January 2000, we granted each of our non employee directors at that
time, Andy Garonni, Ron R. Goldie and Steven Antebi, options to purchase up to
150,000 shares of common stock under our 1999 Stock Option Plan. The exercise
price for these options was not less than the fair market value on the date of
grant. The right to purchase these shares was immediately vested.
In February 2000, each of Robert A. Rositano, Jr. and Dean Rositano were
granted options to purchase up to 384,000 shares of our common stock under our
1999 stock option plan. The exercise price for these options was not less than
100% of the fair market value on the date of grant. The right to puchase 24,000
of these shares vests in 12 equal quarterly installments. The right to purchase
60,000 of these shares vests in 12 equal monthly installments. The right to
purchase the remaining shares vests upon our achievement of certain business
objectives.
In February 2000, we granted Robert Speicher options to purchase up to
150,000 shares of common stock under our 1999 Stock Option Plan. The exercise
price for these options was not less than the fair market value on the date of
grant. The right to purchase the shares accrues in 12 equal quarterly
installments.
68
In October 1999, we granted Glenn Goelz, our former chief financial
officer, options to purchase up to 250,000 shares of common stock under the 1998
Stock Option Plan. In January 2000, we granted Mr. Goelz additional options to
purchase up to 112,000 shares of common stock under our 1999 Stock Option Plan.
The exercise price for these options was not less than the fair market value on
the date of grant. The right to purchase 12,000 of the options issued were
vested on the date of grant and the right to purchase the remaining shares
vested in 12 equal quarterly installments. In February 2000, we granted Mr.
Goelz, additional options to purchase up to 168,000 shares of common stock under
our 1999 Stock Option Plan. The exercise price for these options was not less
than the fair market value on the date of grant and the remainder accrued in 12
quarterly installments. As of April 30, 2000, Mr. Goelz resigned and any shares
not vested on the date of his resignation terminated automatically.
Mr. Brian Stroh, our former Vice President of Information Services, was
granted options to purchase 12,000 and 124,000 shares of common stock,
respectively, under two option agreements. Under each agreement, the options
were to vest in 12 equal quarterly installments beginning on the date of grant.
Mr. Stroh resigned as the Vice President of Information Services and as an
employee of Nettaxi.com on November 9, 2000. Therefore, Mr. Stroh's options to
purchase our common stock expired on February 9, 2001.
As previously described, we have an agreement with Alchemy Communications,
pursuant to which Alchemy Communications hosts the servers that support our web
site. Mr. Andrew Garroni, a member of our board of directors, Mr. Garroni is a
member of the board of directors of Alchemy Communications and is also the
Secretary of Alchemy Communications.
On October 30, 2000, we entered into a consulting agreement with Mr.
Michael Gardner, the beneficial owner of 6.6% of our outstanding common stock.
Under the agreement, Mr. Gardner was to perform certain consulting services
specified in the agreement. As compensation for his services, Mr. Gardner
received warrants to purchase 350,000 shares of our common stock, having an
exercise price of $0.35 per share.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Financial Statements. The following financial statements of
Nettaxi.com are included in a separate section of this Annual Report on Form
10-K commencing on the pages referenced below:
69
2. Financial Statement Schedules. The financial statement schedules of
Nettaxi.com have been omitted because they are not applicable, not required, or
the information is included in the consolidated financial statements or notes
thereto.
3. Exhibits. The following Exhibits are attached hereto and
incorporated herein by reference:
Exhibit Number Description of Exhibit
- --------------- ------------------------
2.1 Agreement and Plan of Reorganization dated September 24,
1998 by and among Nettaxi Online Communities, Inc., the
owners of all the outstanding shares of common stock of
Nettaxi Online Communities, Inc. and the Company.
(Incorporated by reference to exhibit 2.1 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129) which was declared effective on August 13, 1999)
2.2 Merger Agreement and Plan of Reorganization dated April 1,
1999 by and between Plus Net, Inc. and the Company.
(Incorporated by reference to exhibit 2.2 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
3.1 Articles of Incorporation of the Company. (Incorporated by
reference to exhibit 3.1 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
3.2 Certificate of Amendment to the Articles of Incorporation of
the Company. (Incorporated by reference to exhibit 3.2 filed
with the Registrant's Registration Statement on Form S-1
(File No. 333-78129))
3.3 By-Laws of the Company (Incorporated by reference to exhibit
3.3 filed with the Registrant's Registration Statement on
Form S-1 (File No. 333-78129))
3.4 Certificate of Amendment to the Articles of Incorporation of
the Company. (Incorporated by reference to Exhibit 3.4 filed
with the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999)
3.5 Certificate of Amendment to the Articles of Incorporation of
the Company. (Previously filed with this registration
statement)
70
4.1 Specimen Common Stock Certificate of the Company.
(Incorporated by reference to exhibit 4.1 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Articles
of Incorporation and By-Laws of the Company defining the
rights of holders of Common Stock of the Company.
4.3 Convertible Debenture dated March 31, 1999 in favor of RGC
International Investors, LDC. (Incorporated by reference to
exhibit 4.3 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
4.4 1999 Stock Option Plan of the Company. (Incorporated by
reference to exhibit 4.4 filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-32678)
which was filed on March 17 2000)
4.5 Form of Stock Option Agreement for options issued pursuant
to 199 Stock Option Plan of the Company. (Incorporated by
reference to exhibit 4.5 filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-32678))
10.1 Asset Purchase and Sale Agreement dated October 1, 1997 by
and between SSN Properties, LLC and the Company.
(Incorporated by reference to exhibit 10.1 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.2 Sub Lease dated September 3, 1997 by and between Execustaff
and the Company. (Incorporated by reference to exhibit 10.2
filed with the Registrant's Registration Statement on Form
S-1 (File No. 333-78129))
10.3 Stock Option Agreement dated March 20, 1998 by and between
Robert A. Rositano, Jr. and the Company. (Incorporated by
reference to exhibit 10.5 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.4 Stock Option Agreement dated March 20, 1998 by and between
Dean Rositano and the Company. (Incorporated by reference to
exhibit 10.6 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
10.5 Employment Agreement dated August 1, 1998 between Dean
Rositano and the Company. (Incorporated by reference to
exhibit 10.9 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
10.6 Employment Agreement dated August 1, 1998 between Robert A.
Rositano, Jr. and the Company. (Incorporated by reference to
exhibit 10.10 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
71
10.7 Stock Option Agreement dated August 1, 1998 by and between
Robert A. Rositano, Jr. and the Company. (Incorporated by
reference to exhibit 10.11 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.8 Stock Option Agreement dated August 1, 1998 by and between
Dean Rositano and the Company. (Incorporated by reference to
exhibit 10.12 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
10.9 Letter Agreement dated September 3, 1998 between Bay Tree
Capital Associates, LLC and the Company. (Incorporated by
reference to exhibit 10.14 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.10 1998 Stock Option Plan of the Company. (Incorporated by
reference to exhibit 10.17 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.11 Form of Stock Option Agreement for options issued pursuant
to 1998 Stock Option Plan of the Company. (Incorporated by
reference to exhibit 10.18 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.12 Stock Option Agreement under the 1998 Stock Option Plan by
and between Dean Rositano and the Company. (Incorporated by
reference to exhibit 10.19 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.13 Stock Option Agreement under the 1998 Stock Option Plan by
and between Robert A. Rositano, Jr. and the Company.
(Incorporated by reference to exhibit 10.20 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.14 Technology Licensing Agreement dated February 3, 1999 by
and between Go Hip, Inc. and the Company. (Incorporated by
reference to exhibit 10.22 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.15 First Amendment to Technology Licensing Agreement dated as
of April 1, 1999 by and between Go Hip, Inc. and the
Company. (Incorporated by reference to exhibit 10.23 filed
with the Registrant's Registration Statement on Form S-1
(File No. 333-78129))
72
10.16 Settlement Agreement dated March 2, 1999 by and among
Michael Gardner, Bay Tree Capital Associates, LLP, Wall
Street Trading Group, Bruce K. Dorfman, Robert A. Rositano,
Jr., Dean Rositano and the Company. (Incorporated by
reference to exhibit 10.28 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.17 Common Stock Purchase Option to Purchase Common Shares of
Nettaxi, Inc. dated March 4, 1999 between Wall Street
Trading Group and the Company. (Incorporated by reference to
exhibit 10.29 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
10.18 Securities Purchase Agreement dated March 31, 1999 by and
among RGC International Investors, LDC and the Company.
