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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[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
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
[ ] EXCHANGE ACT OF 1934
For the transition Period from to
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Commission file number: 000-26881
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NETNATION COMMUNICATIONS INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0803438
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Suite 1410 - 555 West Hastings Street
Vancouver, British Columbia, Canada V6B 4N6
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (604) 688-8946
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Securities registered under
Section 12(b) of the Act:
Title of Class Name of exchange on which registered
None None
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Securities registered under
Section 12(g) of the Act: Common Stock, $0.0001 par value
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ( 229.405 of this chapter) 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 March 16, 2001, the aggregate market value of the voting common equity
held by non-affiliates of the registrant was $20,226,963, based on the closing
trade reported on the Nasdaq Small Capitalization Market quotation system.
Shares of common stock held by each officer and director and by each person who
owns five percent or more of the outstanding common stock have been excluded
from this calculation as such persons may be considered to be affiliated with
the Company.
As of March 16, 2001, the registrant's outstanding common stock consisted of
15,232,321 shares, $0.0001 par value per share.
TABLE OF CONTENTS
Part Item(s) Page No.
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I 1 Business 1
2 Properties 25
3 Legal Proceedings 26
4 Submission of Matters to a Vote of Security Holders 26
II 5 Market for Registrant's Common Equity and Related Stockholder Matters 27
6 Selected Financial Data 28
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 30
7A Quantitative and Qualitative Disclosure About Market Risk 33
8 Financial Statements and Supplementary Data 34
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 34
III 10 Directors and Officers of the Registrant 35
11 Executive Compensation 37
12 Security Ownership of Certain Beneficial Owners and Management 40
13 Certain Relationships and Related Transactions 40
IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
Signatures 42
Index to Consolidated Financial Statements 43
PART I
ITEM 1: BUSINESS
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FORWARD -LOOKING STATEMENTS
Except for the historical information presented in this document, the matters
discussed in this Form 10-K, and specifically in the sections entitled
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," or otherwise incorporated by reference into this
document contain "forward-looking statements" (as such term is defined in the
Private Securities Litigation Reform Act of 1995). These statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. The safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, apply to forward-looking statements
made by the Registrant. These forward-looking statements involve risks and
uncertainties, including those identified within the section entitled "Factors
Affecting Future Operating Results" and elsewhere in, or incorporated by
reference into, this Form 10-K. The actual results that the Registrant achieves
may differ materially from any forward-looking projections due to such risks and
uncertainties. These forward-looking statements are based on current
expectations, and the Registrant assumes no obligation to update this
information. Readers are urged to carefully review and consider the various
disclosures made by the Registrant in this Annual Report on Form 10-K and in the
Registrant's other reports filed with the Securities and Exchange Commission
that attempt to advise interested parties of the risks and factors that may
affect the Registrant's business.
OTHER MATTERS OF NOTE
Unless otherwise indicated or the context otherwise requires, all references
herein to "NetNation" or the "Company" are to NetNation Communications Inc., a
Delaware corporation, and its consolidated wholly-owned subsidiaries: NetNation
Communications Inc. (the "Canadian Subsidiary"), NetNation Communications (UK)
Ltd. (the "U.K. Subsidiary"), NetNation Communications (USA) Inc. (the "U.S.
Subsidiary"), and DomainPeople Inc.
NetNation Communications Inc., NetNation.com, and DomainPeople.com are
trademarks or service marks of NetNation Communications, Inc. Other trademarks
and tradenames in this Form 10-K are the property of their respective owners.
OVERVIEW OF THE COMPANY
NetNation competes in the shared and dedicated web hosting, server co-location
and domain name registration markets and is focused on meeting the needs of
small and medium-sized businesses and individuals who are establishing a
commercial or informational presence on the Internet. These markets are
currently managed as a single operating segment by the Company.
Web Hosting
NetNation commenced web hosting operations in February of 1997. Web hosting
services offered by NetNation can be described to fit between the creation and
development of web-sites and the direct provision of Internet connectivity such
as by an Internet Service Provider (ISP). Web hosting encompasses a broad range
of possible services, including basic services such as simply posting a
customer's web-site on the Internet using the hosting company's computer
hardware and software, to enhanced services such as enabling financial
transactions over the Internet (E-commerce), email, audio and video
capabilities. Enhanced services may be developed internally by the web hosting
company or purchased from external sources and resold by the web hosting
company. NetNation offers a range of basic and enhanced web hosting services to
businesses wishing to place their web-site on the Internet. These businesses
often decide to use a web hosting company in order to avoid the financial cost,
time and expertise requirements of hosting the web-site and obtaining enhanced
services themselves.
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Web hosting can be differentiated into shared or dedicated hosting. NetNation
offers both services. Shared hosting involves multiple customers who have their
web-sites hosted on a shared computer server. Dedicated server hosting is
available to customers that prefer not to host their web-sites on a shared
server. Dedicated servers provide significantly more server and network
resources than those available from a shared server and give customers the
ability to run complex, high volume or high bandwidth web-sites and
applications. NetNation has partnered with Cobalt Networks Inc. to offer
dedicated server solutions which are located at the Company's data center in
Vancouver. NetNation offers a number of dedicated server options at various
prices depending upon the specific hardware configuration, level of service and
data transfer rates required by the customer.
NetNation hosts customer web-sites and indirectly provides access to the
Internet through its ISP's. However, NetNation has strategically determined not
to offer web-site design and development services. Web-site design and
development may include such features as graphics, text, color, typestyle, audio
and video. The person or company typically responsible for assisting in the
design and maintenance of a web-site is called a webmaster. This function is
labor intensive and would involve significant human resources and time to
service a broad customer base. Consequently, webmaster functions are typically
performed by specialized companies servicing a number of customers. These
customers may also rely upon their webmasters to direct them to suitable hosting
and/or ISP companies. NetNation has decided not to provide the services of
webmasters to its customers due to the intensive use of human resources required
and the corresponding impact on the ability of the Company to scale quickly.
Instead, NetNation has developed a program for resellers which is designed to
provide incentive for the webmasters to direct their customers to NetNation for
web hosting.
Server Co-Location
NetNation also provides server co-location services. Server co-location
services involves a customer physically placing their computer hardware
(referred to as a "server") on NetNation's premises. The customer gains access
to NetNation's Internet support and maintenance services, high-speed Internet
connections, security systems and appropriate physical environment for the
server (e.g. static free, air-conditioned). NetNation's data center also
provides for back-up and secure continuous power supply and 24 hour-per-day 7
day-per-week monitoring by NetNation technical staff.
Domain Name Registration
NetNation is accredited and operational as a domain name registrar and offers
the service through its wholly-owned subsidiary, DomainPeople Inc. This
accreditation allows NetNation to register domain names (e.g. Top-level domains
such as .com, .net, and .org) for individuals and companies.
Every person or business that would like to obtain a personalized web address
must first reserve a domain name (such as "mycompany.com"). Customers can
register a domain name initially for a minimum one year period. The Company
believes that offering this service provides a marketing advantage as the domain
name registration customer may return to NetNation when selecting a web hosting
provider. NetNation provides a number of incentives for domain name
registration customers to migrate into the web hosting services that are
expected to generate a recurring revenue stream.
Prior to November 30, 1999, registration of these domain names was exclusively
provided through Network Solutions Inc. The registration fee, formerly payable
to Network Solutions Inc., is now received directly by the registrars. Each
registrar, in turn, submits a fee of $6 per domain name, per year, to Network
Solutions Inc. as its contribution towards the maintenance of a centralized
database registry. To expand its domain name registration market share,
DomainPeople is forming alliances and is private labeling with ISPs and other
Internet companies worldwide.
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In August 2000, the Company, through its wholly-owned subsidiary, DomainPeople,
Inc., made a 5% minority interest investment in Afilias, LLC (Afilias), through
the purchase of 100 Class A Units representing a 5% voting interest. Afilias is
a company formed for the purpose of bidding for, developing, financing,
marketing, owning and operating a registry to register and maintain Internet
top-level domain names and has obtained the exclusive rights to register and
maintain the new .info top-level domain names. The registration of these domain
names is expected to commence some time in 2001. NetNation does not have
significant influence over Afilias and NetNation uses the cost method of
accounting for the investment. The carrying value of the investment at December
31, 2000 was $100,000.
Marketing and Sales
NetNation's marketing is comprised of print and online advertising that is
designed to position the Company and increase brand awareness. NetNation also
has developed a number of initiatives designed to attract Value Added Resellers
("VARs"), Original Equipment Manufacturers ("OEMs"), and other revenue
generating arrangements.
Operations
NetNation has operations in Vancouver, Canada (it's head office) and London,
England.
BACKGROUND OF THE COMPANY
During 2000, NetNation derived 74% of its revenue from its web hosting services.
Web hosting, which is sometimes referred to as "web-site outsourcing", involves
the rental of space on a computer infrastructure. The infrastructure consists
of computer hardware, referred to as "servers", and computer software. The
hardware and software facilitate the connection of customers' web-sites to the
Internet. In addition to the basic infrastructure, web hosting companies may
also provide customer support services and access to additional services such as
enabling commercial transactions on the Internet. These additional services,
which are essentially software packages, may be developed directly by the web
hosting company or obtained under license from third parties.
To begin using a web hosting service, the typical customer would register and
pay for a domain name and would set-up a billing account with NetNation for web
hosting services. The customer would pay the initial set-up fee for the web
hosting service and then pay a recurring monthly fee. A customer would then
provide its web-site to NetNation for placement on a computer server, which in
turn is connected to the Internet through an ISP. If the customer has a
commercial web-site, NetNation can assist the customer in meeting those
commercial objectives by making available services that enable commercial
transactions over the Internet.
Typical customers of web hosting companies consist of small- and medium-sized
businesses that wish to have a web-site on the Internet without incurring the
costs and time delays involved with developing, maintaining and updating a web
presence on their own. The web-site is an informational or an informational/
commercial tool for these customers. In addition to small- and medium-sized
businesses, web hosting services may be purchased by entities, such as VARs and
OEMs, that will resell the services in connection with their own web related
services.
NetNation will host a customer's web-site on NetNation's computer infrastructure
for a basic monthly fee ranging from $10-$50. The fee entitles a customer to
basic services, including disk storage space on NetNation's server, the ability
to receive and transmit data over the Internet, 24-hour customer support, email
access, and email forwarding capabilities. Additional services available for an
extra charge include, for example, the ability to add security to data
transmissions, to carry out financial transactions over the Internet, to track
and send orders, to give a receipt for purchases made through customers'
web-site, and to add audio/video capabilities. Additional information on the
services offered by NetNation is described under the section entitled "Services
and Products of NetNation".
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NetNation believes that the Internet continues to represent a growing and
substantial opportunity for businesses or organizations that wish to interact in
innovative ways with offices, employees, customers, suppliers and partners
around the globe. Both small and large business enterprises are recognizing
their increasing need to take advantage of the Internet by establishing
web-sites. As a result, reliable web-site hosting services and enhanced
services are becoming increasingly critical to most mainstream enterprises. Due
to this ever-growing importance, many enterprises are seeking to outsource these
functions in order to ensure reliability, scalability for rapid growth,
sophisticated performance monitoring and expert management.
The skill and technology demands of the Internet can present a significant
barrier to in-house development for all but the largest Information Technology
("IT") departments. To set-up an in-house solution, the company would have to
buy the computing hardware equipment, firewall/switching equipment, power
back-up system, fire control system, physical security, fast network cable
connection, and pay the wages of a system administrator. The cost for a typical
small business to obtain a T-1 (1.54 Megabit) or greater bandwidth connection to
the Internet by telephone line is upwards of $1,000 per month. NetNation
estimates that a company will typically save at least two-thirds of the cost of
an in-house solution due to lower communications, equipment, and labor costs.
NetNation has targeted the North American and European small- and medium-sized
business markets for a number of reasons. The percentage of these markets that
utilize the Internet is expected to continue to be one of the fastest growing
segments internationally. In addition, as globalization of business takes
place, these businesses are required to compete domestically and internationally
against better capitalized and larger competitors. They need to be efficient
and make use of the latest technology in order to gain advantage or to survive.
These businesses may look to outsource their Internet services because they
typically lack the technology expertise and resources, capital, personnel, and
time required to install, maintain and monitor their own web servers and added
services.
The geographic location of the market for web hosting services is worldwide,
although NetNation's marketing plan targets prospective customers in countries
with high Internet use backed by good ISP and telecommunications support.
Marketing in all geographic areas includes exposure to prospective customers of
NetNation's services through VARs. Up to December 31, 2000, NetNation's
marketing efforts have been directed primarily to North American and European
markets. During 2001, the Company is significantly expanding its marketing
effort with strategic partnerships and extended international marketing. To
date, NetNation has primarily utilized trade shows, television, print, marketing
agreements with other online service providers, online media, and co-marketing
with creators of web-site creation/authoring tools, to effect its marketing
plan.
BUSINESS STRATEGY
NetNation plans to significantly increase its marketing efforts in the
international market for web hosting and domain name registration services and
will continue to emphasize the development of strategic- and revenue-generating
arrangements with VARs, OEMs and other strategic arrangements. NetNation will
also continue to expand its data center in Vancouver, Canada.
Due to the constantly evolving nature of the Internet and related technologies,
existing web hosting products and services, such as online commerce packages,
will be reviewed on an ongoing basis in order to keep pace with changes in third
party technologies and generally in how business is transacted on the Internet.
Examples of products and services NetNation expects will be demanded by current
and potential customers in 2001 and beyond include:
a) managed services;
b) enhanced services;
c) dedicated hosting services;
d) new top-level domain name extensions (i.e. .info, .store, .web, .firm,
etc);
e) unified messaging and intranets for "virtual" and distributed offices;
and
f) automated marketing tools.
Existing products and services will require integration with third-party
technology and products in order to upgrade NetNation's service solutions.
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ORGANIZATION
NetNation was incorporated under the laws of the State of Delaware on May 7,
1998, under the name Collectibles Entertainment Inc. ("Collectibles") for the
purpose of operating an online sports card and other tradeable memorabilia
distribution business. Collectibles changed its name to NetNation
Communications, Inc. on April 14, 1999 in conjunction with the acquisition of a
web-site hosting business based in Vancouver, Canada. The common shares of
NetNation currently trade on the Nasdaq Small Capitalization Market under the
ticker symbol "NNCI".
NetNation has four wholly-owned subsidiaries: NetNation Communications Inc.,
NetNation Communications UK Ltd., NetNation Communications (USA) Inc., and
DomainPeople Inc.
NetNation entered into the web hosting business through its acquisition of the
Canadian Subsidiary. The Canadian Subsidiary is a private company incorporated
under the laws of the Province of British Columbia, Canada on February 19, 1997.
The Canadian Subsidiary became a wholly owned subsidiary on April 7, 1999
pursuant to an agreement between the shareholders of the Canadian Subsidiary and
Collectibles (the "Share Purchase Agreement"). Pursuant to the Share Purchase
Agreement, Collectibles acquired 9,000,000 Class A common shares and 1,000,000
Class B preferred shares of the Canadian Subsidiary, being all of the issued and
outstanding shares of the Canadian Subsidiary. The purchase price for the
shares of the Canadian Subsidiary was $1,000,000 in Canadian currency, which was
paid by the issuance of 10,000,000 common shares of Collectibles. Upon
conclusion of the acquisition, Collectibles changed its name to NetNation.
NetNation has a wholly-owned subsidiary in the United Kingdom, NetNation
Communications UK Ltd., a company incorporated under the laws of the United
Kingdom on June 1, 1999. The UK Subsidiary was incorporated to facilitate
NetNation's UK operations and facilitate the Company's European expansion.
NetNation has a wholly-owned subsidiary in the United States, NetNation
Communications (USA) Inc, a company incorporated under the laws of the State of
Delaware on October 20, 1999. The US Subsidiary was incorporated to facilitate
NetNation's U.S. operations.
NetNation has a wholly-owned subsidiary in the United States, DomainPeople Inc.,
a company incorporated under the laws of the State of Delaware on November 24,
1999. DomainPeople was incorporated to encompass the Company's Domain Name
Registration business.
SERVICES AND PRODUCTS OF NETNATION
NetNation offers a range of Internet products and services targeted to the
small- and medium-sized business market.
All of NetNation's services have been designed to meet the specific and evolving
needs of its target market. Customers pay a one-time set-up fee and thereafter
pay monthly fees for the services they utilize. NetNation can then provide
enhanced services to these customers as their needs evolve.
The concept behind NetNation's products and services is to enable its customers
to create, update, upgrade and expand their web presence faster, and on a
substantially more cost-effective basis, than the customers could develop
internally. The services offered by NetNation can be summarized as follows:
1. Shared server web-site hosting: This service permits a customer to post
their web-site on the Internet using NetNation's hardware and software,
Internet access, web-site management tools and support services. The
customer's web-site is hosted on a server that is shared with a number of
other NetNation customers.
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2. Dedicated server web-site hosting: This service permits a customer to post
their web-site on the Internet and access NetNation's Internet services.
The customer's web-site is hosted on a dedicated server that is not shared
with any other web-sites. This service is appropriate for those customers
that run complex, high volume or high bandwidth web-sites and applications.
NetNation has partnered with Cobalt Networks Inc. to offer an affordable,
yet robust, dedicated server solution.
3. Server co-location: This service permits a customer to place their own
server hardware in NetNation's premises and access NetNation's Internet
services.
4. Domain name registration: NetNation's ICANN accreditation and operational
status allows for the registration of domain names (e.g. top-level domains
such as .com, .net, and .org) for individuals and companies.
5. Enhanced Internet services: These services permit a customer with a
web-site to add features to that web-site such as audio/video, online
commerce capabilities, email and various other features.
6. OEM Products and Services: These services consist of web hosting and
enhanced Internet services tailored for wholesale to OEMs.
A description of each of the above services is set out below.
Shared Server Web-site Hosting
A core component of NetNation's business is the provision of shared web server
hosting services for individuals and businesses that want an Internet presence
at a reasonable cost. Shared server means that a number of customers will share
space on one server. NetNation offers a number of shared server web-site
hosting plans to meet the needs of a broad range of customers.
NetNation's entry-level shared server web-site hosting plan is called
WebStarter(TM). The WebStarter (TM) package of services offers customers up to
500 megabytes ("MB") of data transfer per month and 10 MB of disk storage on
NetNation's web servers. Customers can store HyperText Markup Language ("HTML"-
a programming language) coded files, graphics, video and audio on their
web-site. This basic service meets the requirements of most individuals and that
of relatively small businesses.
To allow customers to make effective use of their web presence, customers can
establish emailboxes on their web-site, have their email forwarded to another
computer, establish online chat rooms, and even have automated email messages
(autoresponders) sent to visitors of their web-site. Support is also provided
for popular web-authoring tools such as Microsoft FrontPage and its specialized
extensions.
The more advanced and costly web-site hosting services offer enhanced
functionality and resources. NetNation has implemented a variety of tools to
allow its customers to use their sites more effectively. All of the
standardized web-site hosting plans feature detailed web statistics and access
to raw log files, giving customers the ability to track the performance and
evaluate the effectiveness of their web-sites. Customers are able to update
web-sites remotely by sending files through File Transfer Protocol ("FTP"). In
addition, NetNation provides a number of popular Common Gateway Interface
("CGI", a programming language) scripts that allow customers to deploy web-site
and web page hit counters, guest books, mail forms and discussion forums rapidly
and easily. NetNation also supports custom CGI scripts that enable customers to
build unique functionality into their web-sites.
NetNation supports the following platforms, operating systems and applications:
Intel based servers (Pentium Pro, Pentium II, etc.)
Red Hat, Slackware and Storm Linux
Windows NT 4.0 and Windows 2000
Apache web server
Microsoft IIS
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NetNation has developed a set of utilities called the customer's Control Panel.
The Control Panel is a proprietary account interface tool that enhances a
customer's web-site control and management capabilities. For example, customers
can use the Control Panel to change passwords, set email forwarding options and
view web-site statistics without the need to converse directly with NetNation
staff.
Dedicated Server Web-site Hosting
Dedicated server solutions are available for customers that prefer not to host
their web-sites on a shared server. Dedicated servers provide significantly
more server and network resources than those available from a shared server and
give customers the ability to run complex, high volume or high bandwidth
web-sites and applications. NetNation has partnered with Cobalt Networks Inc.
to offer dedicated server solutions which are located at the Company's data
center in Vancouver, Canada. NetNation offers a number of dedicated server
options at various prices depending upon the specific hardware configuration,
level of service, and data transfer rates required by the customer.
Server Co-location
Server Co-location is the service of providing a physical space on NetNation's
premises where customers can place their own server while sharing NetNation's
Internet connectivity, network infrastructure, and physical security. This type
of service is useful for those customers that do not want to share server
resources with other customers in a hosted environment. A typical candidate for
server co-location would be someone that requires video/audio streaming for a
busy site, a specialized online commerce package or someone that requires full
control of the server's functionality. Co-located servers can be managed by
NetNation or by the customer using remote access software. Customers
outsourcing these services are often able reduce expenses and eliminate many of
the headaches associated with running web-sites, particularly large ones.
Domain Name Registration
Every individual or business entity desiring a web-site address must first
reserve a domain name that will serve as the basis of their personalized
web-site address through which users of the Internet can connect to their
web-site. In May 1999, NetNation was selected as an official registrar of
domain names by ICANN. Prior to then, Network Solutions Inc. held sole
authority to register top-level domain names ("TLD's") ending in .com, .net and
.org, which account for between 50% - 75% of the world's Internet addresses.
NetNation became operational as a domain name registrar in December of 1999. As
at March 16, 2001, the Company had registered approximately 170,000 Internet
domain names. The domain name registration service also is a source of
marketing for NetNation's web hosting services.
Enhanced Internet Services
Due to the rapid evolution of web-based services, NetNation is continually
exploring complementary and new services targeted at the needs of its current
and prospective customers. Other industry-specific web hosting activities
include audio and video streaming, and electronic commerce solutions, which are
currently offered by NetNation. Current areas of new product focus include
expanded electronic commerce products, simplified web-site development tools,
and automated marketing services. Most of NetNation's service packages are a
combination of software licensed from third parties and an enabling/facilitating
software that is developed in-house at NetNation.
NetNation provides several different electronic commerce solutions to allow
businesses to develop and maintain successful online storefronts which may
replicate many of the features, products, services, payment methods, delivery
options etc. which are offered by land-based businesses. Dependent on the level
of complexity and their specific needs, businesses can choose on-line commerce
solutions ranging from simple online catalogues to complex full-featured
interactive online stores. These commerce solutions are distinguished from
web-site development in that they are packaged solutions that are available from
a web host. Some modification may be required by the user to ensure the
application is specific to the business. Web-site development instead
concentrates on the physical appearance of the entire web-site, graphics, color,
typestyles, text, layering of pages, placement of icons, and other similar
issues.
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With these products, NetNation's web hosting customers can construct customized
online storefronts with integrated end-to-end sales process support and
automated payment systems with connections to their legacy accounting systems.
Customers can select one of these credit card processing services or another
service of their own choosing. Any financial arrangements for these services are
between the customer and the credit card processing company. NetNation does not
purchase credit card processing services from these entities for resale
purposes.
For an initial setup fee and a subsequent monthly fee, NetNation offers several
packages that support online commerce. The packages are available to both UNIX
and Windows NT users. The Unix packages are based on a "shopping cart" licensed
from Miva Corporation while the Windows NT packages are based on shopping carts
licensed from Inex Inc. A "shopping cart" refers to a program that allows a
business to implement an online storefront by enabling tracking and sending of
orders made through the web-site and giving a customer a receipt for purchases
made through the web-site.
OEM Products and Services
NetNation offers its proprietary technology and services to OEMs that want to
private label their web-site hosting and domain name registration activities,
but wish to outsource the actual service. OEMs make bulk purchases of web
hosting services and resell them under their own name. An example of an OEM is
a traditional Internet service provider ("ISP") that does not offer focused web
hosting services. NetNation sells the services in bulk to the ISP, which in
turn resells the services to end users of the ISP under a different brand name.
As another example of these OEM relationships, NetNation, through its wholly
owned subsidiary DomainPeople, is currently providing an OEM with a private
label domain search and registration service, using NetNation's proprietary
"Smart Whois" service (http://www.swhois.com). The OEM prefers to obtain
certain services from third party providers rather than undertake the
development on its own to replicate a particular service. In this particular
case, NetNation is a third-party provider of the service (Smart Whois) that the
OEM wishes to obtain and utilize on a private label basis. Customers visiting
the OEM web-site would not know that the program is linked to NetNation's
servers in completing the service. The revenue, generated from the registration
of domain names using the Smart Whois service, is shared.
MARKETING AND PUBLIC RELATIONS
The marketing and public relations group of NetNation is responsible for product
and service planning, advertising, marketing communications and public
relations. NetNation relies primarily on a combination of print media and
online advertising. NetNation has placed aggressive print advertising in major
business and technical publications to accelerate NetNation's customer growth.
Some of the publications used for advertising are Fortune, Entrepreneur, Home
Office Computing, Small Business Computing, e Biz, PC World, Wired, Web
Techniques, PC Computing, Wall Street Journal, National Post and the Globe &
Mail. NetNation allocates 75% of its print advertising budget towards these
major publications. Each one of these publications is considered by NetNation
to be a major publications for the market segment that NetNation is targeting.
For example, National Post and the Globe & Mail are the only mainstream national
newspapers in Canada. Entrepreneur and Home Office Computing are widely
distributed magazines in the area of individuals starting their own business and
who may want an Internet presence. Web Techniques is a specialized magazine for
businesses and individuals wanting to develop web-sites. PC World and PC
Computing are widely distributed magazines targeting the consumer market that
may want a comparative analysis of computing products and services. NetNation's
online marketing program consists of a general rotation and of keyword specific
web banner advertisements. Other marketing vehicles used by NetNation include
collateral sales materials and NetNation's web-site. The latter is the first
interface point for most prospective customers, particularly those reacting to
one of NetNation's online ads. NetNation is continuously analyzing the
effectiveness of each of these marketing initiatives for the purpose of
developing future marketing strategies. The Company is increasing its public
relations program and cultivation of media relationships, with the goal of
securing broader media coverage and public recognition of NetNation.
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DISTRIBUTION AND SALES
NetNation sells its products and services worldwide directly to existing and
potential customers and indirectly through VARs and OEMs. Direct sales are
generated through the use of traditional media and online marketing campaigns.
Indirect sales are generated from NetNation's more than 1,200 value-added
resellers in approximately 80 countries. The VARs attract customers to
NetNation because the potential customer has already developed an Internet-based
business relationship with the VAR. NetNation also generates indirect sales
through the relationships that have been established with OEM partners.
NetNation has approximately 16,000 web hosting accounts in over 130 countries as
of March 16, 2001. For the year ended December 31, 2000, United States
customers comprised 52% of the total web hosting customer base, followed by
Canada at 30%, and all other countries combined at 18%.
Direct Sales
At present, NetNation generates most of its new web hosting accounts from online
registrations on its web-site and calls received from its traditional media
and online advertising campaigns. NetNation's web-site enables customer
registration around the clock and its automated voice mail system allows sales
calls to be captured 24 hours a day. NetNation has expanded its sales force to
include outbound sales, and has specialized sales personnel for dedicated and
co-located hosting and domain name registration services.
VARs
As at March 16, 2001, NetNation has a network of over 1,200 VARs in
approximately 80 countries that resell NetNation's services. Most of these VARs
base their businesses on selling web page design, integration and consulting
services. Approximately 70% of the VARs are in the business of web page design
and 30% are in the business of integration and consulting. NetNation's
International Reseller Program was designed for these webmasters, consultants
and other value added resellers that wish to offer web hosting services as a
value added service in their particular market. The VARs are responsible for
maintaining customer relationships, technical support, customer billing, and
the provision of alue-added services such as web page design and system
integration. When a customer of the VAR requests a particular set of services
configured with a specific web-site package, the VAR arranges with NetNation to
provide the bundled web hosting package to the customer. The VAR then buys the
web hosting services from NetNation at a discount from retail and resells the
services to their customers as a complete package. Resellers set their own
price, marketing and technical support policy that is best suited to the market
that they are serving.
In order to facilitate purchasing from NetNation, a VAR maintains a master
account with NetNation. Each VAR typically resells NetNation's web hosting
services to between 5 and 10 new customers. In order to terminate a VAR
relationship, the VAR must typically give 30 days notice.
OEMs
OEM stands for "original equipment manufacturer", which in this document refers
to other service providers that may buy NetNation's services in bulk and resell
them under their own brand name. To further expand its distribution channels,
NetNation is establishing OEM relationships with companies that have an
attractive target customer base for NetNation's services. Candidates for OEM
partnering include telecommunication and cable companies, online communities and
Internet portal companies, ISPs, marketing organizations, and large system
integrators. NetNation believes that OEMs will typically consist of potential
competitors that for cost reasons have opted to outsource their web-hosting and
domain name registration services and resell them under their own brand name.
NetNation believes that various OEMs already have access to NetNation's target
markets but that not all of the customer demands are being met. NetNation
believes that by entering into OEM relationships with such entities there will
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be an overlap of customer demands. For example, an OEM relationship with an
online search company will allow NetNation to offer web hosting solutions and
domain name registration services to customers of the search company, whereas
the online search company could provide the search capabilities. Such
relationships create situations where customers can be referred among the OEM
parties.