(Incorporated by reference to exhibit 10.30 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.19 Stock Purchase Warrant dated March 31, 1999 by and among
RGC International Investors, LDC and the Company.
(Incorporated by reference to exhibit 10.31 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.20 Registration Rights Agreement dated March 31, 1999 by and
among RGC International Investors, LDC and the Company.
(Incorporated by reference to exhibit 10.32 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.21 Oppenheimer Funds 401K Plan. (Incorporated by reference to
exhibit 10.33 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
10.22 Standard Office Lease- Gross dated March 1999 by and
between South Bay Construction and Development Co. III &
South Bay Construction and Development Co. VII and the
Company. (Incorporated by reference to exhibit 10.34 filed
with the Registrant's Registration Statement on Form S-1
(File No. 333-78129))
10.23 Form of Indemnification Agreement between the Company and
each of its Directors and Executive Officers. (Incorporated
by reference to exhibit 10.35 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.24 Employment Agreement dated April 1, 1999 by and between Mr.
Glenn Goelz and the Company. (Incorporated by reference to
exhibit 10.37 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
10.25 Consulting Agreement dated May 10, 1999 by and between
Fontenelle LLC and the Company. (Incorporated by reference
to exhibit 10.38 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
73
10.26 Lease Agreement dated as of May 27, 1999 by and between H&L
Realty and Management Company, Agent for owners Flamingo
Fountains and the Registrant. (Incorporated by reference to
exhibit 10.41 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
10.27 Master Software License Bundling and Distribution Agreement
dated November 13, 1997 between Apple Computer, Inc. and the
Company. (Incorporated by reference to exhibit 10.42 filed
with the Registrant's Registration Statement on Form S-1
(File No. 333-78129))
10.28 Master Software License, Bundling and Distribution
Agreement dated March 14, 1997 between Fountain
Technologies, Inc. and the Company. (Incorporated by
reference to exhibit 10.43 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.29 Web Advertising Services Agreement dated June 3, 1998
between Fly Cast Communications Corporation and the Company.
(Incorporated by reference to exhibit 10.44 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.30 Sales and Representation Contract dated July 7, 1998
between Michael Weiner dba Unique Media Services and the
Company. (Incorporated by reference to exhibit 10.45 filed
with the Registrant's Registration Statement on Form S-1
(File No. 333-78129))
10.31 Merchant Services Agreement dated August 3, 1998 by and
between eCharge Corporation and the Company. (Incorporated
by reference to exhibit 40.46 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.32 Conversion Agreement dated September 4, 1998 by and between
SSN Properties, LLC and the Company. (Incorporated by
reference to exhibit 10.47 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.33 Internet Infospace Content (World Wide Web Site)
Distribution Agreement dated October 8, 1998 by and between
InfoSpace.com, Inc., a Delaware corporation and the Company.
(Incorporated by reference to exhibit 10.48 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.34 Agreement for Terminal Facility Co-Location Space dated
January 18, 1999 between Alchemy Communications, Inc. and
the Company. (Incorporated by reference to exhibit 10.49
filed with the Registrant's Registration Statement on Form
S-1 (File No. 333-78129))
74
10.35 Letter Agreement dated January 15, 1999 between Babenet,
Ltd. and the Company. (Incorporated by reference to exhibit
10.50 filed with the Registrant's Registration Statement on
Form S-1 (File No. 333-78129))
10.36 License and Distribution Agreement dated March 30, 1999 by
and between Netopia, Inc. and the Company. (Incorporated by
reference to exhibit 10.51 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.37 Website Linking and Promotion Agreement dated March 5, 1999
between PI Graphix, Inc. and the Company. (Incorporated by
reference to exhibit 10.52 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.38 Development Agreement dated as of December 16, 1998 between
the Big Network Inc. and the Company. (Incorporated by
reference to exhibit 10.53 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.39 Development and License Agreement dated May, 1999 by and
between eBay, Inc. and the Company. (Incorporated by
reference to exhibit 10.54 filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129))
10.40 Internet Services Suite Agreement dated May 5, 1999 by and
between Wired Digital, Inc., Lycos, Inc. and the Company.
(Incorporated by reference to exhibit 10.55 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.41 Financial Consulting Agreement dated June 29, 1999 by and
between The Phoenix Group International, LLC and the
Company. (Incorporated by reference to exhibit 10.56 filed
with the Registrant's Registration Statement on Form S-1
(File No. 333-78129))
10.42 Co-Branded Free ISP Agreement dated November 30, 1999 by
and between Spin Media Network, Inc. and the Company.
(Incorporated by reference to exhibit 10.57 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.43 Internet Content Distribution Agreement dated December 30,
1999 by and between InfoSpace.com and the Company.
(Incorporated by reference to exhibit 10.58 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
75
10.44 Advertising Impression Network Contract dated July 1, 1999
by and between White Sand Communications, Inc. and the
Company. (Incorporated by reference to exhibit 10.59 filed
with the Registrant's Quarterly Report on Form 10-Q for the
period ending September 30, 1999)
10.45 Advertising Impression Network Contract dated July 1, 1999
by and between Multinet Communications Worldwide Limited and
the Company(Incorporated by reference to exhibit 10.60 filed
with the Registrant's Quarterly Report on Form 10-Q for the
period ending September 30, 1999)
10.46 Data Center Service Agreement dated July 15, 1999 by and
between Babenet, LTD and the Company. (Incorporated by
reference to exhibit 10.61 filed with the Registrant's
Quarterly Report on Form 10-Q for the period ending
September 30, 1999)
10.47 Data Center Service Agreement dated July 15, 1999 by and
between Whitehorn Ventures Limited and the Company.
(Incorporated by reference to exhibit 10.62 filed with the
Registrant's Quarterly Report on Form 10-Q for the period
ending September 30, 1999)
10.48 Data Center Service Agreement dated August 15, 1999 by and
between White Sand Communications, Inc. and the Company.
(Incorporated by reference to exhibit 10.63 filed with the
Registrant's Quarterly Report on Form 10-Q for the period
ending September 30, 1999)
10.49 Co-Branded Free ISP Agreement dated November 30, 1999 by
and between Spin Media Network, Inc. and the Company
(Incorporated by reference to exhibit 10.64 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.50 Internet Content Distribution Agreement dated December 30,
1999 by and between InfoSpace.com and the Company.
(Incorporated by reference to exhibit 10.65 filed with the
Registrant's Registration Statement on Form S-1 (File No.
333-78129))
10.51 Sinclair Davis Trading Group Agreement dated as of December
8, 1999 by and between Sinclair Davis Trading Corp. and the
Company. (Incorporated by reference to exhibit 10.66 filed
with the Registrant's Annual Report on Form 10-K for the
period ending December 31, 1999)
10.52 Form of Subscription Agreement of the Company.
(Incorporated by reference to exhibit10.67 filed with the
Registrant's Annual Report on Form 10-K for the period
ending December 31, 1999)
76
10.53 Letter Of Intent Agreement dated as of February 29, 2000
between PPC Racing and the Company. (Previously filed with
this registration statement)
10.54 Registration Rights Agreement dated as of April 28, 2000 by
and between RGC International Investors, LDC and the
Company. (Incorporated by reference to Exhibit 10.54 filed
with the Registrant's registration statement on Form S-1
filed on June 2, 2000)
10.55 Warrant Agreement dated as of April 28, 2000 by and between
RGC International Investors, LDC and the Company.
(Incorporated by reference to Exhibit 10.54 filed with the
Registrant's registration statement on Form S-1 filed on
June 2, 2000)
10.56 Settlement Agreement and Mutual General Release dated as of
April 28, 2000 by and between RGC International Investors
LDC, Rose Glen Capital Management, L.P., RGC General Partner
Corporation, Steve Katznelson, Gerald Stahlecker, Chris
Hinkel and the Company. (Incorporated by reference to
Exhibit 10.54 filed with the Registrant's registration
statement on Form S-1 filed on June 2, 2000)
10.57 Consulting Agreement dated as of October 29, 2000 by and
between the Company and Michael Gardner.
10.58 Online Advertising Insertion Order dated as of April 3, 2000
by and between the Company and Hearme.com.