NetNation also distributes its services by bundling them with complementary
software packages such as HTML editors, online commerce packages and other web
development tools. The relationships with these software companies call for a
variety of distribution cooperation ranging from advertising each partner's
products on their respective web-sites, to including NetNation's free trial
coupons in software packages directly targeted at web-site builders and users.
CUSTOMER SERVICE
NetNation uses online and automated customer support through its web-site and
online "frequently asked questions" feature (FAQs). These online services are
in addition to NetNation's multi-lingual technical support staff who are
accessible via telephone or email 24 hours per day, 7 days a week. Technical
support staff are responsible for helping customers with their web-site hosting
accounts, web page setup and transfer, and use of the various online web-site
management tools that NetNation provides.
NetNation's Customer Service and Accounts Receivable/Accounting Solutions Group
handles accounting and billing information. NetNation has implemented a feature
to its "Control Panel" to allow customers to check their billing statements
online. Additionally, customers can call NetNation during normal business hours
to discuss their account.
TECHNOLOGY
NetNation has created a secure, scalable and reliable web-site hosting service.
NetNation believes that this technology provides a significant competitive
advantage and is focused on combining its internally developed technology with
third-party software and hardware.
Web-site Hosting Platform
NetNation attempts to balance and limit the number of web-site customers per
server machine to ensure quality service levels. Even though industry-standard
web servers can support multiple web-sites on a single machine, the ability to
manage large numbers of sites is difficult and requires significant
technological innovation. NetNation has expended significant resources
developing technology and tools to efficiently manage a high ratio of customers
to servers and to simultaneously monitor service quality. Although NetNation has
developed the technology to allow over 3,000 simultaneous web-sites on a single
server, it generally limits the number of web-sites to approximately 2,000 per
machine.
NetNation believes that it has the capability to accommodate most hardware/
software configurations that prospective customers may have. NetNation uses
standard technologies such as the Linux operating system, Cobalt Networks
servers, Apache web server software, Sendmail mail server, and Bind for DNS.
Some of the technological barriers that NetNation has been able to overcome
include the ability to communicate with a Microsoft Windows NT based SQL server
from a UNIX machine, the elimination of the "file handle" limits on the servers
and the ability to run Microsoft FrontPage extensions on Linux machines.
To facilitate customer maintenance and support, NetNation has developed various
tools that enable customers to change their own passwords, setup POP3 mail
accounts, modify email routing for automatic message forwarding, and to monitor
their web-site statistics. Customers access these services through a
proprietary Control Panel front-end interface. The Control Panel tools are
continually being upgraded to enhance customer service and ensure a high level
of scalability as additional servers and customers come online.
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Network Operations
The provision of qualified service is of the utmost importance to the business
of NetNation. Accordingly, NetNation invests significant resources into
building a scalable network infrastructure. Wherever feasible, NetNation makes
its network fault tolerant with redundant equipment. Such actions include
standby equipment to handle additional capacity if a server has to be replaced
for such reasons as malfunction of a hard drive or software. The redundancy
allows for operations to continue efficiently as possible although the point of
failure can be isolated to a particular piece of equipment. Another instance of
failure can occur with the power backup supply to a server that may have to be
replaced. The availability of redundancy of equipment or excess capacity allows
for the alternative processing of data until the defective equipment or software
can be replaced or repaired. These measures, along with continual monitoring,
are designed to help minimize down time and provide early identification of
potential sources of failure. At March 16, 2001, the Company had one operating
data center, located in Vancouver, Canada.
COMPETITION
The markets for web hosting and domain name registration services are very
competitive. It is estimated that there are over 5,000 web hosting service
providers in North America alone. Over 95% of them are very small and run by
programmers or other "techies". Others are ISPs that offer limited web-site
hosting as an add-on service to their dial-up web access services. There are
also almost 150 accredited registrars of top-level domain names worldwide.
NetNation's current and potential competitors include:
a) other web hosting and Internet services companies;
b) "pure" domain name registrars that are accredited and operational;
c) domain name registrars that are accredited but not yet operational;
d) regional and national ISPs;
e) regional and national telecommunications companies;
f) large information technology outsourcing firms; and
g) cable and satellite service providers.
The principal competitive factors in this market include:
a) efficient, available customer service and technical support;
b) quality and reliability of service;
c) network capability and scalability (scalability refers to the ability of
the hardware and software to support increasingly larger or more complex
web-site requirements of customers);
d) pricing of services;
e) brand name recognition;
f) breadth of products and services offered and the timely introduction
thereof;
g) technical and engineering expertise;
h) network security;
i) maintenance and expansion of marketing distribution channels;
j) financial resources;
k) attraction and retention of key technical and managerial personnel;
l) development of a broad international presence; and
m) compliance with and the leveraging of industry standards.
NetNation considers that most web hosting competitors fit into two major
groupings, each having its own set of competitive strengths and weaknesses. The
first grouping, and most obvious of NetNation's direct competitors, are the big
telephone and cable companies. NetNation believes that because of their large
corporate size, it takes these competitors much longer to develop and
incorporate new features into their hosting services and to offer those services
at a competitive price without subsidizing the pricing. As a result, NetNation
believes that by careful attention to its cost structure and rapid response to
market demand for new features it can effectively compete with larger and more
financially secure companies, both in services provided and on price.
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The second major type of competitors are the pure-play web-site hosting
companies. NetNation believes that many of these companies have insufficient
resources, inadequate infrastructure, insufficient Internet connectivity, and/or
inadequate technical support. These companies may have congested network
servers and slow Internet connectivity causing delays in web-site access and
upload. This can result in lost customers visiting and exploring a web-site
through abandoned connections. The smaller of these companies may not have
scalable systems that can respond quickly to their customers' growth
requirements and may not be capable of supporting large numbers of new
customers. NetNation is aware that some of its customers came to NetNation as a
result of experiencing an inadequate level of service from a competitor. While
some of these pure-play web-site hosting companies may face these competitive
deficiencies, there are a number of web-site hosting companies that have shown
the ability to compete effectively, including Interland, Hostpro, Interliant
and Webhosting.com. The ability of NetNation to compete with these companies
over time is unproven.
Competitive Advantages
The following key advantages are provided to the customers of NetNation through
its various service solutions:
High-performance with quality and reliability. NetNation's web-site
hosting solutions are designed to deliver hardware and software performance to
ensure customers' web-sites load rapidly when visited. This is a factor that is
consistently used by web hosting ratings services such as TopHost and HostIndex.
NetNation believes that features such as redundant and fault tolerant equipment
housed in secure and environmentally protected facilities permit NetNation to
offer a reliable service with minimal downtime to customer web-sites.
Large number of service options. NetNation's services range from domain
name registration to sophisticated web hosting commerce offerings. In 2000, 74%
of NetNation's revenues were generated by web-site hosting services. This is
augmented by a number of fee based Internet enhancement services. These enhanced
services include electronic commerce solutions for the web, expanded disk
storage and data bandwidth options, web-site to database interfaces, and
multimedia support tools for applications such as RealAudio and RealVideo.
NetNation also offers the ability for customers to co-locate their web servers
on NetNation's secure premises and gain access to technical support services,
expertise, and bandwidth.
Cost-effective solutions. There are potential significant cost saving
benefits to NetNation's customers through the elimination of high capital costs
for web-site equipment, labor, and software. Customers can tap directly into the
knowledge and operating experience of NetNation's staff. Ongoing operating
costs to customers are usually a small fraction of costs of staffing, support
and bandwidth of an internally hosted web-site costs. The shared nature of
NetNation's services provides customers with access to the huge bandwidth
capabilities at a cost of less than $100 versus over a $1,000 per month for
their own T-1 (1.54 megabits) or greater bandwidth telephone line.
Flexibility and Scalability. NetNation's web-site hosting solutions offers
a highly scalable structure designed to permit the support of tens of thousands
of web-sites. This enables NetNation to provide a continual level of reliable
service to both existing and new customers. NetNation's structure permits the
quick expansion of available disk storage space and network bandwidth required
to accommodate rapid growth in the activity, size of or number of visitors to
customers' web-sites.
Customer Support. Through its standardized systems, NetNation has the
ability to rapidly deploy customer web-sites. Most of this process is automated
and does not require the extensive involvement of any NetNation personnel.
NetNation believes it has developed an efficient system of support and related
customer services via email or telephone through NetNation's technical service
group. Customer support services are available 24 hours per day and 7 days per
week.
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Ease of Use. Through interactions with its thousands of customers,
NetNation has developed and implemented proprietary software tools to assist its
customers. These tools allow customers to easily order, change, and manage
their web-sites, remotely. Detailed statistics and activity logs are available
for customers to review their account and performance information. For
customers that are buying the "DomainPlus" package, NetNation has developed a
tool that allows customers to create a one page web-site based on a selection of
Company provided templates. By using this tool, customers can create a simple
web-site within minutes.
EMPLOYEES
As of March 16, 2001, NetNation had 80 employees. All employees, with the
exception of the founders, are required to enter into an employment agreement
that contains industry standard terms including protection of proprietary
interests, confidentiality, and non-competition terms.
NetNation believes that its ability to attract, hire, and retain qualified
personnel now and in the future is important to its success. While sourcing and
recruiting appropriate technical personnel is often difficult and competitive,
NetNation expects that its need to recruit additional personnel in the future
will not negatively affect its operations. Management believes that its
employee relations are good. None of NetNation's employees are represented by a
collective bargaining unit.
INTELLECTUAL PROPERTY RIGHTS
NetNation relies on copyrights, trademarks, trade secret laws, and contractual
restrictions to establish and protect its proprietary rights in its services and
products. NetNation does not have any patented technology at this time that
would limit competitors from entering NetNation's market. Management of
NetNation believes that the steps taken by NetNation to protect its intellectual
property are consistent with industry standards for web-site hosting companies
today.
NetNation also relies on third party software licenses. All employees and
contractors are required to and have entered into confidentiality and invention
assignment agreements. Suppliers, distributors, and certain customers are also
required to enter into confidentiality agreements.
To date, NetNation has received no notification that its services or products
infringe the proprietary rights of third parties. Third parties could however
make such claims of infringement in the future. Any future claims that do occur
may have a material adverse affect on NetNation and its business.
RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
Limited Operating History
NetNation has only been operating since February 1997. As a result, the
NetNation business model is still in an evolving stage. The limited operating
history means NetNation does not have the benefit of the many years of
experience that some other companies have and can use to modify their business
plans and optimize their business strategies. The ability of NetNation to
sustain revenue and income, in the future, is unproven. Therefore NetNation's
limited operating history makes an evaluation of NetNation and its prospects
difficult. See "Management's Discussion and Analysis" in this Form 10-K.
Continuing Losses Expected
The Company expects to incur additional losses and to generate negative
operating cash flow for part of 2001. The Company's build up of its data center
and expansion of its services will require significant amounts of cash in 2001.
The extent to which negative cash flow will occur depends upon a number of
factors, including the following:
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- the number, size, and timing of any investments and acquisitions;
- the expense and time required to integrate any future acquired operations;
- the time and effort required to capture operating efficiencies;
- the ability to generate increased revenues and cash flow; and
- potential regulatory developments that may apply to NetNation's operations.
Industry Risks
NetNation and its prospects must be considered in light of the risks, expenses
and difficulties encountered by companies in the new and rapidly evolving market
for web hosting, domain name registration, and related enhanced Internet
services. To address these risks, NetNation must market its services and build
its brand names effectively, provide scalable, reliable and cost-effective
services, continue to grow its infrastructure to accommodate additional
customers and increased use of its network bandwidth, expand its channels of
distribution, continue to respond to competitive developments and retain and
motivate qualified personnel. NetNation may not sustain revenue growth in
future quarterly or annual periods.
Fluctuations in Results of Operations
NetNation has experienced significant fluctuations in its results of operations
on a quarterly and an annual basis. NetNation expects to continue to experience
significant fluctuations in its quarterly and annual results of operations due
to a variety of factors, many of which are outside the Company's control. These
controllable and non-controllable factors include:
Controllable Factors
a) introductions of products or services by NetNation;
b) the mix of services sold by NetNation;
c) the timing and magnitude of capital expenditures, including construction
costs relating to the expansion of operations;
d) the timing and magnitude of expenditures on advertising and promotion;
e) changes in the pricing policies of NetNation; and
f) the timing and magnitude of expenditures on advertising and promotion.
Non-controllable Factors
a) demand for and market acceptance of NetNation's services;
b) introductions of products or services by NetNation's competitors;
c) reliable continuity of service and network availability;
d) the ability to increase bandwidth as necessary;
e) provisions for customer discounts and credits;
f) customer retention;
g) timing and success of marketing efforts and service introductions by the
Company, its VARs and OEMs;
h) the introduction by third parties of new Internet and networking
technologies;
i) increased competition in NetNation's markets;
j) changes in the pricing policies of NetNation's competitors; and
k) fluctuations in bandwidth used by customers.
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After consideration for the increase in variable marketing expenses, NetNation's
committed costs pertaining to premises, communication and wages account for
approximately 50% of total expenses for the foreseeable short term. Absorbing
these costs within the short term and maintaining efficient operations means
that NetNation would be particularly sensitive to fluctuations in revenues. If
NetNation was unable to continue using third-party products in NetNation's
services offerings, NetNation's service development costs could increase
significantly. For these and other reasons, in some future quarters,
NetNation's results of operations may not meet or exceed the expectations of the
investors, which could have a material adverse effect on NetNation's worth. See
"Management's Discussion and Analysis" in this Form 10-K.
Dependence Upon New Markets; Uncertainty of Acceptance of Services
The markets for web-site hosting, domain name registration, and related enhanced
Internet services have only begun to develop in the past few years and are
evolving rapidly. There is significant uncertainty regarding whether these
markets ultimately will prove to be viable over the long term or, if they prove
viable, whether they will continue to grow. NetNation's future growth, if any,
will depend upon the willingness of businesses to outsource web-site hosting
services and NetNation's ability to market its services in a cost-effective
manner to a sufficiently large number of customers. The market for NetNation's
services may not develop further, NetNation's services may not be more widely
adopted, and significant numbers of businesses or organizations may not use the
Internet for commerce and communication. If these markets fail to develop
further or develop slower than expected, or if NetNation's services do not
achieve broader market acceptance, NetNation's business, results of operations
and financial conditions would be materially and adversely affected. In
addition, to be successful in this emerging market, NetNation must be able to
differentiate itself from its competition through its service offerings and
brand recognition. NetNation may not be successful in differentiating itself or
achieving market acceptance of its services, and may experience difficulties
that could delay or prevent the successful development, introduction or
marketing of these services. If NetNation incurs increased costs or is unable,
for technical or other reasons, to develop and introduce new services or
products or enhancements to existing services in a timely manner, or if new
services do not achieve market acceptance in a timely manner or at all,
NetNation's business, results of operations and financial condition could be
materially adversely affected.
Dependence Upon Expansion of Service Offerings
NetNation's success depends on the growth of its current web hosting and domain
name registration businesses. The Company expects to drive this internal growth
by expanding and enhancing its product and service base with additional
value-added products and product lines. The Company may be able to develop
these additional product capabilities internally, but expects that primarily the
development of strategic relationships with various vendors and distribution
partners will be critically important. Accordingly, it will be important that
the Company either develops these capabilities internally or identifies suitable
potential product and service vendors and distributors with whom the Company can
complete agreements on acceptable terms. NetNation expects that competition for
strategic relationships with key vendors and potential distributors could be
significant, and that the Company may have to compete with other companies with
greater financial and other resources to obtain these important relationships.
There can be no assurance that NetNation will be able to identify suitable
partnering candidates or be able to complete agreements on acceptable terms with
these parties.
Dependence Upon Channel Partners
An important element of NetNation's strategy for growth is to continue to
develop its reseller channel through the marketing of Reseller Packages, which
is being used by NetNation's network of domestic and international VARs, and
through the development of NetNation's OEM relationships. NetNation's VARs
typically are web development or web consulting companies that also sell
NetNation's web-site hosting services but that do not generally have established
customer bases to which they can market NetNation's services. Therefore, in
those markets, primarily international, where NetNation does not focus its
direct marketing efforts, NetNation is dependent on third parties to stimulate
demand for NetNation's services. Currently, NetNation does not have direct
marketing efforts in South America, Africa, and Australia. The failure of
NetNation's services to be commercially accepted in certain markets, whether as
a result of a VARs performance or otherwise, could cause NetNation's current
channel partners to discontinue their relationships with NetNation, and
NetNation may not be successful in establishing additional channel partner
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relationships as required. OEMs and VARs have no obligation to market or resell
NetNation's web-site hosting and domain name registration services, and OEMs can
terminate their relationships with NetNation with limited or no penalty with as
little as 30 days' notice. The loss of VARs or OEMs, the failure of such
parties to perform under agreements with or the inability of NetNation to
attract and retain new VARs or OEMs with the industry experience required to
market NetNation's web-site hosting and domain name registration services
successfully in the future could have a material adverse effect on NetNation's
business, results of operations and financial condition. NetNation's direct
sales efforts may conflict with the efforts of its indirect channel partners,
which may adversely affect NetNation's relationships with such partners. In
addition, to the extent that NetNation succeeds in increasing its sales through
indirect channels such as VARs or OEMs, those sales will be at discounted rates,
and revenue and gross margin to NetNation for each such sale will be less than
if NetNation had sold the same services to the customer directly. Refer to
"Distribution and Sales" in this Form 10-K.
Highly Competitive Markets With Few Barriers to Entry
The markets served by NetNation are highly competitive and are becoming more so.
There are few substantial barriers to entry, and NetNation expects that it will
face additional competition from existing competitors and new market entrants in
the future.
NetNation may not have the resources, expertise or other competitive factors to
compete successfully in the future. Many of NetNation's competitors have
substantially greater financial, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships in the industry than NetNation. As a result, certain
of these competitors may be able to develop and expand their network
infrastructures and service offerings more rapidly, adapt to new or emerging
technologies and changes in customer requirements more quickly, take advantage
of acquisition and other opportunities more readily, devote greater resources to
the marketing and sale of their services and adopt more aggressive pricing
policies than can NetNation. In addition, these competitors have entered and
will likely continue to enter into joint ventures or consortiums to provide
additional services competitive with those provided by NetNation.
Rapid Growth May Strain Resources
NetNation has been growing, and expects to continue to experience rapid growth.
This rapid growth has placed, and is likely to continue to place, a significant
strain on the Company's managerial, operating, financial and other resources.
The expansion efforts also require significant time commitments from the
Company's senior management and places a strain on their ability to manage the
existing business. The Company also may be required to manage multiple
relationships with third parties as the Company's value-added service offerings,
including web hosting, are expanded. Future performance will depend, in part,
upon NetNation's ability to manage this growth effectively. To that end, the
Company will have to undertake the following improvements, among others:
- implement additional management information systems capabilities;
- further develop operating, administrative and financial and accounting
systems and controls;
- improve coordination between engineering, accounting, finance, marketing
and operations; and
- hire and train additional personnel.
Risks Associated with International Expansion and Operations
NetNation's success is dependent in part on expanding its international
presence, primarily through NetNation's VARs. As a result, NetNation will depend
upon its VAR network to market and sell its services and manage the accounts of
customers internationally. NetNation's VARs may not be able to continue to
market and sell NetNation's web-site hosting services successfully. NetNation
denominates its sales to VARs in U.S. dollars. Thus, fluctuations in the value
of the U.S. dollar relative to the Canadian dollar and to the currency of a
given country may make NetNation's services less (or more) profitable
and therefore less (or more) attractive to VARs selling in that country.
In addition, there are certain risks inherent in conducting business
internationally, such as changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, differing technology standards,
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longer payment cycles, political and economic instability, fluctuations in
currency exchange rates, imposition of currency exchange controls, seasonal
reductions in business activity, increased difficulty in enforcing contracts and
potentially adverse tax consequences, any of which could adversely affect
NetNation's international operations. Furthermore, foreign governments where
NetNation currently operates or plans to operate, have enforced laws and
regulations related to the operations of Internet service providers, such as
Germany, that are stricter than those currently in place in the United States
and Canada. In Germany, in August of 1997, the German legislation entered
into force a federal law to regulate the conditions for information and
communications services (the "Multimedia Law"). Such provisions obligate service
providers to protect data collected from customers. Such duties include allowing
customers in Germany to pay for Internet service on an anonymous basis. Service
providers in Germany are also required to protect contractual data from being
used in advertising and market research. Service providers in Germany are
prohibited from transferring billing data on a customer, or former customer, to
third parties. Furthermore, all personal data on a customer has to be deleted
after termination of the relationship.
One or more of these factors could have a material adverse effect on NetNation's
current or future international operations and, consequently, on NetNation's
business, results of operations and financial condition. To the extent that
NetNation does business in foreign markets directly, NetNation will also be
subject to risks such as challenges in staffing and managing foreign operations,
employment laws, and practices in foreign countries and problems in collecting
accounts receivable. In addition, NetNation or its channel partners may not be
able to compete effectively in international markets.
General Acquisition Risks
The Company may acquire strategically important companies and operations. These
acquisitions could materially adversely affect the Company's operating results
as a result of dilutive issuances of equity securities or the incurrence of
debt. In addition, the purchase price for many of these acquired businesses
likely will significantly exceed the current fair values of the net assets of
the acquired businesses. As a result, material goodwill and other intangible
assets would be required to be recorded which would result in significant
amortization charges in future periods. These charges, in addition to the
financial impact of such acquisitions, could have a material adverse effect on
NetNation's business, financial condition and results of operations.
Increased Bandwidth Requirements
As customers' usage of bandwidth increases, NetNation will need to make
additional investments in its infrastructure to maintain adequate downstream
data transmission speeds, the availability of which may be limited or the cost
of which may be significant. Additional network capacity may not be available
from third-party suppliers as NetNation needs it, and, as a result, NetNation's
network may not be able to achieve or maintain a sufficiently high capacity of
data transmission, especially if the usage of NetNation's customers increases.
NetNation's failure to achieve or maintain high-capacity data transmission could
significantly reduce consumer demand for its services and have a material
adverse effect on its business, results of operations and financial condition.
To accommodate a higher degree of scalability from the present structure will
require further additions to capital assets, possible upgrade and partial
replacement of existing capital assets, and additional costs to accommodate
increased bandwidth usage. The Company has implemented an infrastructure
maintenance program to ensure that these issues are proactively addressed. This
program, however, may result in increased capital expenditure costs.
Network Solutions' Competitive Advantage
The Internet domain name registration system is composed of two principal
functions: registry and registrar. Registries maintain the database that contain
names registered within the top level domains and their corresponding Internet
protocol addresses. Registrars act as intermediaries between the registry and
individuals and businesses, referred to as registrants, seeking to register
domain names. The agreements among Network Solutions, ICANN and the U.S.
19
Department of Commerce have given Network Solutions the exclusive right to
operate and maintain the registry for the .com, .net and .org domains at least
until November 30, 2003. Registrars other than Network Solutions are known in
the industry as "competitive registrars." As the exclusive registry for these
domains, Network Solutions receives from NetNation, and every other competitive
registrar, $6 per domain name per year. Although registry fees may not be used
directly to fund Network Solutions' registrar business, the substantial net
revenues from these fees, and the certainty of receiving them, provide Network
Solutions significant advantages over any competitive registrar.
Increased Domain Name Registration Competition
Competition in the domain name registration services industry will intensify as
the number of entrants into the market increases. As at March 16, 2001, ICANN
had accredited almost 150 competitive registrars, including NetNation, to
register domain names in the .com, .net, and .org domains. NetNation faces
substantial competition from competitive registrars and others in that:
- many accredited registrars that are not currently registering domain names
may begin to do so in the near future;
- companies that are not accredited registrars may offer domain name
registrations through a competing accredited registrar's system; and
- ICANN may accredit new registrars to register domain names in the .com,
.net and .org domains.
The Company faces competition from other competitive registrars and others in
the domain name registration industry who may have longer operating histories,
greater name recognition or greater resources. Competitors in the domain name
registration industry include companies with strong brand recognition and
Internet industry experience, such as major telecommunications firms, cable
companies, ISPs, web-hosting providers, Internet portals, systems integrators,
consulting firms and other registrars. Many of these companies also possess
core capabilities to deliver ancillary services, such as customer service,
billing services and network management. NetNation's market position could be
harmed by any of these existing or future competitors, some of which may have
longer operating histories, greater name recognition and greater financial,
technical, marketing, distribution and other resources than NetNation does.
Since competition in the domain name registration industry is in its early
stages, NetNation cannot provide assurance that the Company will not be
required, by market factors or otherwise, to reduce, perhaps significantly, the
prices charged for domain name registration and related products and services.
Further, some of NetNation's competitors are offering domain name registrations
for free and derive their revenues from other sources. Reducing the prices
NetNation charges for domain name registration services in order to remain
competitive could materially adversely affect the Company's results of
operations.
Accreditation to New Top-Level Domains
ICANN or another approving entity may introduce new generic top-level domains.
The Company cannot provide assurance that, if introduced, NetNation will be
accredited to offer registrations in these domains or that customers will rely
on NetNation to provide registration services within any new generic top level
domains. The Company's business, financial condition, and results of operations
would be materially adversely affected if substantial numbers of customers turn
to other registrars for these registration needs.
Maintenance of ICANN Accreditation
NetNation needs to be an ICANN-accredited registrar in order to register domain
names in the .com, .net, and .org domains. The Company's current ICANN
accreditation agreement expires on May 23, 2001 and the Company is in the
process of obtaining a five year renewal of its original agreement to August 16,
2005. While NetNation anticipates that ICANN will renew this agreement, there
is no assurance that it will do so. If ICANN does not renew the Company's
accreditation, NetNation's business, financial condition and results of
operations would be materially adversely affected.
20
Risk of System Failure
NetNation's operations depend upon its ability to protect its network
infrastructure, equipment and customer files against damage from human error,
fire, earthquakes, hurricanes, floods, power loss, telecommunications failures,
sabotage, intentional acts of vandalism and similar events. The occurrence of a
natural disaster or other unanticipated problems at NetNation's Network
Operations Centers could result in interruptions in the services provided by
NetNation. The Company has no formal disaster recovery plan. Although
NetNation is currently building redundancy into its network, NetNation's network
is currently subject to various single points of failure, and a problem with one
of NetNation's routers or switches could cause an interruption in the services
provided by NetNation to a portion of its customers. NetNation has, in the
past, experienced periodic interruptions in service ranging from 2 minutes to 3
hours, totaling between 20 and 24 hours a year. Although these interruptions
were of short duration, they did occur and the extent of future interruptions is
indeterminable. The interruptions had no significant impact on the business of
NetNation.
In addition, failure of any of NetNation's telecommunications providers to
provide the data communications capacity required by NetNation, as a result of
human error, a natural disaster, or other operational disruption, could result
in interruptions in NetNation's services. Any damage to, or failure of, the
systems of NetNation or its service providers could result in reductions in, or
terminations of, services supplied to NetNation's customers, which could have a
material adverse effect on NetNation's business, results of operations, and
financial condition. In addition, NetNation's reputation could be materially
adversely affected.
Dependence Upon Network Infrastructure
NetNation's success will depend upon the capacity, scalability, reliability and
security of its network infrastructure, including the capacity leased from AT&T
Canada Inc., Group Telecom, and Bell Intrigna, its telecommunications network
suppliers. NetNation is dependent on such companies to maintain the operational
integrity of their telecommunications networks. Therefore, NetNation's
operating results depend, in part, upon the pricing and availability of
telecommunications network capacity from a limited number of providers in a
consolidated market. In the event of a material increase in pricing or decrease
in telecommunications capacity available to NetNation, if NetNation were unable
either to access alternative networks on a cost-effective basis to distribute
its customers' content or to pass through any additional costs of utilizing
existing or alternative networks to its customers, NetNation's business, results
of operations and financial condition could be materially adversely affected.
Dependence Upon the Internet and Internet Infrastructure Development
NetNation's success will depend largely upon continued growth in the use of the
Internet. Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of access, quality of service and
necessary increases in bandwidth availability, remain unresolved and are likely
to affect the development of the market for NetNation's services. The adoption
of the Internet for information retrieval and exchange, commerce and
communications, particularly by those enterprises that have historically relied
upon alternative means of information gathering, commerce and communications,
generally will require the acceptance of a new medium of conducting business and
exchanging information. Demand and market acceptance of the Internet are
subject to a high level of uncertainty and depend upon a number of factors,
including the growth in consumer access to and acceptance of new interactive
technologies, the development of technologies that facilitate interactive
communication between organizations and targeted audiences and increases in the
speed of user access. If the Internet as a commercial or business medium fails
to develop further or develops more slowly than expected, NetNation's business,
results of operations and financial condition could be materially adversely
affected.
Rapid Technological Change; Evolving Industry Standards
NetNation's future success will depend, in part, upon its ability to offer
services that incorporate leading technologies, address the increasingly
sophisticated and varied needs of its current and prospective customers and
respond to technological advances and emerging industry standards and practices
on a timely and cost-effective basis. The market for NetNation's services is
characterized by rapidly changing and unproven technologies, evolving industry
21
standards, changes in customer needs, emerging competition and frequent new
service introductions. Technological advances may have the effect of encouraging
certain of NetNation's current or future customers to rely on in-house personnel
and equipment to furnish the services currently provided by NetNation. In
addition, keeping pace with technological advances in NetNation's industry may
require substantial expenditures and lead time, which may have a material
adverse effect on NetNation's business, results of operations and financial
condition.