10.59 Content License Agreement dated April 27, 2000 by and
between the Company and ScreamingMedia.
10.60 Development and Revenue Sharing Agreement dated August 23,
2000 by and between the Company and Activeworlds.com, Inc.
10.61 GoTo.com Search Services Order dated as of September 1, 2000
by and between the Company and GoTo.com
10.62 WebMall Co-Branded Web Page Agreement dated as of September
7, 2000 by and between the Company and StoreRunner Network,
Inc.
10.63 Software License Agreement dated as of September 29, 2000 by
and between the Company and Annuncio Software, Inc.
10.64 Consulting Services Agreement dated as of October 11, 2000
by and between the Company and Annuncio Software, Inc.
10.65 Online Advertising Services Contract dated as of February 1,
2001 by and between the Company Fastclick.com, Inc.
10.66 Gigabit Data Services Agreement dated as of March 2001 by
and between the Company and Alchemy Communications, Inc.
10.67 Exit Traffic Agreement dated as of January 1, 2000 by and
between the Company and Internet Fuel.com, Inc.
21.1 Subsidiaries of the Company. (Incorporated by reference to
exhibit 10.57 filed with the Registrant's Registration
Statement on Form S-1 (File No. 333-78129))
23.1 Consent of BDO Seidman, LLP
(b) Reports on Form 8-K.
None.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NETTAXI.COM
Date: April 3, 2001 By: /s/ Dean Rositano
-------------------
Dean Rositano,
Chief Financial Officer
(Principal Accounting and
Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------- -------------
/S/ Robert A. Rositano, Jr. Chief Executive Officer, April 3, 2001
- ----------------------------- Secretary and Director
Robert A. Rositano, Jr. (principal executive officer)
/S/ Dean Rositano President Chief Financial Officer April 3, 2001
- ----------------------------- and Director
Dean Rositano (principal accounting officer)
/S/ Andrew Garroni Director April 3, 2001
- -----------------------------
Andrew Garroni
78
NETTAXI.COM
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
NETTAXI.COM
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
NETTAXI.COM
CONTENTS
================================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 4
Consolidated statements of operations 5
Consolidated statements of shareholders' equity (deficiency) 6
Consolidated statements of cash flows 7
Notes to consolidated financial statements 8 - 33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of
Nettaxi.com
We have audited the accompanying consolidated balance sheets of Nettaxi.com as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity (deficiency) and cash flows for each of the
three years in the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nettaxi.com as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ BDO Seidman LLP
San Jose, California
March 8, 2001
3
NETTAXI.COM
Consolidated Balance Sheets
================================================================================
December 31, 2000 1999
- ------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents (Note 9) $ 13,894,700 $ 987,700
Accounts receivable, net of allowance for doubtful accounts
of $433,000 and $83,600, respectively (Note 9) 775,100 1,181,600
Prepaid expenses and other assets (Note 7) 1,035,000 609,200
- ------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 15,704,800 2,778,500
- ------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net (Note 2) 1,748,300 1,968,600
PURCHASED TECHNOLOGY, net (Note 3) 319,000 493,000
OTHER INTANGIBLES, net (Note 3) 55,000 85,000
DEFERRED EXPENSE (Note 7) 272,500 655,200
DEPOSITS 24,000 50,900
- ------------------------------------------------------------------ ------------- -------------
$ 18,123,600 $ 6,031,200
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 1,162,400 $ 4,041,400
Accrued expenses (Note 4) 397,900 659,100
Income taxes payable (Note 8) 125,600
Current portion of capital lease obligations 5,400
- ------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,560,300 4,831,500
- ------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Convertible notes payable, related party (Note 6) 3,200,000
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,560,300 8,031,500
- ------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9, and 12)
STOCKHOLDERS' EQUITY (DEFICIENCY) (Notes 6, 7, and 13):
Preferred stock, $0.001 par value; 1,000,000 shares authorized;
no shares issued and outstanding
Common stock subscribed (95,000) (95,000)
Common stock, $0.001 par value; 200,000,000 shares authorized;
43,124,586 and 23,214,446 shares issued and outstanding,
respectively 43,100 23,200
Additional paid-in capital 44,732,900 11,899,300
Deferred compensation (429,900) (491,400)
Accumulated deficit (27,687,800) (13,336,400)
- ------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) 16,563,300 (2,000,300)
- ------------------------------------------------------------------------------------------------
$ 18,123,600 $ 6,031,200
================================================================================================
See accompanying notes to consolidated financial statements.
4
NETTAXI.COM
Consolidated Statements of Operations
================================================================================
Years ended December 31, 2000 1999 1998
=====================================================================================
NET REVENUES (Notes 9 and 10) $ 9,418,400 $ 5,032,800 $ 258,000
OPERATING EXPENSES:
Cost of operations 7,307,700 4,003,800 239,800
Sales and marketing 5,908,300 4,788,800 745,600
Research and development 1,563,000 2,186,700 634,700
General and administrative 5,007,300 3,456,000 1,053,200
Asset impairment (Note 3) - - 667,000
- -------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 19,786,300 14,435,300 3,340,300
- -------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (10,367,900) (9,402,500) (3,082,300)
OTHER INCOME (EXPENSE):
Interest income 703,800 75,100 9,800
Interest expense (Notes 6 and 7) (4,685,700) (426,200) (68,800)
Other income 28,500
- -------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (14,349,800) (9,753,600) (3,112,800)
INCOME TAXES (Note 8) (1,600) (126,800) (800)
- -------------------------------------------------------------------------------------
NET LOSS $(14,351,400) $(9,880,400) $(3,113,600)
=====================================================================================
PREFERRED STOCK DIVIDEND $ $ $ (14,300)
=====================================================================================
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS (14,351,400) (9,880,400) (3,127,900)
=====================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.36) $ (0.46) $ (0.32)
=====================================================================================
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING 39,381,211 21,274,203 9,724,781
=====================================================================================
See accompanying notes to consolidated financial statements.