NetNation believes that its ability to compete successfully also depends upon
the continued compatibility and interoperability of its services with products
offered by various vendors. Enhanced or newly developed third-party products may
not be compatible with NetNation's infrastructure, and such products may not
adequately address the needs of NetNation's customers. Although NetNation
currently intends to support emerging standards, industry standards may not be
established, and even if they are established, NetNation may not be able to
conform to these new standards in a timely fashion and maintain a competitive
position in the market. The failure of NetNation to conform to the prevailing
standard, or the failure of a common standard to emerge, could have a material
adverse effect on NetNation's business, results of operations and financial
condition. In addition, products, services or technologies developed by others
could render NetNation's services noncompetitive or obsolete.
System Security Risks
A significant barrier to electronic commerce and communications is the need for
secure transmission of confidential information over public networks. Certain of
NetNation's services rely on security technology licensed from third parties
to provide the encryption and authentication necessary to effect secure
transmission of confidential information. Unauthorized access, computer viruses,
accidental or intentional actions and other disruptions could occur. NetNation
has in the past experienced minor delays or interruptions in service as a result
of the accidental and intentional actions of Internet users or "hackers", and
may in the future experience such interruptions because of the same actions.
Furthermore, such inappropriate use of the network by third parties could also
potentially jeopardize the security of confidential information, such as credit
card and bank account numbers, stored in the computer systems of NetNation,
which could result in liability to NetNation and the loss of existing customers
or the deterrence of potential customers. NetNation's security measures have
been circumvented in the past, and any new measures implemented by NetNation
could be circumvented in the future. The costs required to eliminate computer
viruses and alleviate other security problems could be prohibitively expensive
and the efforts to address such problems could result in interruptions, delays
or cessation of service to NetNation's customers, which could have a material
adverse effect on NetNation's business, results of operations and financial
condition. Concerns over the security of Internet transactions and the privacy
of users may also inhibit the growth of the Internet, especially as a means of
conducting commercial transactions.
Government Regulation and Legal Uncertainties
Only a small body of laws and regulations currently apply specifically to
content of, access to, or commerce on, the Internet. It is possible that laws
and regulations with respect to the Internet may be adopted by governments in
any of the jurisdictions in which NetNation can sell its products, covering
issues such as user privacy, freedom of expression, pricing, characteristics and
quality of products and services, taxation, advertising, intellectual
property rights, information security and the convergence of traditional
telecommunications services with Internet communications. Although sections of
the U.S. Communications Decency Act of 1996 (the "CDA") that, among other
things, proposed to impose criminal penalties on anyone distributing "indecent"
material to minors over the Internet were held to be unconstitutional by the
U.S. Supreme Court, similar laws may be proposed, adopted and upheld in the U.S.
or other jurisdiction. The nature of future legislation and the manner in which
it may be interpreted and enforced cannot be fully determined and, therefore,
legislation similar to the CDA could subject NetNation and/or its customers to
potential liability, which in turn could have a material adverse effect on
22
NetNation's business, results of operations and financial condition. The
adoption of any such laws or regulations might decrease the growth of the
Internet, which in turn could decrease the demand for the services of NetNation
or increase the cost of doing business or in some other manner have a material
adverse effect on NetNation's business, results of operations and financial
condition. In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyright and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of such laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies. Changes to such laws intended
to address these issues could create uncertainty in the marketplace that could
reduce demand for the services of NetNation or increase the cost of doing
business as a result of costs of litigation or increased service delivery costs,
or could in some other manner have a material adverse effect on NetNation's
business, results of operations and financial condition. In addition, because
NetNation's services are available over the Internet virtually worldwide, and
because NetNation facilitates sales by its customers to end users located in
multiple provinces, states and foreign countries, such jurisdictions may claim
that NetNation is required to qualify to do business as a foreign corporation in
each such state/province or that NetNation has a permanent establishment in each
such foreign country. Failure by NetNation to qualify as a foreign corporation
in a jurisdiction where it is required to do so could subject NetNation to taxes
and penalties for failure to qualify and could result in the inability of
NetNation to enforce contracts in such jurisdictions. Any new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to NetNation's business, could have a material
adverse effect on NetNation's business, results of operations and financial
condition.
NetNation is not currently subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses in general. However, in the future, it
may become subject to regulation by the FCC or another regulatory agency.
NetNation's business could suffer depending on the extent to which its
activities are regulated or proposed to be regulated. In respect to the FCC's
recent decision that could result in an increase in the cost of transmitting
data over the Internet, since the data transmission costs are not a significant
component, it is anticipated that this issue will have a minor adverse effect on
the Company's business.
NetNation does not currently collect sales or other taxes with respect to the
sale of services or products in states and countries where NetNation believes it
is not required to do so. NetNation does collect sales and other taxes in the
states and countries in which NetNation has offices and is required by law to do
so. Currently, NetNation collects federal taxes in Canada from Canadian
residents. One or more jurisdictions have sought to impose sales or other
tax obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more jurisdictions that
NetNation should collect sales or other taxes on its products and services, or
remit payment of sales or other taxes for prior periods, could have a minor
adverse effect on the Company's business.
In respect to the Internet Freedom Act (in which the tax free moratorium ends on
October 21, 2001), it is possible that U.S. states may impose taxes on Internet
based commerce after October 21, 2001. The materiality of such taxes on the
results of operations cannot be determined by the Company at this time. The
growth of the Internet, coupled with publicity regarding Internet fraud, may
lead to the enactment of more stringent consumer protection laws. If NetNation
becomes subject to claims that NetNation has violated any laws, even if
NetNation successfully defends against these claims, the business could suffer.
Moreover, new laws that impose restrictions on NetNation's ability to follow
current business practices or increase its costs of doing business could hurt
the business.
Risks Associated With Information Disseminated Through NetNation's Network
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. Despite the passage of the Communications
Decency Act which provided some relief to online service providers from civil
liability for content they did not create, it is possible that claims could be
made against online services companies and Internet access providers under
United States, Canadian and foreign laws for defamation, negligence or copyright
or trademark infringement, or other theories based on the nature and content of
the materials disseminated through their networks. Several private lawsuits
seeking to impose such liability upon online services companies and Internet
access providers are currently pending. In addition, legislation has been
proposed that imposes liability for or prohibits the transmission over the
23
Internet of certain types of information. The imposition upon NetNation and
other web-site hosting providers of potential liability for information carried
on or disseminated through their systems could require NetNation to implement
measures to reduce its exposure to such liability, which may require the
expenditure of substantial resources, or to discontinue certain service
offerings. The increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals also could affect the growth of
Internet use. In addition, NetNation is subject to a number of risks associated
with the potential actions of customers utilizing NetNation's network. For
example, if a customer were to engage in "spamming" (a practice of sending large
quantities of unsolicited email), NetNation would have an obligation to block
that customer's access to the Internet through NetNation's network. A failure by
NetNation to satisfy this obligation could result in NetNation being denied
access to the telecommunications networks through which NetNation's network
links to the Internet. Spamming could also cause a significant disruption in
NetNation's ability to route email to and from its customers.
Dependence on Key Personnel
NetNation's success depends in significant part upon the continued services of
its key personnel. The Company's technical, sales and administrative matters
come under the direct responsibility of, or are shared by, the following key
personnel: David Talmor, Chairman and President; and Joseph Kibur, Chief
Executive Officer. The loss of the services of one or both of these key persons
could have a material adverse effect on NetNation's business, results of
operations and financial condition.
Ability to Attract, Train and Retain Personnel
NetNation's failure to attract additional qualified personnel could have a
material adverse effect on NetNation's business, results of operations and
financial condition. Any officer or employee of NetNation can terminate his or
her relationship with NetNation at any time. NetNation's future success will
also depend on its ability to attract, train, retain and motivate highly
qualified technical, marketing, sales and management personnel. Competition for
such personnel is intense, and NetNation may not be able to attract and retain
key personnel.
Protection and Enforcement of Intellectual Property Rights
NetNation relies on a combination of copyright, trademark, service mark and
trade secret laws and contractual restrictions to establish and protect certain
proprietary rights in its services. NetNation has no patented technology
that would preclude or inhibit competitors from entering NetNation's market.
NetNation has entered into confidentiality and invention assignment agreements
with its employees and contractors, and nondisclosure agreements with its
suppliers, distributors and certain customers in order to limit access to and
disclosure of its proprietary information. These contractual arrangements or the
other steps taken by NetNation to protect its intellectual property may not
prove sufficient to prevent misappropriation of NetNation's technology or to
deter independent third-party development of similar technologies. The laws of
certain foreign countries may not protect NetNation's services or intellectual
property rights to the same extent as do the laws of the United States and
Canada. NetNation also relies on certain technologies that it licenses from
third parties. These third-party technology licenses may not continue to be
available to NetNation on commercially reasonable terms. The loss of the ability
to use such technology could require NetNation to obtain the rights to use
substitute technology, which could be more expensive or offer lower quality or
performance, and therefore have a material adverse effect on NetNation's
business, results of operations and financial condition. To date, NetNation is
not a subject of a lawsuit in respect to NetNation's services infringing the
proprietary rights of third parties, but third parties could claim infringement
by NetNation with respect to current or future services. NetNation expects that
participants in its markets will be increasingly subject to infringement claims
as the number of services and competitors in NetNation's industry segment grows.
Any such claim, whether meritorious or not, could be time-consuming, result in
costly litigation, cause service installation delays or require NetNation to
enter into royalty or licensing agreements. Such royalty or licensing agreements
might not be available on terms acceptable to NetNation, or at all. As a result,
any such claim could have a material adverse effect upon NetNation's business,
results of operations and financial condition.
Future Capital Needs
NetNation has capital requirements for such applications as marketing and
advertising, the development of new services, the expansion and upgrading of its
technical infrastructure and data center, and geographical expansion. NetNation
may not be successful in generating sufficient cash from operations for those
purposes and will need to raise additional capital. Failure to generate
24
sufficient cash flows or to raise sufficient funds may require NetNation to
revise, delay or abandon some or all of its development and expansion plans or
otherwise forego market opportunities and may make it difficult for NetNation to
respond to competitive pressures, any of which could have a material adverse
effect on NetNation's business, results of operations and financial condition.
Control by Principal Stockholders, Executive Officers and Directors
NetNation's Chairman and President, David Talmor, and Chief Executive Officer,
Joseph Kibur, in the aggregate, beneficially own approximately 55.2% of
NetNation's outstanding common stock as at March 16, 2001. As a result, such
persons, acting together, will have the ability to control most matters
submitted to stockholders of NetNation for approval (including the election and
removal of directors) and to control the management and affairs of NetNation.
Accordingly, such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of NetNation, impeding a merger,
consolidation, takeover or other business combination involving NetNation or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of NetNation, which in turn could have a material
adverse effect on NetNation's worth.
Dilutive Effect of Future Sales of Securities
Future sales of substantial amounts of NetNation's Common in the public market
could adversely affect the market price of the common stock and shareholders
could experience dilution in their stock ownership of the Company and in the
value of their shares. Dilution is a reduction in the value of the holder's
investment measured by the difference between the purchase price of the shares
of the common stock and the net tangible book value of the shares after the
purchase takes place. As at December 31, 2000, there were 10,415,821 shares of
common stock which are restricted or affiliate shares ("Restricted Shares").
Those Restricted Shares will gradually be converted to free-trading shares, the
sale of which could have a material adverse effect on the future market price of
NetNation's common stock.
Stock Price Volatility
The market price of NetNation's common stock has fluctuated significantly in the
past, and is likely to continue to be highly volatile. To date, the trading
volume in the Company's stock has been relatively low and significant price
fluctuations can occur as a result. If the low trading volumes experienced to
date continue, such fluctuations could occur in the future. The Company cannot
provide assurance that the sales price of its common stock will not fluctuate or
decline significantly in the future. In addition, the U.S. equity markets have
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the stocks of technology
companies. These broad market fluctuations may materially adversely affect the
market price of NetNation's common stock in future. Such fluctuations and
variations may be the result of changes in NetNation's business, operations or
prospects, announcements of technological innovations and new products by
competitors, NetNation or its competitors entering into new contractual
relationships with strategic partners, proposed acquisitions by NetNation or its
competitors, financial results that fail to meet public market analyst
expectations of performance, regulatory considerations and general market and
economic conditions in the U.S. and throughout the world.
ITEM 2: PROPERTIES
- --------------------
NetNation's executive offices and Network Operation Center, are located in
Vancouver B.C., Canada. They consist of approximately 14,000 square feet, which
is leased at a rate of $21,000 per month pursuant to agreements that expire
on April 30, 2002. Beginning on July 1, 1999, NetNation established a
representative sales office in London, England, which is leased on a month to
month basis at a rate of $3,900. All property is insured to industry standards.
The Company believes that these facilities will be suitable for the operation of
its business for the foreseeable future.
25
ITEM 3: LEGAL PROCEEDINGS
- ----------------------------
As at December 1, 2000, the Company has discontinued lease payments on the San
Diego premises due to a number of circumstances. To date, the landlord has not
commenced legal action against the Company. Should the landlord commence legal
action against the Company, the outcome of the proceedings is unknown. The
remaining lease payments of $381,254 have been accrued in the consolidated
financial statements, and a gain will be recognized in the event of a favorable
outcome.
The Company contracted with Inovaware Corporation (formerly known as ISP Power)
on January 17, 2000 to develop customized billing software. The contract called
for three payments of $80,000 totalling $240,000 and the Company made the first
payment in 2000. The Company claims that Inovaware Corporation was unable to
complete development of the software in accordance with the terms of the
contract, and has terminated the contract with Inovaware on the basis that
Inovaware Corporation did not fulfill its contractual obligations. Inovaware
Corporation is claiming the Company owes it the remaining $160,000, plus $40,000
for additional work under the terms of the contract. To date, Inovaware
Corporation has not commenced legal action against the Company. Should
Inovaware commence legal action against the Company, the outcome of the
proceedings and the amount of potential damages is unknown. However, should
Inovaware prevail in its claim, the Company could be required to pay damages
which could have a material effect on the Company's operating results.
To the knowledge of the officers and directors of NetNation, there are no other
pending legal proceedings or litigation and none of its property is the subject
of a pending legal proceeding. Further, NetNation's officers and directors know
of no legal proceedings against NetNation or its property contemplated by any
governmental authority.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
No items were submitted to a vote of security holders during the fourth quarter
of 2000.