5
NETTAXI.COM
Consolidated Statements of Shareholders' Equity (Deficiency)
(Notes 6 and 7)
================================================================================
Preferred Stock Common Stock Common Additional
=================== =================== Stock Paid-in
Shares Amount Shares Amount Subscribed Capital
========================================================================================================================
Balances, December 31, 1997 134,000 $ 100 5,238,991 $ 5,200 $ - $ 1,295,300
Net proceeds from sale of preferred stock 11,400 - - - - 22,900
Net proceeds from sale of common stock - - 1,756,378 1,800 - 1,198,300
Issuance of common stock for services
and salaries - - 328,132 300 - 142,500
Exchange of convertible notes payable and
accrued interest - - 2,792,763 2,800 - 1,103,000
Exchange of preferred stock for common stock (145,400) (100) 734,438 700 - (600)
Compensation expense related to warrants granted - - - - - 855,000
Warrants exchanged for common stock - - 2,399,298 2,400 (95,000) 92,600
Issuance of common stock to Placement Agent - - 200,000 200 - 159,800
Common stock issued in connection with
Reorganization - - 660,000 700 - -
Net loss available to common shareholders - - - - - -
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 - - 14,110,000 14,100 (95,000) 4,868,800
Issuance of common stock in connection
with pooling (Note 1) - - 7,000,000 7,000 - -
Deferred compensation related to stock options - - - - - 702,700
Amortization of deferred compensation - - - - - -
Interest related to issuance of warrants - - - - - 361,200
Warrants exercised for common stock - - 150,000 100 - 1,181,200
Exchange of convertible notes payable and
accrued interest - - 802,223 800 - 1,862,500
Proceeds from the issuance of common stock - - 802,223 800 - 1,862,500
Issuance of common stock for services - - 350,000 400 - 1,060,400
Net loss available to common shareholders - - - - - -
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 - - 23,214,446 23,200 (95,000) 11,899,300
Exchange of convertible notes payable and
accrued interest - - 2,382,472 2,400 - 3,317,500
Proceeds from the issuance of common stock - - 632,472 600 - 834,300
Deemed interest on settlement agreement - - - - - 3,896,000
Deferred compensation related to stock options - - - - - 512,200
Amortization of deferred compensation - - - - - -
Conversion of trade payables to common stock - - 778,982 800 - 1,557,200
Warrants issued in conjunction with conversion of
trade payables - - - - - 541,400
Issuance of common stock for services - - 686,250 700 - 947,800
Warrants issued for services - - - - - 84,000
Proceeds from sale of common stock, net of costs
of $1,831,600 - - 15,416,633 15,400 - 21,127,200
Issuance of common stock due to the exercise
of stock options - - 13,331 - - 16,000
Net loss available to common shareholders - - - - - -
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2000 - $ - 43,124,586 $43,100 $ (95,000) $44,732,900
========================================================================================================================
Deferred Accumulated
Compensation Deficit Total
================================================================================================
Balances, December 31, 1997 $ - $ (327,200) $ 973,400
Net proceeds from sale of preferred stock - - 22,900
Net proceeds from sale of common stock - - 1,200,100
Issuance of common stock for services
and salaries - - 142,800
Exchange of convertible notes payable and
accrued interest - - 1,105,800
Exchange of preferred stock for common stock - - -
Compensation expense related to warrants granted - - 855,000
Warrants exchanged for common stock - - -
Issuance of common stock to Placement Agent - - 160,000
Common stock issued in connection with
Reorganization - (700) -
Net loss available to common shareholders - (3,127,900) (3,127,900)
- ------------------------------------------------------------------------------------------------
Balances, December 31, 1998 - (3,455,800) 1,332,100
Issuance of common stock in connection
with pooling (Note 1) - (200) 6,800
Deferred compensation related to stock options (702,700) - -
Amortization of deferred compensation 211,300 - 211,300
Interest related to issuance of warrants - - 361,200
Warrants exercised for common stock - - 1,181,300
Exchange of convertible notes payable and
accrued interest - - 1,863,300
Proceeds from the issuance of common stock - - 1,863,300
Issuance of common stock for services - - 1,060,800
Net loss available to common shareholders - (9,880,400) (9,880,400)
- ------------------------------------------------------------------------------------------------
Balances, December 31, 1999 (491,400) (13,336,400) (2,000,300)
Exchange of convertible notes payable and
accrued interest - - 3,319,900
Proceeds from the issuance of common stock - - 834,900
Deemed interest on settlement agreement - - 3,896,000
Deferred compensation related to stock options (512,200) - -
Amortization of deferred compensation 573,700 - 573,700
Conversion of trade payables to common stock - - 1,558,000
Warrants issued in conjunction with conversion of
trade payables - - 541,400
Issuance of common stock for services - - 948,500
Warrants issued for services - - 84,000
Proceeds from sale of common stock, net of costs
of $1,831,600 - - 21,142,600
Issuance of common stock due to the exercise
of stock options - - 16,000
Net loss available to common shareholders - (14,351,400) (14,351,400)
Balances, December 31, 2000 $ (429,900) $(27,687,800) $ 16,563,300
================================================================================================
See accompanying notes to consolidated financial statements.
6
NETTAXI.COM
Consolidated Statements of Cash Flows
(Note 11)
================================================================================
Years Ended December 31, 2000 1999 1998
=====================================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(14,351,400) $(9,880,400) $(3,113,600)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on disposal of equipment (28,500)
Depreciation and amortization 1,195,300 595,900 433,500
Allowance for doubtful accounts 349,400 52,400 31,200
Issuance of common stock for interest on
convertible notes 119,900 63,300 68,800
Issuance of common stock for services (Note 7) 1,019,400 34,200 302,800
Asset impairment (Note 3) 667,000
Compensation expense related to options
and warrans granted 615,700 211,300 855,000
Interest expense related to settlement agreement 2,400,000
Interest expense related to issuance of warrants 2,196,400 202,200
Changes in operating assets and liabilities:
Accounts receivable 57,100 (1,100,300) (104,800)
Prepaid expenses and other assets (231,000) (62,700) (13,200)
Accounts payable (1,321,000) 3,854,500 175,900
Accrued expenses (261,200) 585,100 13,700
Deferred revenue (47,000) 47,000
Income taxes payable (125,600) 125,600 (600)
- -----------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (8,337,000) (5,365,900) (665,800)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of equipment 34,600
Deposits 26,900 (50,900)
Capital expenditures (771,000) (2,105,400) (159,200)
- -----------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (744,100) (2,156,300) (124,600)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligations under capital lease (5,400) (7,300) (2,000)
Proceeds from convertible notes payable 5,000,000
Net proceeds from issuance of preferred stock 8,600
Net proceeds from issuance of common stock 21,993,500 3,051,400 1,200,100
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 21,988,100 8,044,100 1,206,700
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,907,000 521,900 416,300
CASH AND CASH EQUIVALENTS, beginning of year 987,700 465,800 49,500
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 13,894,700 $ 987,700 $ 465,800
=====================================================================================================
See accompanying notes to consolidated financial statements.
7
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF The Company
ACCOUNTING
POLICIES Nettaxi.com (formerly Nettaxi, Inc and formerly Swan Valley
Snowmobiles, Inc.), the Company, is a Nevada Corporation,
which was incorporated on October 26, 1995.
On September 29, 1998 the Company completed the acquisition
of 100% of the outstanding common stock of Nettaxi OnLine
Communities, Inc., a Delaware corporation, and changed its
name to Nettaxi, Inc. (now Nettaxi.com). For accounting
purposes, the acquisition has been treated as the
acquisition of the Company by Nettaxi OnLine Communities,
Inc. with Nettaxi OnLine Communities, Inc. as the acquiror.
All shares and per share data prior to the acquisition have
been restated to reflect the stock issuance and related
stock split (Note 7).
As the former shareholders of Nettaxi OnLine Communities,
Inc. received 85% of the shares in the Company immediately
after the acquisition, the financial statements for periods
prior to the reorganization are those of Nettaxi OnLine
Communities, Inc.
Effective May 7, 1999, the Company completed a merger in a
single transaction with Plus Net, Inc. by exchanging 7
million shares of its common stock for all of the common
stock of Plus Net, Inc. Each share of Plus Net was exchanged
for 1,000 shares of Nettaxi common stock.
The merger constituted a tax-free reorganization and has
been accounted for as a pooling of interest under Accounting
Principles Board Opinion No. 16.
For periods proceeding the merger, there were no
intercompany transactions that require elimination from the
combined consolidated results of operations and there were
no adjustments necessary to conform the accounting practices
of the two companies.
The merger with Plus Net, Inc. allowed the Company to
provide its customers with a web based e-mail program and a
robust meta search engine. Plus Net, Inc. also had an
e-commerce processing engine that enabled the acceptance and
processing of online credit card transactions.
8
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Plus Net, Inc. reported no revenues and a net loss of $200
for the period ended December 31, 1998. For the period from
January 1 to May 7, 1999 Plus Net, Inc. had revenues of
approximately $700,000 and net income of approximately
$413,600. Subsequent to the merger the Company ceased its
evaluation and processing of online credit card transactions
business. In 1999, this line of business accounted for
approximately $1,285,000 of the Company's revenues.
Nettaxi OnLine Communities, Inc., was incorporated on
October 23, 1997 to capitalize on a significant opportunity
that exists today through the convergence of the media and
entertainment industries with the vast communications power
of the Internet. The Company's Web site,
http://www.nettaxi.com, is an online community designed to
seamlessly integrate content with e-commerce services for
the Company's subscribers, providing comprehensive
information about news, sports, entertainment, health,
politics, finances, lifestyle, and areas of interest to the
growing number of Internet users. The Company's mission is
to establish nettaxi.com as an entry point, or portal, to
the Internet by continuing to develop premium online
communities, which are both content-rich to its subscribers
and provide easy-to-use e-commerce services to businesses
which reside in these online communities.
The Company's principal executive offices are located in
Campbell, California.
Consolidation
The accompanying consolidated financial statements include
the accounts of Nettaxi.com (formerly Nettaxi, Inc. and
formerly Swan Valley Snowmobile, Inc.) and its wholly-owned
subsidiary, Nettaxi OnLine Communities, Inc. All
intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
9
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Use of Estimates
The preparation of consolidated 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 consolidated financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having
original maturities of 90 days or less to be cash
equivalents.
Accounts Receivable and Allowances For Doubtful Accounts
The Company grants credit to its customers after undertaking
an investigation of credit risk for all significant amounts.
An allowance for doubtful accounts is provided for estimated
credit losses at a level deemed appropriate to adequately
provide for known and inherent risks related to such
amounts. The allowance is based on reviews of losses,
adjustment history, current economic conditions and other
factors that deserve recognition in estimating potential
losses. While management uses the best information available
in making its determination, the ultimate recovery of
recorded accounts receivable is also dependent upon future
economic and other conditions that may be beyond
management's control.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated
economic useful lives of the assets, as follows:
Estimated useful lives
Furniture and fixtures 5 years
Office equipment 5 years
Computers and equipment 3 years
===========================================================
10
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Assets held under capital leases are amortized on a
straight-line basis over the shorter of the lease term or
the estimated useful lives of the related assets.
Purchased Technology and Other Intangibles
The Company amortizes, on a straight-line basis, the cost of
purchased technology and other intangibles over the shorter
of five (5) years or the useful life of the related
technology or underlying asset.
Revenue Recognition and Deferred Revenue
The Company's revenues are derived principally from the sale
of banner advertisements, web hosting services and from
products from its online malls. Advertising revenues are
recognized in the period in which the advertisement is
delivered, provided that collection of the resulting
receivable is probable. Advertisers are charged on a per
impression or delivery basis up to a maximum as specified in
the contract. To date, the duration of the Company's
advertising commitments has not exceeded one year. When the
Company guarantees a minimum number of impressions or
deliveries, revenue is recognized ratably in proportion to
the number of impressions or deliveries recorded to the
minimum number of impressions and deliveries guaranteed. Web
hosting revenues are recognized in the period in which the
services are provided. Product revenue is recognized upon
shipment, provided no significant obligations remain and
collectability is probable.
Advertising revenue include barter revenues, which are the
exchange by Nettaxi.com of advertising space on
Nettaxi.com's web sites for reciprocal advertising space on
other web sites. Revenues from these barter transactions are
recorded as advertising revenues at the lower of the
estimated fair value of the advertisements received or
delivered and are recognized when the advertisements are run
on Nettaxi.com's web sites. Barter expenses are recorded
when Nettaxi.com's advertisements are run on the reciprocal
web sites, which is typically in the same period as when
advertisements are run on Nettaxi.com's web sites. Barter
revenues and related expenses for the years ended December
31, 2000, 1999, and 1998 were approximately $2,224,800,
$343,400, and $0, respectively, representing 28%, 7%, and 0%
of net revenues, respectively.
11
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In November 1999, the Financial Accounting Standards Board
(FASB) issued Emerging Issues Task Force (EITF) Issue 99-17
Accounting for Advertising Barter Transactions. Under EITF
99-17, revenues and expenses should be recognized from
advertising barter transactions at the fair value of the
advertising surrendered or received only when the company
has a historical practice of receiving or paying cash for
such transactions.
In December 1999, the staff of the Securities and Exchange
Commission (SEC) issued its Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition. SAB No. 101 provides the SEC
staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. SAB No.
101 is effective for the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. The Company
believes that its current revenue recognition policies
comply with the provisions of SAB No. 101.
Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, which requires an asset and
liability approach. This approach results in the recognition
of deferred tax assets (future tax benefits) and liabilities
for the expected future tax consequences of temporary
differences between the book carrying amounts and the tax
basis of assets and liabilities. The deferred tax assets and
liabilities represent the future tax return consequences of
those differences, which will either be deductible or
taxable when the assets and liabilities are recovered or
settled. Future tax benefits are subject to a valuation
allowance when management believes it is more likely than
not that the deferred tax assets will not be realized.
Advertising Costs
The cost of advertising is expensed as incurred. Advertising
costs for the years ended December 31, 2000, 1999, and 1998,
were approximately $2,365,600, $2,831,300, and $3,100,
respectively.
12
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Long-Lived Assets
The Company periodically reviews its long-lived assets for
impairment. When events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable,
the Company writes the asset down to its fair value.
Fair Values of Financial Instruments
The following methods and assumptions were used by the
Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents:
The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents approximates fair
value.
Short-term debt:
The fair value of short-term debt approximates cost because
of the short period of time to maturity.
Long-term debt:
The fair value of long-term debt is estimated based on
current interest rates available to the Company for debt
instruments with similar terms and remaining maturities.
Related party notes receivable and payable:
The fair value of the notes receivable and notes payable to
shareholders is based on arms-length transactions and bear
interest at rates comparable to similar debt obligations.
13
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
At December 31, 2000 and 1999, the fair values of the
Company's debt instruments approximate their historical
carrying amounts.
Stock-Based Incentive Program
SFAS No. 123, Accounting for Stock-Based Compensation,
encourages entities to recognize compensation costs for
stock-based employee compensation plans using the fair value
based method of accounting defined in SFAS No. 123, but
allows for the continued use of the intrinsic value based
method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. The Company continues to use the accounting
prescribed by APB Opinion No. 25 for stock-based
compensation to its employees and as such is required to
disclose pro forma net income (loss) and earnings (loss) per
share as if the fair value based method of accounting had
been applied (Note 7). The Company accounts for stock-based
compensation to non-employees under SFAS No. 123.
In March 2000, the Financial Accounting Standards Board
issued Interpretation (Interpretation) No. 44, Accounting
for Certain Transactions involving Stock Compensation, an
Interpretation of ABP Opinion No. 25, which became effective
July 1, 2000. Interpretation No. 44 clarifies (a) the
definition of employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a stock
compensation plan qualifies as a noncompensatory plan, (c)
the accounting consequences of various modifications to the
terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards
in a business combination. Adoption of the provisions of the
Interpretation had no significant impact on the Company's
financial statements.
14
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Basic and Diluted Loss Per Common Share
In February 1997, the FASB issued SFAS No. 128, Earnings Per
Share, which was effective December 28, 1997. Conforming to
SFAS No. 128, the Company changed its method of computing
earnings per share and restated all prior periods included
in the consolidated financial statements. Basic loss per
common share is determined by dividing loss available to
common shareholders by the weighted average number of common
shares outstanding. Diluted per-common-share amounts assume
the issuance of common stock for all potentially dilutive
equivalent shares outstanding. Anti-dilution provisions of
SFAS 128 require consistency between diluted
per-common-share amounts and basic per-common-share amounts
in loss periods. For the periods reported, there were no
differences between basic and diluted earnings per share.
The number of potential common shares not included in
diluted earnings per share, due to their being
anti-dilutive, are 23,994,732, 3,838,679, and 280,000, for
the years ended December 31, 2000, 1999, and 1998,
respectively. All share and per share information has been
adjusted for the shares exchanged for the common stock of
Plus Net, Inc.
Adoption of New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133,
as amended by SFAS No. 138, requires companies to recognize
all derivatives contracts as either assets or liabilities in
the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the
fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. In June 1999,
the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, which amends SFAS
No. 133 to be effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. Historically,
the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new
standard to have a material impact on the Company's results
from operations, financial position or cash flows.
15
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. PROPERTY AND Property and equipment consisted of the following:
EQUIPMENT
December 31, 2000 1999
============================================================
Furniture and fixtures $ 203,600 $ 196,200
Office equipment 55,100 59,700
Computers and equipment 2,721,100 2,134,400
------------------------------------------------------------
2,979,800 2,390,300
Less accumulated depreciation 1,231,500 421,700
------------------------------------------------------------
$1,748,300 $1,968,600
============================================================
Depreciation expense amounted to $903,400, $361,800 and
$59,800 for the years ended December 31, 200, 1999, and 1998
respectively.
3. PURCHASED In November 1997, the Company issued a convertible secured
TECHNOLOGY promissory note in the amount of $1,020,000 (Note 6) and
AND OTHER 2,475,066 shares of common stock, valued at $980,000, to a
INTANGIBLES related party in exchange for certain fixed assets,
liabilities and technology. Core to the technology acquired
was a web to database software application and the
underlying technology to the Company's Internet The City
products. Based on the fair market value of the
consideration exchanged, as determined by an independent
appraisal service, the aggregate purchase price was
$2,000,000, and was allocated to the following respective
assets and liabilities based on their fair market value at
the time of the transaction:
============================================================
Purchased technology $1,740,000
Other intangibles 150,000
Computers and equipment 100,000
Office equipment 45,000
Furniture and fixtures 5,000
Contracts payable and accrued expenses (40,000)
------------------------------------------------------------
$2,000,000
============================================================
16
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In 1998, the Company experienced several functional problems
with portions of the purchased technology, namely the web to
database software application, due to those components
incompatibility with subsequent releases of upgraded
versions of its operating system. Following attempts to make
these components compatible, the Company decided, in
December 1998, not to spend additional monies on these
components but to replace them. As approximately 50% of the
components of the acquired technology were no longer
technically viable with the upgraded versions of the
Company's operating system and provided no alternative
future use, the Company wrote off the unamortized portion of
the impaired technology, resulting in a charge to expense of
$667,000.