26
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
NetNation's common shares are principally traded on the Nasdaq Small
Capitalization Market under the ticker symbol NNCI. From February 3, 1999 to
April 27, 1999, the common shares of NetNation traded under the ticker symbol
CBET, reflecting the previous name of NetNation as Collectibles Entertainment
Inc. On April 27, 1999, NetNation began trading under the ticker symbol NNCI.
Price Range of Common Stock
---------------------------
High/Ask Low/Bid
------------- ------------
Fiscal Year Ended December 31, 2000
First Quarter . . . . . . . . . . . . $ 17.875 $ 4.563
Second Quarter. . . . . . . . . . . . $ 15.500 $ 3.500
Third Quarter.. . . . . . . . . . . . $ 6.375 $ 3.375
Fourth Quarter. . . . . . . . . . . . $ 4.000 $ 1.313
Fiscal Year Ended December 31, 1999
First Quarter (from February 3, 1999) $ 4.500 $ 2.000
Second Quarter. . . . . . . . . . . . $ 6.125 $ 3.250
Third Quarter . . . . . . . . . . . . $ 5.750 $ 3.500
Fourth Quarter. . . . . . . . . . . . $ 4.875 $ 3.750
Holders
As at March 16, 2001 there were approximately 1,800 registered shareholders of
record of NetNation's common stock.
Dividends
NetNation has not declared any cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future. NetNation's policy is
to reinvest all earnings into the business.
RECENT SALES OF UNREGISTERED SECURITIES
All amounts shown under this item are in U.S. dollars.
On March 3, 2000, NetNation completed a private placement of 250,000 shares of
its common stock at a price of $10.00 per share for gross proceeds of
$2,500,000. As part of the private placement, the investor also received
warrants which entitled it to purchase one additional common share for every two
shares it originally purchased. The warrants are exercisable during a two-year
period at $12 per common share. The Company may require the exercise of the
warrants during this time period if certain financial conditions are met, in
which case the Company will receive an additional $1,500,000 and will issue an
additional 125,000 common shares. The offering was made to Pictet Ltd. without
registration under the Act, in reliance upon the exemption from registration
afforded by 506 of Regulation D under the Act. If the exemption under 506 of
Regulation D is not available, NetNation believes that this sale was also exempt
under Regulation S and 4(2) under the Act, due to the foreign residency of the
27
purchaser, their level of sophistication and the limited number of investors.
The price per share in the offering was determined by the board of directors of
NetNation based on the then current market price for the shares. At the time
the transaction was under negotiation, the share price was trading in the $4.563
to $17.875 range and the offering price reflected the size, volatility and risk
commensurate with the nature of the transaction.
NetNation has not sold any securities in reliance upon a registration statement
filed under the Securities Act.
ITEM 6: SELECTED FINANCIAL DATA
- -----------------------------------
OVERVIEW
On April 7, 1999, NetNation acquired 100% of the Canadian Subsidiary. Prior to
the acquisition, there were no significant business operations. In accordance
with generally accepted accounting principles this transaction was accounted for
as a recapitalization of the Canadian Subsidiary, as if it issued stock for
consideration equal to the net monetary assets of NetNation. Accordingly, the
results from the Canadian Subsidiary are presented as the prior period
comparative information of the consolidated companies.
For the year ended December 31, 2000, NetNation had revenue of $5,011,859,
representing an increase of 100% over the previous year. Since inception,
NetNation has focused on maximizing the growth of its customer base and
expanding the range of services and products offered.
Prior to April 1999, NetNation did not raise significant external equity or debt
to assist in growth. Historically, NetNation has reinvested all excess cash
flow in order to maximize growth. The majority of any surplus funds were
invested in expanded marketing activities, particularly advertising since
advertising has been NetNation's prime driver of new business and has
consistently proven its ability to generate revenue growth and new customers.
On April 7, 1999, NetNation raised $0.9 million through the issuance of common
shares. On April 12, 1999, NetNation raised a further $1.1 million of
convertible debt financing which was subsequently converted to common shares on
February 18, 2000. On March 3, 2000, NetNation raised $2.5 million through the
issuance of common shares.
28
SELECTED FINANCIAL DATA
===========================================================================
Years ended December 31,
2000 1999 1998
- ---------------------------------------------------------------------------
Sales $ 5,011,859 $ 2,511,021 $1,108,430
Gross profit 3,199,603 1,799,065 687,191
Expenses
Sales & marketing 2,977,927 1,575,699 461,913
General & admin. 3,352,296 1,472,687 303,400
Depreciation 340,977 95,445 31,428
Write-off of intellectual
property 500,000 -- --
Net loss 3,971,597 1,344,766 124,677
Loss per share $ 0.26 $ 0.10 $ 0.01
Weighted average number 15,316,804 13,164,836 9,692,030
of common shares
Total assets $ 3,130,828 $ 1,518,165 $ 177,359
Debentures payable $ -- 1,100,000 $ --
Cash generated by (used for)
Operating activities $(1,123,555) $ (604,773) $ 94,177
Investing activities (1,514,787) (435,922) (86,590)
Financing activities 2,399,010 1,982,909 (4,734)
===========================================================================
29
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATION
- -------------
OPERATING RESULTS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Revenue
NetNation's 2000 revenue was generated from providing web hosting services to
SMEs and domain name registration. Also included in revenue were co-located
server services; during the year 2000, however, these were relatively minor
contributors. NetNation's web hosting customers normally pay a set-up fee and
regular charges, either monthly, quarterly or annually, thereafter. There are a
variety of hosting packages offered by NetNation in addition to a number of
value-added services and products, to enable customers to easily select and
modify a solution that precisely meets their individual requirements.
NetNation's 2000 revenues were derived from Web Hosting (72%), Domain Name
Registration services (26%), and Server Co-Location (2%). As at December 31,
2000, NetNation had registered approximately 150,000 Internet domain names and
was hosting more than 16,000 web-sites. NetNation's products and services are
sold worldwide, directly to customers and through VARs (Value Added Resellers).
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 and related material
indicates that the fair value of initial set-up fees should be recognized over
the estimated period of service. The Company's contracts generally include such
fees. The Company has determined the impact of SAB 101 and the resulting
cumulative adjustment of $597,950 has been recorded in the Company's financial
statements in the fourth quarter of 2000. The effect on first quarter 2000
results if the Company were to restate the previously reported results would be
that revenue and gross profit would decrease by $423,217 and the net loss would
increase by the same amount. The effect on second quarter 2000 results would be
that revenue and gross profit would decrease by $173,677 and the net loss would
increase by the same amount. The effect on the third quarter results would be
that revenue and gross profit would decrease by $21,764 and the net loss would
increase by the same amount.
NetNation's 2000 revenue of $5,011,859 was an increase of $2,500,838, or
100%, over 1999 revenue. During 2000, the number of sites hosted increased
approximately 60%, from 10,000 to 16,000, and the number of resellers in the
network grew approximately 60%. The growth in hosted sites and revenue
was entirely "organic" and resulted from a significant numbe of valuable
partnerships and reselling relationships established during the year.
Cost of Sales
Cost of sales increased $1,100,300 or 155% from 1999 and as a percentage of
revenues, increased from 28% to 36%. Part of the change as a percentage of
revenue was due to the effect of the SAB 101 adjustment in 2000 mentioned above.
The majority of cost of sales consists of personnel costs for the network
operations center and technical support and the costs to register domain names
for the Company's customers.
Sales and Marketing Expenses
Sales and marketing expenses rose $1,402,228, or 89%, from 1999, and as a
percentage of revenue, decreased from 63% to 59%. The increase was due to
higher expenditures on advertising and the increase in the number of personnel.
The largest single expenditure category in sales and marketing expenses
continues to be the advertising expenditures. Advertising, online and print, is
considered to be a significant driver of NetNation's web hosting business.
30
In March 2000, an equity financing was secured that allowed NetNation to further
increase advertising activities in support of its internal growth plan.
NetNation's advertising is focused in media where NetNation's advertising is
believed to best engage the attention of the target hosting market, small- and
medium-sized businesses.
General and Administrative Expenses
General and administrative expenses include expenditures on administrative
personnel, rent, general office costs, professional advisors and public
relations. In 2000, general and administrative expenses increased $1,879,609,
or 128%, over 1999, and as a percentage of revenue, increased from 59% to 67%.
The overall increase was due mainly to additional personnel, the amortization of
the deferred compensation expense, additional rent on the Company's expanded
office space, and increased legal costs.
The Company has set up a provision of $381,254 for the remaining lease payments
on the lease on the San Diego premises. As at December 1, 2000, the Company has
discontinued lease payments due to a number of circumstances. To date, the
landlord has not commenced legal action against the Company. Should the
landlord commence legal action against the Company, the outcome of the
proceedings is unknown. In the event of a favourable outcome, a gain will be
recognized.
Write-Off of Intellectual Property
In 2000, the Company made an unsuccessful attempt to acquire American Digital
Network ("ADN"), a company involved in the web-hosting, ISP, and Internet
services industry. As part of the planned acquisition, NetNation advanced ADN
$500,000 and received as security the intellectual property rights to the
eStoreManager software. The acquisition was terminated and NetNation has not
been able to recover its advanced funds and has taken possession of the
eStoreManager software. If ADN is unable to repay the advances, NetNation will
retain the full rights to the eStoreManager software. ADN has the option to
repurchase the software from NetNation at $500,000 plus 10% annual interest if
repurchased by February 10, 2001, $750,000 with no interest if repurchased by
May 10, 2001, and $1,500,000 with no interest if repurchased by August 10, 2001.
If the vendor decides to repurchase after February 10, 2001 and on or before
August 10, 2001, NetNation retains a non-exclusive rights to have a world-wide,
royalty-free, perpetual license to use, distribute, and reproduce the software.
As at March 16, 2001, ADN has not exercised its option to repurchase the
software. As the Company does not expect to recover the amounts advanced to
ADN, nor does it expect to make commercial use of the intellectual property
rights acquired, the Company has decided to write-off the amount advanced to
ADN.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Revenue
NetNation's 1999 revenue was generated from providing web hosting services to
SMEs and domain name registration. Also included in revenue was co-located
server services but for 1999 this was a relatively minor contributor.
NetNation's web hosting customers normally pay a set-up fee and regular charges,
either monthly, quarterly or annually, thereafter. There are a variety of
hosting packages offered by NetNation in addition to a number of value-added
services and products, to enable customers to easily select and modify a
solution that precisely meets their individual requirements.
NetNation's 1999 revenues were derived from Web Hosting (88%), Domain Name
Registration services (12%), and Server Co-Location (1%). As at December 31,
1999, NetNation had registered over 55,000 Internet domain names and was hosting
more than 10,000 web-sites. NetNation's products and services are sold
worldwide, directly to customers and through VARs (Value Added Resellers).
31
NetNation's 1999 revenue of $2,511,021 was an increase of $1,402,591, or 128%,
over 1998 revenue. During 1999, the number of sites hosted increased 117%, from
4,600 to over 10,000, and the number of resellers in the network grew 150%. The
growth in hosted sites and revenue was entirely "organic" and resulted from
a significant number of valuable partnerships and reselling relationships
established during the year.
Cost of Sales
Cost of sales increased $290,717 or 69% from 1998 and as a percentage of
revenues, decreased from 38% to 28%. The majority of cost of sales consists of
personnel costs for the network operations center and technical support.
Sales and Marketing Expenses
Sales and marketing expenses rose $1,113,786, or 241%, from 1998, and as a
percentage of revenue, increased from 42% to 63%. The significant majority of
sales and marketing expenses are comprised of advertising expenditures. In
fact, during 1999, 82% of non-personnel sales and marketing expenses were for
online and print advertising. Advertising, online and print, is considered to be
a significant driver of NetNation's web hosting business.
During 1998 expenditures were restricted on advertising to a level supported by
internal cash generation. In April 1999, an equity financing was secured which
allowed NetNation to increase advertising activities in support of its internal
growth plan. NetNation's advertising is focused in media where NetNation's
advertising is believed to best engage the attention of the target hosting
market, small- and medium-sized businesses.
General and Administrative Expenses
General and administrative expenses include expenditures on administrative
personnel, rent, general office costs, professional advisors and public
relations. In 1999, general and administrative expenses increased $1,169,287,
or 385%, over 1998, and as a percentage of revenue, increased from 27% to 59%.
The increase was due mainly to additional personnel and the additional costs of
professional advisors and public relations that are normally associated with
public companies.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1999, NetNation's strategy required funding growth through
internally-generated cash flows. During 1999, NetNation moved into the next
phase of its growth strategy by entering the public markets as an operating
company. NetNation was able to raise the capital required for the growth in
revenues during 1999 through private investment. NetNation's financing strategy
calls for a minimization of debt financing in favor of equity financing whenever
feasible.
On April 7, 1999, NetNation acquired all of the outstanding common and preferred
shares of the Canadian Subsidiary in exchange for 10,000,000 shares of
NetNation's common stock issued from treasury. These shares are subject to a 12
month hold period from April 7, 1999, in addition to volume restrictions on
resale that apply thereafter until April 7, 2001, and affiliate resale
restrictions that may apply. As part of the acquisition transaction, 1,000,000
shares of common stock were cancelled which had been held by an original
shareholder who was no longer involved in the operations of the company.
On April 12, 1999, after the acquisition of the Canadian Subsidiary, NetNation
raised $1,100,000 through the sale of two Series A Convertible Debentures,
both of which originally matured on September 30, 2000. Each debenture is
non-interest bearing and is convertible into 275,000 shares of common stock at a
rate of $2.00 per share. On February 18, 2000, the holders of the convertible
debentures exercised their option to convert the debentures to shares of common
stock. NetNation also raised $900,000 through a private placement of 450,000
shares of common stock at $2.00 per share.
32
During the summer of 1999, NetNation issued 60,000 shares to an unrelated
company in return for investor and public relations services.
On March 3, 2000, NetNation issued 250,000 common shares at $10 per share for
gross proceeds of $2,500,000. In addition, NetNation issued warrants entitling
the investors to purchase one additional share for every two shares they already
own. The warrants are exercisable during a two-year period at $12 per
additional share purchased. NetNation may require the exercise of the warrants
during this time period if certain financial conditions are met, in which case
NetNation will receive an additional $1,500,000 and will issue a further 125,000
shares of common stock.
In 2000, NetNation utilized net cash of $1,123,555 for operating activities
which includes a positive contribution of $1,895,503 from working capital items.
NetNation continued to build its brand in web hosting through increased
marketing expenditures included in the operating loss. NetNation also
established itself in the domain name registration business through the
incorporation of its wholly-owned subsidiary DomainPeople Inc. and the
associated marketing expenditures. NetNation continued to expand its data
center through investment in infrastructure. To fund these initiatives,
$2,348,942 was raised through the issuance of common stock and the Company
entered into leasing transactions of $51,565 for part of its capital
expenditures. At the end of 2000, the Company had $748,745 in cash and
equivalents.
In 1999, NetNation utilized net cash of $604,773 for operating activities which
includes a positive contribution of $252,490 from working capital items. In
addition to increased marketing expenditures included in the operating loss,
NetNation also set the stage for future growth by increasing investment in data
center and other equipment. To fund these expenditures, $1,100,000 was raised
through the issue of debentures and $932,211 through the issue of common stock.
At the end of 1999, the Company had $988,077 in cash and equivalents.
In 1998, NetNation generated sufficient cash from operations to fund capital
expenditures. NetNation did not raise significant equity or debt funding. Net
cash generated from operating activities was $94,177 in 1998.
OUTLOOK: ISSUES AND UNCERTAINTIES
Refer to "Risk Factors Affecting Future Operating Results" in this Form 10-K.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------
NetNation believes its exposure to overall foreign currency risk is immaterial.
NetNation does not manage or maintain market risk sensitive instruments for
trading or other purposes and is, therefore, not subject to multiple foreign
exchange rate exposures. As disclosed in Item 7, on February 24, 2000, the
holders of the convertible debentures exercised their option and converted all
of the debentures into common shares. After giving effect to this conversion,
the Company has no outstanding long-term indebtedness for which the Company is
subject to the risk of interest rate fluctuations.
NetNation reports its operations in US dollars and its currency exposure,
although considered by NetNation as immaterial, is primarily between the US and
Canadian dollars. Exposure to the currencies of other countries is also
immaterial as international transactions are settled in US dollars. Any future
financing undertaken by NetNation will be denominated in US dollars. As
NetNation increases its marketing efforts, the related expenses are basically in
US dollars except for the marketing efforts in the UK and Canada. If these
advertisements are coordinated through a US agency, then the expenses are in US
dollars.
33
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------------
The Consolidated Financial Statements of NetNation Communications Inc.,
including the Report of Independent Auditors, are set forth beginning on page
F-1.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following table sets forth selected unaudited quarterly information for
the Company's last eight fiscal quarters:
==========================================================================================
Fiscal 2000 Quarter End
-----------------------------------------------
March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------
Sales before cumulative adjustment (note) 1,414,732 1,423,387 1,390,814 1,380,876
Cumulative adjustment (note) (423,217) (173,677) (21,764) 20,708
Sales after cumulative adjustment (note) 991,515 1,249,710 1,369,050 1,401,584
Gross profit. 590,823 750,596 880,241 977,943
Net loss for the period 582,302 635,191 1,067,571 1,686,533
Net loss per share 0.04 0.04 0.07 0.11
==========================================================================================
==========================================================================================
Fiscal 1999 Quarter End
-----------------------------------------------
March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------
Sales 425,891 484,308 606,601 994,221
Gross profit 306,435 336,888 432,000 723,742
Net loss 909 273,900 495,382 574,575
Net loss per share 0.00 0.03 0.05 0.02
Footnote: The fourth quarter of 2000 includes a cumulative adjustment of a
reduction in revenue and income of $597,950 for a change in accounting policy.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- ---------------------
No changes in and disagreements with accountants are reportable pursuant to this
item.
34
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------------
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information regarding the members of the Board of
Directors and the Executive Officers of the Company as of the Record Date:
Name Age Position(s)
- --------------- --- ----------------------------------------
David Talmor 43 Chairman, President and Director
- --------------- --- ----------------------------------------
Joseph Kibur 28 CEO and Director
- --------------- --- ----------------------------------------
Ernest Cheung 50 Director
- --------------- --- ----------------------------------------
Anil Wirasekara 44 Director
- --------------- --- ----------------------------------------
Calvin Mah 38 CFO
- --------------- --- ----------------------------------------
Jag Gill 31 General Counsel, Secretary and Director
- --------------- --- ----------------------------------------
All of the officers identified above serve at the discretion of the Board and
have consented to act as officers of the Company. The biographies for the above
individuals are presented below:
DAVID TALMOR is Chairman of the Board and President of NetNation Communications,
Inc., Delaware, U.S.A. Mr. Talmor was Chief Executive Officer of the Company
until January 2000. Previously, he was appointed Chairman of the Board,
President, Chief Executive Officer and Secretary of NetNation Communications,
Inc., Delaware, U.S.A., in April 1999. From March 1997 to April 1999, Mr.
Talmor served as Director, Chief Executive Officer and President of the Canadian
subsidiary of NetNation Communications, Inc. Mr. Talmor has over 15 years of
business experience, both in Financial/Business roles (more recently), and in
Electronics Engineering roles (Israeli Air Force, Eldat and Moldat). From 1996
to 1997, he was President of Minerva Ventures Management, Richmond, British
Columbia, Canada, investigating suitable technological companies as investment
and acquisition candidates. From 1994 to 1995, he was Business Development
Manager of MacDonald Dettwiler & Associates Ltd., Richmond, British Columbia,
Canada, (www.mda.ca), a Canadian company in the field of satellites' ground
stations. Mr. Talmor qualified as a Certified Public Accountant (CPA) in Israel
with Kesselman & Kesselman, Chartered Accountants, the country's largest
accounting firm and associated with Coopers & Lybrand. Mr. Talmor received a BA
in Economics and Accounting, a B.Sc. in Statistics and an MBA, all from Tel-Aviv
University in 1985, 1985 and 1988 respectively. In addition, Mr. Talmor
received an Electronics Diploma from both "The Technological Institute of
Tel-Aviv" in 1976 and from "The Israeli Air-Force", IDF in 1978.
JOSEPH KIBUR was appointed Chief Executive Officer of NetNation Communications,
Inc., Delaware, U.S.A. in September 2000. He was appointed a Director and Chief
Operating Officer of NetNation Communications, Inc., Delaware, U.S.A., in April
1999. From March 1997 to April 1999, he served as Director, Chief Operating
Officer and Secretary of the Canadian Subsidiary of NetNation Communications,
Inc. From 1995 to 1997 Mr. Kibur operated his own Internet consulting business
(Superhighway Consulting, Vancouver, British Columbia, Canada) until he
co-founded the Canadian Subsidiary of NetNation Communications, Inc. with Mr.
David Talmor. Prior, Mr. Kibur attended Simon Fraser University, Burnaby,
British Columbia, Canada, and in 1996 obtained his Bachelor of Science (B.Sc.)
degree in Management and Systems Science (Computer Science, Business and
Mathematics).
ERNEST CHEUNG has served as Director of NetNation Communications, Inc.,
Delaware, since February 1999. Mr. Cheung received an MBA in Finance and
Marketing from Queen's University, in Kingston, Ontario in 1975, and obtained
a Bachelors Degree in Math in 1973 from University of Waterloo, Ontario.
From 1984 to 1991 he was Vice President and Director, Capital Group Securities,
Ltd. in Toronto, Canada. From 1991 to 1993 he was Vice President of Midland
Walwyn Capital, Inc. of Toronto, Canada. From 1993 to 1994 he was Vice Chairman,
Tele Pacific International Communications Corp. of Vancouver, B.C. He has
served or served as a director of the following companies:
35
Name of Issuer Symbol Market Position From To
- -------------------------------- ------ ----------------- ---------- ------- -------
Agro International Holdings Inc. AOH CDNX President Jan-97 Current
BIT Integration Technology Inc. BGT CDNX VP Finance Feb-96 Jun-97
China NetTV Holdings Inc.* CNHD OTCBB President May-00 Current
Drucker, Inc.*. DKIN OTCBB Secretary Apr-97 Current
Global-Pacific Minerals Inc. GPJ TSE, CDNX Mar-97 Current
ITI World Investment Group Inc. IWI.A CDNX Jun-98 Current
NetNation Communications Inc. NNCI Nasdaq Small Cap. Apr-99 Current
Pacific E-Link Corp. PLC CDNX Sep-92 Jun-95
Richco Investors Inc. YRU.A CDNX President May-95 Current
SpeechLink Communications Corp SLCC NASD Pink Sheet May-98 Current
Spur Ventures Inc. SVU CDNX Mar-97 Current
Xin Net Corp.* XNET OTCBB Secretary Mar-97 Current
* Reporting Companies in US
ANIL WIRASEKARA has served as Director of NetNation Communications, Inc.,
Delaware, since October 1999. In 1992, Mr. Wirasekara joined MacDonald
Dettwiler and Associates Ltd., one of Canada's largest space technology and
information systems companies and a world leader in satellite mapping and
spatial information services, as the Manager of Operations Accounting and
Information, and in 1995 was appointed Chief Financial Officer. From 1988 to
1991, he was Controller and Secretary of Rainex Limited, a Vancouver company
involved in project developments, technology transfers and international trade.
Mr. Wirasekara holds the designations of a Chartered Accountant and Certified
Management Accountant. Mr. Wirasekara is also a member of the Chartered
Institute of Management Accountants of the U.K., the Chartered Institute of
Marketing and Management of the U.K. and the Institute of Chartered Accountants
of Sri Lanka.
CALVIN MAH was appointed Chief Financial Officer of NetNation Communications,
Inc. in February 2001. Prior to joining NetNation, from 1996 to 2000, Mr. Mah
was CFO of Simba Technologies Inc., a privately-held, venture-backed software
development company. In 1995-96, Mr. Mah was Senior Financial Analyst for
Pacific Forest Products Ltd., a $400 million publicly-traded logging and
sawmilling company with 1,100 employees. In 1993-95, Mr. Mah was Controller
of Brookdale International Systems Inc., a privately held developer and
manufacturer of emergency respiratory devices for industrial and consumer use.
From 1989 to 1993, Mr. Mah was Manager of Corporate Finance for Granges Inc., a
$60 million publicly-traded gold, silver, copper and zinc mining company with
operations in the U.S. and Canada. Mr. Mah is professionally qualified as a
Chartered Accountant. He graduated with a Bachelor of Commerce in Accounting
and Management Information Systems (Honours) from the University of British
Columbia in 1985.
JAG GILL was appointed General Counsel of NetNation Communications, Inc. in July
1999. During May 1997 to July 1999, Mr. Gill articled with Baker Newby,
Abbotsford and became Associate Solicitor prior to joining NetNation. Mr. Gill
attended Osgoode Hall Law School, York University, Toronto Ontario and graduated
with a Bachelor of Laws in 1997. He received his Bachelor of Arts in Economics
in 1993 from the University of Victoria in Canada.
Relationships Among Directors or Executive Officers
There are no family relationships among any of the directors or executive
officers of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's Directors, executive officers and persons who own more than 10% of a
registered class of the Company's securities to file with the SEC initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Directors, executive officers and
greater-than-10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) reports they file.
36
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, the Company believes that during the year ended December
31, 2000, its Directors, Executive Officers and greater-than-10% stockholders
complied with all Section 16(a) filing requirements.
ITEM 11: EXECUTIVE COMPENSATION
- ---------------------------------
SUMMARY COMPENSATION TABLE
The following table discloses all plan and non-plan compensation awarded to,
earned by, or paid to the Chief Executive Officer ("CEO") or individual acting
in a similar capacity, and the four most highly compensated executive officers
for the year ended December 31, 2000. The table includes executive compensation
paid to the principals of the Canadian Subsidiary prior to it being acquired by
the Company.
Annual Compensation Long Term Compensation
------------------------------------------ ----------------------------------
Awards Payouts
------------------------ --------
Restricted
Shares Securities
Or Under
Restricted Options/
Name and Other Share SARs LTIP
Principal Year Salary Bonus Annual Units Granted Payouts
Position *** (USD$) ($) Compensation ($) ($) (#) ($)
(a) (b) (c) (d) (e) (f) (g) (h)
- ----------------------------------------------------------------------------------------------------
David Talmor, 2000 105,348
Chairman, President, 1999** 109,029 - - - - -
and Director **** 1998* 56,395 - - - - -
* Compensation in 1998 precedes the acquisition of the Canadian Subsidiary by
the Company, and accordingly the Principal Position and compensation
columns relate to payments made by the Canadian Subsidiary and not the
Company.
** As the acquisition of the Canadian Subsidiary by the Company occurred on
April 7, 1999, the Principal Position and compensation prior to this relate
to payments made by the Canadian Subsidiary and not the Company. Payments
of $36,000 were made by the Canadian Subsidiary to David Talmor with the
remainder of the compensation for 1999 being paid by the Company.
*** The Company's fiscal year end was changed to December 31, in order to match
the fiscal year end of the Canadian Subsidiary. The information in the
above table is presented as at December 31 for each of the relevant years.
OPTION/SAR GRANTS OR EXERCISES AND LONG TERM INCENTIVE PLAN
There were no stock option grants, stock appreciation rights (SAR's) grants,
option/SAR exercises or long term incentive plans (LTIP's) awarded to the named
executive officers in the last three financial years.
37
DEFINED BENEFIT OF ACTUARIAL PLAN
The Company does not have a defined benefit or actuarial plan in place.
COMPENSATION OF DIRECTORS
Directors are not compensated for their service as directors other than with
stock options. All directors are reimbursed for any reasonable expenses
incurred in the course of fulfilling their duties as a director of the Company.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
There are currently no employment contracts in place with the executive officers
of the Company other than the standard employment agreements used for all
employees. The Company intends to review its contracts with certain key
individuals, including the rights and obligations of the Company upon the
resignation of an officer, or upon a change in control of the Company.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are Mr. Cheung Mr. Wirasekara. All of
the members of the committees are directors of the Company.
Board Compensation Committee Report on Executive Compensation
The Board Compensation Committee was formed March 2000. The board has not
prepared a report on executive compensation at this time. As at March 16, 2001,
no policies have been defined with respect to compensation for executive
officers by the committee.
38
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Company's common stock with the cumulative total return on The Nasdaq Composite
Index and The Nasdaq Telecommunications Index. These two indices have been
chosen for their relevance in assessing the performance of the Company against
that of companies in the same or similar lines of business. The period
displayed commences on September 30, 1999, being the end of the month date that
the Company's common stock became registered under Section 12 of the Securities
Exchange Act of 1934, as amended. The graph assumes an investment of $100 on
September 30, 1999, and the reinvestment of any dividends.