Purchased technology and other intangibles consisted of the
following:
December 31, 2000 1999
============================================================
Purchased technology $870,000 $870,000
Less accumulated amortization 551,000 377,000
------------------------------------------------------------
$319,000 $493,000
============================================================
Other intangibles $150,000 $150,000
Less accumulated amortization 95,000 65,000
------------------------------------------------------------
$ 55,000 $ 85,000
============================================================
4. ACCRUED
EXPENSES Accrued expenses consisted of the following:
December 31, 2000 1999
============================================================
Payroll and related expenses $ 97,800 $216,200
Professional fees 157,300 135,000
Marketing 83,800 93,000
Accrued interest, related party 125,500
Other 59,000 89,400
------------------------------------------------------------
$397,900 $659,100
============================================================
17
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. LEASE The Company leases its facility under an operating lease,
COMMITMENTS which expires on May 1, 2002. The facility lease requires
the Company to pay certain maintenance and operating
expenses, such as taxes, insurance, and utilities. Rent
expense for the years ended December 31, 2000, 1999, and
1998, was $281,600, $178,000, and $35,500, respectively.
In 1999, the Company entered into operating leases on
certain vehicles. For the years ended December 31, 2000 and
1999, rent expense related to the vehicle leases aggregated
$5,300 and $2,600.
A summary of the future minimum payments required under
noncancelable operating leases with terms in excess of one
year follows:
Operating
Years Ending December 31, Leases
============================================================
2001 $ 284,400
2002 98,400
------------------------------------------------------------
$ 382,800
============================================================
6. CONVERTIBLE On November 1, 1997, the Company issued a 10% five-year
NOTES PAYABLE, convertible secured promissory note in the amount of
RELATED PARTY $1,020,000. In September 1998, this note, with accrued
interest of $85,800, was converted into 2,792,763 shares of
common stock. Interest expense on the note aggregated
$68,800 in 1998.
18
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
On March 31, 1999 the Company entered into a $5,000,000
Convertible Debt Financing Agreement (the Agreement) with
RGC International Investors, LDC (RGC). The convertible
debenture bears interest at 5% and matures on March 31,
2004. The debentures are convertible at the option of the
holder into that number of shares of common stock equal to
the principal amount of the debentures to be converted
including all accrued interest, divided by the conversion
price specified in the debentures. The conversion price is
the lesser of a variable or fixed conversion price. The
variable conversion price is based on the trading price of
the Company's common stock over a fixed period to conversion
of the debentures, and the fixed conversion price is $11.88.
The fixed conversion price represents 120% of the average of
the three lowest trades ten days prior to the effective date
of the Agreement.
In accordance with the terms of the debt agreement, RGC
converted, in November and December 1999, $1,800,000 of the
debentures, with accrued interest of $63,300, into 802,223
shares of common stock and, in January and February 2000,
$800,000 of the debentures, with accrued interest of $34,900
into 632,472 shares of common stock.
On April 28, 2000, the Company reached a settlement
agreement with RGC for the $2,400,000 remaining principal
amount of the convertible debentures, plus accrued interest
thereon of approximately $85,000, whereby the Company agreed
to issue an aggregate of 1,750,000 shares of common stock
"settlement shares" and warrants to purchase an aggregate of
2,200,000 shares of common stock, with an exercise price of
$1.50 per share, as discussed further in Note 7. It was also
agreed that beginning on the date of the agreement and prior
to the delivery of the settlement shares, the debentures
would be convertible at a fixed conversion price of $1.42
per share. As the fair market value of the Company's stock
on April 28, 2000 was $3.00, the Company recognized a deemed
noncash interest expense of $2,400,000 resulting from the
implied beneficial conversion feature.
7. SHAREHOLDERS' In October 1997, the Company offered shares of its preferred
EQUITY stock through a private placement offering. This offering
PREFERRED established a maximum of 150,000 shares of Series A
STOCK preferred stock at $0.75 per share, each share convertible
into 5.05 shares of the Company's common stock at any time.
19
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
During the year ended December 31, 1998 and the period ended
December 31, 1997, the Company issued 11,400 and 134,000
shares of Series A preferred stock in this offering for net
cash proceeds of $8,600 and $100,500, respectively. As these
shares were issued at a discount from the then fair market
value of the stock the Company recorded deemed preferred
stock dividends of $14,300 and $167,500 in the year ended
December 31, 1998 and for the period ended December 31,
1997, respectively.
In September 1998, all of the shares of Series A preferred
stock were converted into 734,438 shares of the Company's
common stock.
COMMON STOCK
In October 1997, the Company offered shares of its common
stock through a private placement offering. This offering
established a maximum of 1,262,650 shares of common stock at
$0.40 per share. During 1998, the Company issued 506,378
shares of common stock in this offering for net proceeds of
$200,500.
During the year ended December 31, 1998, the Company issued
252,045 shares of common stock with an ascribed value of
$120,000 as payment for services. The shares issued for
services performed were valued at the then fair market value
of the share issued in the October 1997 private placement
offering.
During the year ended December 31, 1998, the Company issued
76,087 shares of common stock with an ascribed value of
$22,800 to officers and employees of the Company in lieu of
salaries.
In September 1998, the Company's Board of Directors declared
a 2.53 to 1 stock split, in connection with the Acquisition
as discussed in Note 1. All references to number of shares
of common stock and per share data in the consolidated
financial statements have been adjusted to reflect the stock
split on a retroactive basis.
20
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In September 1998, in connection with the Acquisition, the
Company offered shares of its common stock through a private
placement offering (the Offering). The Offering established
a maximum of 1,250,000 shares of common stock at $0.80 per
share. The Placement Agent received 200,000 shares of common
stock with a fair market value of $160,000. The Company
issued 1,250,000 shares of common stock in the Offering for
net proceeds of $999,600.
In May 1999, the Company completed a merger in a single
transaction with Plus Net, Inc. (as discussed in Note 1) by
exchanging 7,000,000 shares of its common stock for all of
the common stock of Plus Net, Inc. Each share of Plus Net
was exchanged for 1,000 shares of Nettaxi common stock.
In accordance with the Convertible Debt Financing Agreement,
entered into between the Company and RGC International
Investors, LDC on March 31, 1999, RGC had the option to
purchase one additional share of common stock for every
share of common stock issuable as a result of a conversion
of the debenture, at a price equal to the applicable
conversion price.
In November and December 1999, RGC exercised this investment
option right and purchased 802,223 shares of the Company's
common stock for proceeds of $1,863,300 and, in January and
February 2000, an additional 632,472 shares of common stock
for proceeds of $834,900.
In December 1999, the Company issued 350,000 shares of
common stock to a consulting group in exchange for a
two-year agreement to provide the Company with consulting
services. Based on the then fair market value of the shares
issued the price of these services was determined to be
$1,060,800. In February 2000, the Company issued an
additional 175,000 shares of common stock, with a fair
market value of $574,200, in consideration for extending the
agreement for an additional six months.
The Company amortizes the aggregate consideration given over
the 30 months term of the agreement. Included in prepaid
expenses and deferred expenses are, as of December 31, 2000
and 1999, $926,500 and $1,026,600, respectively,
representing the unamortized portion of the consideration
given for these consulting services.
21
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In September 2000, the Company issued 75,000 additional
shares of common stock to the consulting group in
consideration of failure to execute the demand registration
rights in a timely manner pursuant to the agreements. Based
on the fair market value of the shares issued, the Company
recognized $37,500 in consulting expense for this
transaction.
In February 2000, the Company offered shares of its common
stock, valued at $1.50 per share, and warrants, each
expiring on January 31, 2003 and entitling the holder the
right to purchase one share of common stock at an exercise
price of $4.00 per share, through a private placement
offering. The Company issued 15,416,633 shares of common
stock and warrants to purchase 15,416,633 shares of common
stock in the offering for net proceeds of $21,142,600.
In February 2000, the Company issued 6,250 shares of common
stock, with a fair market value of $9,700, in settlement for
the cancellation of a letter of intent to provide
sponsorship.
In March and April 2000, the Company issued 778,982 shares
of common stock and warrants to purchase 389,491 shares of
common stock at an exercise price of $2.76 per share, as
discussed further below, in exchange for the conversion of
$1,558,000 in trade payables.
In July and August 2000, the Company issued an aggregate of
430,000 shares of common stock, with a fair market value of
$327,100, in consideration for consulting services. The
Company amortizes the aggregate consideration given over the
term of the underlying agreements. Included in prepaid
expenses is, as of December 31, 2000, $29,200 representing
the unamortized portion of the consideration given for these
consulting services.
In May 2000, the Company's Certificate of Incorporation was
amended to increase the number of shares of authorized
common stock to 200,000,000.
22
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
WARRANTS
In 1998, prior to the adoption of the Stock Option Plan as
discussed below, the Company granted warrants to directors
and employees of the Company, to purchase 2,399,298 shares
of common stock at $0.04. As the exercise price for those
warrants was less than the market price of the common stock
on the grant date, the Company recorded in accordance with
APB Opinion No. 25, Accounting for Stock Issued to
Employees, $855,000 of compensation costs associated with
these warrants.
In September 1998, these warrants were exchanged for
2,399,298 shares of common stock via the issuance of
promissory notes for $95,000, concurrent with the
reorganization of the Company. The promissory notes have
been accounted for as common stock subscribed and are an
offset to shareholders' equity until such notes are
collected.
During the years ended December 31, 2000 and 1999, the
Company issued warrants in connection with financing,
consulting services, and conversion of trade payables to
purchase 3,139,491 and 475,000 shares of common stock,
respectively.
The Company estimates the fair value of warrants at the
grant date by using the Black-Scholes valuation model with
the following weighted-average assumptions used for grants
in 2000 and 1999: dividend yield of 0%; expected volatility
of 138% and 69%; risk-free interest rate of 6.2% and 6.2%;
and the expected contractual lives of the warrant. The
computed value is charged to operations or interest over the
term of the related agreements.
In March 1999, the Company issued warrants, which vested
immediately to purchase 125,000 shares of common stock at
$8.00 per share. These warrants were Issued in connection
with a dispute settlement and expire in March 2001.
In conjunction with the Agreement, entered into between the
Company and RGC on March 31, 1999, the Company issued
warrants, which vested immediately, to purchase 150,000
shares of common stock at $12.375. The Company recognized an
additional $115,500 of interest expense associated with
these warrants. In August 1999, the Company entered into an
agreement with RGC pursuant to which it exercised these
warrants.
23
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In consideration for the early exercise of the warrants, the
exercise price for the warrants was decreased from $12.375
to $7.875 and the Company issued RGC warrants to purchase an
additional 150,000 shares of common stock at $7.875. These
warrants were subsequently, due to anti-dilution provisions,
issued at an execise price of $4.38 per share, resulting in
an increase in the number of shares issuable upon exercise
of the warrants to 269,692. The Company recognized an
additional $245,700 of interest expense associated with
these warrants. In 2000 and 1999, the Company recognized
$159,000 and $86,700 of this amount as interest expense
respectively.
In June 2000, the Company issued warrants, which vested
immediately, to purchase 2,200,000 shares of common stock at
$1.50 per share, exercisable over five years, in accordance
with the settlement agreement entered into between the
Company and RGC or April 28, 2000. The Company recognized an
additional $1,496,000 of deemed interest expense associated
with these warrants.
In February 2000, the Company issued warrants, which vested
immediately, to purchase 200,000 shares of common stock at
an exercise price of $4.00, in addition to previously issued
warrants to purchase 50,000 shares of common stock at an
exercise price of $12.375 for finders fee in connection with
the private placement.
In March and April 2000, the Company issued warrants to
purchase 389,491 shares of common stock at an exercise price
of $2.76 in conjunction with the conversion of trade
payables. The Company recognized $541,400 in interest
expense associated with these warrants.
In October 2000, the Company issued warrants for consulting
services, which vested immediately to purchase 350,000
shares of common stock at an exercise price of $0.35 per
share. The aggregate value of these warrants, $84,000, is
amortized over a four months period. Included in prepaid
expenses is, as of December 31, 2000, $42,000 representing
the unamortized portion of the consideration given for these
consulting services.
24
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
STOCK OPTION PROGRAM
In September 1998, the Company adopted the 1998 Stock Option
Plan and, in January 2000, the Board of Directors adopted
the 1999 Stock Option Plan (collectively "the Plans"), which
is subject to its ratification by the stockholders.
The Plans authorizes the grant of options to purchase shares
of common stock to employees, directors, and consultants of
the Company and its affiliates. The options are a
combination of both incentive and nonstatutory options.
Incentive options may be granted at not less than 100% of
the fair market value per share, and nonstatutory options
may be granted at not less than 85% of the fair market value
per share at the date of grant as determined by the Board of
Directors or committee thereof, except for options granted
to a person owning greater than 10% of the outstanding
stock, for which the exercise price must not be less than
110% of the fair market value. Options granted under the
Plans generally vest over three years and are exercisable
over ten years.
The Company has reserved 3,000,000 shares of common stock
for issuance under the 1998 Stock Option Plan and 8,900,000
shares of common stock for issuance under the 1999 Stock
Option Plan.
25
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the status of the Company's stock option plan
as of December 31, 2000, 1999, and 1998, and changes during
the years then ended is presented in the following table:
Options Outstanding
-----------------------------------------------------------
December 31, 2000 December 31, 1999 December 31, 1998
------------------- -------------------- ----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------
Beginning 2,580,166 $ 9.47 280,000 $ 0.80 - $ -
Granted 3,931,600 $ 1.88 2,614,000 $ 10.40 280,000 $ 0.80
Exercised (13,331) $ 1.20 - $ - - $ -
Forfeited (1,504,519) $ 4.64 (313,834) $ 9.45 - $ -
----------- ---------- -------
Ending 4,993,916 $ 4.97 2,580,166 $ 9.47 280,000 $ 0.80
======================================================================
Exercisable at
year-end 2,068,750 640,499 23,333
=========== ========== =======
Weighted-average fair value of options granted during the period:
$ 1.34 $ 5.71 $ 0.71
====== ======== =======
26
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table summarizes information about stock
options outstanding as of December 31, 2000:
Options Outstanding
---------------------- Options Exercisable
Weighted ----------------------
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Prices Exercisable Prices
=========================================================================
0.01-0.75 154,250 9.67 $ 0.47 14,250 $ 0.49
0.76-1.00 265,000 7.76 $ 0.80 202,500 $ 0.80
1.01-2.00 1,530,533 8.44 $ 1.48 539,900 $ 1.47
2.01-5.00 1,240,133 8.07 $ 2.44 690,266 $ 2.44
5.01-10.00 1,464,000 8.63 $ 8.74 309,334 $ 8.42
10.01-15.00 250,000 5.67 $ 13.96 222,500 $ 14.27
15.01-30.00 45,000 0.50 $ 25.60 45,000 $ 25.60
30.01-45.00 45,000 0.50 $ 40.22 45,000 $ 40.22
-------------------------------------- -----------
4,993,916 $ 4.97 2,068,750 $ 5.51
=========== ========= =========== =========
During the years ended December 31, 2000 and 1999, the
Company recorded deferred compensation of approximately
$512,200 and $702,700, respectively, relating to the
issuance of 380,000 and 285,000 consultant options,
respectively, for administrative and sales and marketing
services. These amounts were computed using the
Black-Scholes option valuation model. The related
amortization will be charged to operations over the term of
the related consulting agreements. In 2000 and 1999, such
amortization amounted to approximately $573,700 and
$211,300, respectively. The weighted-average assumptions
used to compute the value of the options granted in 2000 and
1999 were as follows: dividend yield of 0%; expected
volatility of 110% and 82%; risk-free interest rate of 6.2%
and 6.2%; and expected lives of two years.
27
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
SFAS No. 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information
regarding net (loss) income and (loss) earnings per share as
if compensation cost for the Company's stock option plan had
been determined in accordance with the fair value based
method prescribed in SFAS No.123. The Company estimates the
fair value of stock options at the grant date by using the
Black-Scholes option valuation model with the following
weighted average assumptions used for grants in 2000, 1999,
and 1998: dividend yield of 0%; expected volatility of 124%,
112%, and 180%; risk-free interest rate of 6.2%, 6.2%, and
5.7%; and expected lives of three years for all plan
options.
Under the accounting provisions of SFAS No. 123, the
Company's net loss and the basic and diluted net loss per
common share would have been adjusted to the pro forma
amounts below:
2000 1999 1998
==============================================================
Net income (loss):
As reported $(14,351,400) $ (9,880,400) $(3,127,900)
Pro forma $(19,426,800) $(11,516,600) $(3,144,500)
Basic and diluted earnings (loss) per share:
As reported $ (0.36) $ (0.46) $ (0.32)
Pro forma $ (0.49) $ (0.54) $ (0.32)
8. INCOME The provision for income taxes for the year ended December
TAXES 31, 1999 relates to the earnings of Plus Net, Inc. prior to
the merger. The provision for income taxes for the years
ended December 31, 2000, and 1998 consisted of minimum state
taxes.
28
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following summarizes the differences between income tax
expense and the amount computed applying the Federal income
tax rate of 34% for the years ended December 31, 2000, 1999,
and 1998:
2000 1999 1998
=====================================================================
Federal income tax
benefit at statutory rate $(4,675,000) $(3,316,200) $(1,058,400)
State income taxes, net
of federal benefit (799,000) (566,500) (180,800)
Tax benefit not currently
recognizable 4,985,900 3,884,100 835,400
Other 489,700 125,400 404,600
---------------------------------------------------------------------
Provision for income taxes $ 1,600 $ 126,800 $ 800
=====================================================================
The Company's effective tax rate differs from the statutory
federal income tax principally as a result of federal and
state net operating losses for which no deferred benefit is
recognized due to a full valuation allowance provided on the
resulting deferred tax asset.
Temporary differences and carryforwards which gave rise to
significant portions of deferred tax assets and liabilities
as of December 31, 2000, 1999, and 1998 are as follows:
December 31, 2000 1999 1998
===================================================================
Net operating loss
carryforward $ 9,368,000 $ 4,558,900 $ 473,900
Depreciation and
amortization (36,000) (216,800) (90,300)
Accrued compensation
and benefits 37,000 562,700 4,000
Reserves not currently
deductible 555,000 33,300 316,200
-------------------------------------------------------------------
Net deferred tax asset 9,924,000 4,938,100 703,800
Valuation allowance (9,924,000) (4,938,100) (703,800)
-------------------------------------------------------------------
Reported deferred tax asset $ - $ - $ -
===================================================================
29
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
As of December 31, 2000, the Company had a federal net
operating loss (NOL) carryforward in the amount of
$25,143,000 which may be applied to future taxable income
until these benefits begin to expire in 2017. The Company
also had a California NOL carryforward in the amount of
$13,395,000 which may be applied to future taxable income
until these benefits begin to expire in 2002.
The Company's ability to utilize the NOL carryforwards are
dependent upon the Company's ability to generate taxable
income in future periods and may be limited due to
restrictions imposed under Federal and state laws upon a
change in ownership.
9. CONCENTRATION Financial instruments, which potentially subject the Company
OF CREDIT RISK to concentration of credit risk, consist principally of cash
and cash equivalents and trade receivables. The Company
places its cash and cash equivalents with high quality
financial institutions and, by policy, limits the amounts of
credit exposure to any one financial institution.
The Company's accounts receivable are derived from many
customers in various industries. The Company believes any
risk of accounting loss is significantly reduced due to the
diversity of its end-customers and geographic sales areas.
The Company performs credit evaluation of its customers'
financial condition whenever necessary, and generally does
not require cash collateral or other security to support
customer receivables.
10. MAJOR In 2000, four customers accounted for approximately 20%,
CUSTOMERS 13%, 11%, and 10% of revenues, respectively, with related
account receivable as of December 31, 2000 of $294,000, $0,
$95,200, and $0, respectively.
In 1999, one customer accounted for approximately 17% of
revenues, with related account receivable as of December 31,
1999 of $250,000.
In 1998, four customers accounted for approximately 28%,
21%, 13% and 12% of revenues, respectively, with related
accounts receivable as of December 31, 1998 of $52,100,
$38,100, $0 and $23,800, respectively.
30
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. SUPPLEMENTAL The following is supplemental disclosure for the statements
DISCLOSURE of cash flows.
OF CASH
FLOW
INFORMATION
Years Ended December 31, 2000 1999 1998
========================================================================
CASH PAID:
Income taxes $ 127,200 $ 1,600 $ 1,400
Interest $ $ 3,000 $ 100
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of equipment under
capital lease $ $ $ 14,700
Issuance of common stock for
convertible notes payable plus
accrued interest $3,319,900 $1,863,300 $1,020,000
Issuance of common stock
for consulting services $ 948,500 $1,060,800 $
Issuance of common stock
for trade payables $1,558,000 $ $
Warrants issued in conjunction
with debt financing $ $ 361,200 $
Conversion of preferred stock
to common stock $ $ $ 109,100
Promissory notes received for
common stock subscribed $ $ $ 95,000
========================================================================
12. CONTINGENCIES Nettaxi.com acquired certain technology from SSN
Properties, which in turn, acquired these assets through the
foreclosure of convertible notes issued by Simply
Interactive, Inc. Certain minority shareholders of Simply
Interactive, Inc. are disputing the transfer of these assets
to, ultimately, Nettaxi.com. Management believes that the
group's claims are without merit and therefore that any
settlement relating to these claims will not have a material
adverse effect on the financial position of the Company.
31
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
From time to time, in the normal course of business, various
claims are made against the Company. At this time, in the
opinion of management, there are no pending claims, the
outcome of which is expected to result in a material adverse
effect on the financial position of the Company.
13. SUBSEQUENT On March 1, 2001, the Company signed an Asset Purchase
EVENTS Agreement under which it via its newly formed wholly owned
subsidiary, Lookup Guide Acquisition Corporation, a
California corporation, will issue 2,200,000 shares of
common stock in exchange for substantially all assets of
LookupGuide.com, a California corporation.
14. VALUATION
AND
QUALIFYING
ACCOUNTS
Balance Additions
as of Charged to Balance
Beginning Costs and as of End
Description of Period Expenses Deductions of Period
=======================================================================
2000:
Allowance for
doubtful accounts $ 83,600 $ 504,900 $(155,500) $ 433,000
1999:
Allowance for
doubtful accounts $ 31,200 $ 52,400 $ $ 83,600
1998:
Allowance for
doubtful accounts $ $ 31,200 $ $ 31,200
=======================================================================
32
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
15. QUARTERLY The summarized quarterly financial data presented below
INFORMATION reflect all adjustments, which, in the opinion of
(UNAUDITED) management, are of a normal and recurring nature necessary
to present fairly the results of operations for the periods
presented.
Year Ended First Second Third Fourth
December 31, Quarter Quarter Quarter Quarter 2000
- ----------------------------------------------------------------------------------------
Net revenues $ 2,764,900 $ 2,984,900 $ 2,254,000 $ 1,414,600 $ 9,418,400
Gross profit 991,400 1,063,100 600,600 (544,400) 2,110,700
(loss)
Operating (loss) (2,696,500) (2,605,400) (2,360,500) (2,705,500) (10,367,900)
Net (loss) (2,769,000) (6,461,600) (2,132,200) (2,988,600) (14,351,400)
Basic and diluted
(loss) per
common share (0.09) (0.15) (0.05) (0.07) (0.36)
========================================================================================
Year Ended First Second Third Fourth
December 31, Quarter Quarter Quarter Quarter 1999
- --------------------------------------------------------------------------------------
Net revenues $ 689,300 $ 1,189,100 $ 1,102,500 $ 2,051,900 $ 5,032,800
Gross profit 365,900 780,300 (79,900) (37,300) 1,029,000
(loss)
Operating (loss) (410,400) (2,022,700) (3,975,200) (2,994,200) (9,402,500)
Net (loss) (509,100) (2,137,900) (4,089,100) (3,144,300) (9,880,400)
Basic and diluted
(loss) per
common share (0.02) (0.10) (0.19) (0.14) (0.46)
======================================================================================
33