[ PERFORMANCE GRAPH
Comparison of Cumulative Total Return to Stockholders
September 30, 1999 to December 31, 2000 ]
- ----------------------------------------------------------
NetNation Nasdaq Nasdaq
Communications Composite Telecom
Inc. Index Index
- ----------------------------------------------------------
September 30, 1999 $100.00 $100.00 $ 100.00
October 31, 1999 $103.13 $108.02 $ 118.69
November 30, 1999 $109.38 $121.48 $ 131.39
December 31, 1999 $115.63 $148.18 $ 162.52
January 31, 2000 $231.25 $143.49 $ 158.04
February 28, 2000 $294.53 $171.03 $ 182.64
March 31, 2000 $299.61 $166.52 $ 176.38
April 30, 2000 $181.25 $140.58 $ 142.53
May 31, 2000 $121.88 $123.84 $ 120.81
June 30, 2000 $110.94 $144.42 $ 139.36
July 31, 2000 $128.13 $137.17 $ 128.26
August 31, 2000 $100.00 $153.17 $ 133.09
September 30, 2000 $ 96.88 $133.74 $ 116.83
October 31, 2000 $ 75.78 $122.70 $ 99.89
November 30, 2000 $ 71.88 $ 94.60 $ 74.16
December 31, 2000 $ 75.00 $ 89.96 $ 74.18
39
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of March 16, 2001 by
(i) each person or entity known by the Company to beneficially own more
than 5% of the common stock;
(ii) each Director of the Company;
(iii) each of the named Executive Officers of the Company; and
(iv) all Directors and executive officers as a group.
Except as noted below, the Company believes that the beneficial owners of the
common stock listed below, based on information furnished by such owners, have
sole voting and investment power with respect to such shares.
- -------------- ---------------------------------------- -------------------- -------------------
Name and Address Amount of Beneficial
Title of Class Of Beneficial Owner Ownership Percent of Class(2)
- -------------- ---------------------------------------- -------------------- -------------------
David Talmor(3)
Common Chairman, President, and Director 4,187,000(1) 27.49%
- -------------- ---------------------------------------- -------------------- -------------------
Joseph Kibur(3)
Common CEO and Director 4,267,000 28.01%
- -------------- ---------------------------------------- -------------------- -------------------
Ernest Cheung
Director
830-789 West Pender Street,
Common Vancouver, British Columbia, V6C 1H2 0 0%
- -------------- ---------------------------------------- -------------------- -------------------
Jag Gill(3)
General Counsel and Secretary and
Common Director 36,000 0.24%
- -------------- ---------------------------------------- -------------------- -------------------
Calvin Mah(3)
Common CFO 0 0%
- -------------- ---------------------------------------- -------------------- -------------------
Anil Wirasekara
Director
13800 Commerce Parkway, Richmond,
Common British Columbia, V6V 2J3 0 0%
- -------------- ---------------------------------------- -------------------- -------------------
All Executive Officers and Directors as
Common a Group (6 persons) 8,490,000 55.74%
- -------------- ---------------------------------------- -------------------- -------------------
1 2,093,500 common shares beneficially held by David Talmor are registered in the name of Shelley
Talmor, wife.
2 Based on a total issued and outstanding share capital as at March 16, 2001 of 15,232,321 common
shares.
3 The business address for the individuals indicated above is : 1410 - 555 West Hastings Street,
Vancouver, British Columbia, Canada, V6B 4N6.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------------------------------------------------------------
No transactions with management or other parties occurred during the year that
would otherwise be reported under this section.
40
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------
1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and the notes
thereto, the related reports thereon of the independent certified public
accountants, and financial statement schedules, are filed pursuant to Item 8 of
this Report:
Description Page
- ----------- ----
Independent Auditors' Report dated March 7, 2001 F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statement of Stockholders' Equity (Deficiency) for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
2) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter of
2000.
3) LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 ** Agreement dated March 31, 1999 between the shareholders of NetNation (The
Canadian Subsidiary), NetNation (The Canadian Subsidiary), and NetNation
(formerly Collectibles Entertainment Inc.)
3.1 ** Articles of Incorporation
3.2 ** By-laws
4.1 ** Convertible Debenture for $550,000 Maturing on September 30, 2000 issued
to Polaris Investitionen Ltd.
4.2 ** Convertible Debenture for $550,000 Maturing on September 30, 2000 issued
to Beste Investitionen Ltd.
21 List of Subsidiaries
** Incorporated by reference from the Registration Statement on Form 10 of
the Registrant filed with the Securities and Exchange Commission on July
29, 1999, as amended.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NETNATION COMMUNICATIONS INC.
By:/s/ Joseph Kibur
------------------
Name: Joseph Kibur
Title: Chief Executive Officer
Dated: March 29, 2001.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
By:/s/ David Talmor President and Chairman of the Board and March 29, 2001
- ----------------------
Name: David Talmor Director
By:/s/ Joseph Kibur Chief Executive Officer and Director March 29, 2001
- ----------------------
Name: Joseph Kibur (Principal Executive Officer)
By:/s/ Jag Gill General Counsel and Secretary and Director March 29, 2001
- ----------------------
Name: Jag Gill
By:/s/ Anil Wirasekara Director March 29, 2001
- ----------------------
Name: Anil Wirasekara
By:/s/ Ernest Cheung Director March 29, 2001
- ----------------------
Name: Ernest Cheung
By:/s/ Calvin Mah Chief Financial Officer March 29, 2001
- ----------------------
Name: Calvin Mah (Principal Accounting Officer)
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description Page
- ----------- ----
Independent Auditors' Report dated March 7, 2001 F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2000, 1999 and 1998 F-3
Consolidated Statement of Stockholders' Equity (Deficiency) for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
43
AUDITORS' REPORT TO THE STOCKHOLDERS
We have audited the consolidated balance sheets of NetNation Communications Inc.
as at December 31, 2000 and 1999, and the consolidated statements of operations
and comprehensive loss, stockholders' equity (deficiency) and cash flows for the
years ended December 31, 2000, 1999 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2000
and 1999, and the results of its operations and its cash flows for the years
ended December 31, 2000, 1999 and 1998 in accordance with generally accepted
accounting principles in the United States of America.
/s/ Chartered Accountants
Vancouver, Canada
March 7, 2001
F-1
NETNATION COMMUNICATIONS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
December 31, 2000 and 1999
=================================================================================================
2000 1999
- -------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 748,745 $ 988,077
Accounts receivable 33,208 10,961
Prepaid expenses and deposits 131,879 63,208
Deferred expenses 541,000 -
- -------------------------------------------------------------------------------------------------
1,454,832 1,062,246
Deferred expenses, non current portion 125,044 -
Fixed assets, net of accumulated depreciation of $471,391
(1999 - $134,885) (note 4) 1,450,952 455,919
Investments (note 5) 100,000 -
- -------------------------------------------------------------------------------------------------
$ 3,130,828 $ 1,518,165
=================================================================================================
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable and accrued liabilities $ 593,518 $ 189,146
Contingent lease payments (note 11(a)) 381,254 -
Customer deposits 64,517 -
Deferred revenue 1,901,042 400,007
Capital lease liability (note 8) 13,867 -
Debentures payable (note 6) - 1,100,000
- -------------------------------------------------------------------------------------------------
2,954,198 1,689,153
Deferred revenue, non current portion 301,287 -
Capital lease liability, non current portion (note 8) 37,698 -
Stockholders' equity (deficiency):
Share capital (note 7):
Authorized: 50,000,000 common shares with a par value of
$0.0001 each
Issued: 15,310,321 common shares, and 5,000 to be issued shares 1,532 1,461
Additional paid-in capital (notes 7(b) and 7(c)) 5,970,896 2,339,471
Deferred stock-based compensation (666,732) (1,015,466)
Accumulated other comprehensive income 14,601 14,601
Deficit (5,482,652) (1,511,055)
- -------------------------------------------------------------------------------------------------
(162,355) (170,988)
- -------------------------------------------------------------------------------------------------
$ 3,130,828 $ 1,518,165
=================================================================================================
Commitment (note 8)
Contingencies (note 11)
Subsequent events (note 12)
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
/s/ Joseph Kibur Director /s/ David Talmor Director
- ------------------------------ ------------------------------
F-2
NETNATION COMMUNICATIONS INC.
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in United States dollars)
==================================================================================
Years ended December 31,
---------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------
Sales $ 5,011,859 $ 2,511,021 $1,108,430
Cost of sales 1,812,256 711,956 421,239
- ----------------------------------------------------------------------------------
Gross profit 3,199,603 1,799,065 687,191
Expenses:
Sales and marketing 2,977,927 1,575,699 461,913
General and administration 3,352,296 1,472,687 303,400
Write-off of intellectual property (note 3) 500,000 - -
Depreciation and amortization 340,977 95,445 31,428
- ----------------------------------------------------------------------------------
7,171,200 3,143,831 796,741
- ----------------------------------------------------------------------------------
Loss for the year 3,971,597 1,344,766 109,550
Other comprehensive income (loss):
Foreign currency translation adjustments - - (15,127)
- ----------------------------------------------------------------------------------
Comprehensive loss $ 3,971,597 $ 1,344,766 $ 124,677
==================================================================================
Loss per share, basic and diluted $ 0.26 $ 0.10 $ 0.01
==================================================================================
Weighted average shares used in comparing
loss per share, basic and diluted 15,316,804 13,164,836 9,692,030
==================================================================================
See accompanying notes to consolidated financial statements.
F-3
NETNATION COMMUNICATIONS INC.
Consolidated Statement of Stockholders' Equity (Deficiency)
(Expressed in United States dollars)
==================================================================================================================================
Deferred Accumulated
Additional stock- other
paid-in based comprehensive
Shares Amount capital compensation income Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------------
$ $ $ $ $ $
Balance at December 31, 1997 - - - - (526) (19,423) (19,949)
Issuance of common stock for cash 1,097,000 110 29,590 - - - 29,700
Foreign exchange gain - - - - 15,127 - 15,127
Excess of cost over carrying value of
common stock redeemed and cancelled - - - - - (37,316) (37,316)
Loss for the year - - - - - (109,550) (109,550)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,097,000 110 29,590 - 14,601 (166,289) (121,988)
Issuance of common stock for cash 4,000,000 400 39,600 - - - 40,000
Common stock cancelled in conjunction
with the recapitalization (1,000,000) - - - - - -
Adjustment in accordance with
recapitalization accounting
principles - (100) (62,864) - - - (62,964)
Common stock issued to effect the
recapitalization 10,000,000 1,000 25,672 - - - 26,672
Issuance of common stock for cash 450,000 45 899,955 - - - 900,000
Issuance of common stock for services
provided to the Company 60,000 6 266,394 - - - 266,400
Deferred stock-based compensation - - 1,141,124 (1,141,124) - - -
Amortization of deferred stock-based
compensation - - - 125,658 - - 125,658
Loss for the year - - - - - (1,344,766) (1,344,766)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 14,607,000 1,461 2,339,471 (1,015,466) 14,601 (1,511,055) (170,988)
Conversion of debentures to common
stock 550,000 55 1,099,945 - - - 1,100,000
Cash proceeds from private placement of
common stock, net of offering costs 250,000 25 2,348,437 - - - 2,348,462
Deferred stock-based compensation - - (12,829) 12,829 - - -
Amortization of deferred stock-based
compensation - - - 432,785 - - 432,785
Issuance of common stock to settle
share issue costs 5,000 1 49,999 - - - 50,000
Issuance of common stock for cash 48,000 4 97,356 (96,880) - - 480
Common shares to be issued 5,000 1 49,999 - - - 50,000
Cancellation of common stock (149,679) (15) (1,482) - - - (1,497)
Loss for the year - - - - - (3,971,597) (3,971,597)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 15,315,321 1,532 5,970,896 (666,732) 14,601 (5,482,652) (162,355)
==================================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
NETNATION COMMUNICATIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
=============================================================================================
Years ended December 31,
---------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Cash flows from operating activities:
Loss for the year $(3,971,597) $(1,344,766) $(109,550)
Items not involving cash:
Depreciation and amortization 340,977 95,445 31,428
Value assigned to shares issued for services - 266,400 -
Value assigned to shares issued in settlement
of share issue costs 50,000 - -
Value assigned to shares to be issued for
settlement of share issue costs 50,000 - -
Employee stock-based compensation 432,785 125,658 -
Loss on disposal of fixed asset 78,777 - -
Changes in non-cash operating working capital:
Accounts receivable (22,247) 1,674 (7,324)
Prepaid expenses and deposits (68,671) (59,789) 437
Deferred expenses (666,044) - -
Accounts payable and accrued liabilities 404,372 91,346 53,514
Contingent lease payments 381,254 - -
Customer deposits 64,517 - -
Deferred revenue 1,802,322 219,259 125,672
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,123,555) (604,773) 94,177
Cash flows from investing activities:
Purchase of fixed assets (1,414,787) (435,922) (91,327)
Purchase of investments (100,000) - -
Proceeds on disposal of fixed assets - - 4,737
- ---------------------------------------------------------------------------------------------
Net cash used for investing activities (1,514,787) (435,922) (86,590)
Cash flows from financing activities:
Redemption of capital - (49,302) (5,860)
Issue of debentures - 1,100,000 -
Lease financing 51,565 - -
Issue of share capital, net of share issue costs 2,348,942 932,211 1,126
Cancellation of shares (1,497) - -
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,399,010 1,982,909 (4,734)
Effect of exchange rates on cash and cash equivalents - - 15,127
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (239,332) 942,214 17,980
Cash and cash equivalents, beginning of period 988,077 45,863 27,883
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 748,745 $ 988,077 $ 45,863
=============================================================================================
Supplementary information:
Cash paid for:
Interest $ 2,350 $ - $ 6,934
Income taxes - 959 -
Non-cash transactions:
Shares issued to third parties for services 100,000 266,400 -
Conversion of debentures to common stock 1,100,000 - -
Shares issued to employees for services - 1,141,124 -
=============================================================================================
See accompanying notes to consolidated financial statements.
F-5
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
1. DESCRIPTION OF BUSINESS:
NetNation Communications Inc. (the "Company") was incorporated on May 7,
1998 under the laws of the State of Delaware as Collectibles Entertainment
Inc. ("Collectibles").
On April 7, 1999, Collectibles acquired all of the outstanding common
shares of NetNation Communications Inc. ("NetNation Canada"). As
Collectibles was inactive at the time of the transaction, this issuance was
accounted for as a capital transaction of NetNation Canada, effectively as
if NetNation Canada issued common shares to acquire the net monetary assets
of Collectibles followed by a recapitalization. From April 7, 1999, the
results of NetNation Canada are included on a consolidated basis with those
of Collectibles. Subsequent to the transaction, Collectibles changed its
name to NetNation Communications Inc.
On November 24, 1999, DomainPeople Inc. ("DomainPeople"), a wholly-owned
subsidiary of NetNation, was incorporated under the laws of the State of
Delaware and was formed to offer domain name registration and related
services. DomainPeople is accredited by the Internet Corporation for
Assigned Names and Numbers, the regulatory body charged with administering
accreditation, as a registrar for top-level domain names.
The Company's principal business activities are the provision of web-site
hosting, domain name registration, and related services to small and medium
sized businesses.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries, NetNation Communications Inc.,
NetNation Communications (UK) Inc., NetNation Communications (USA)
Inc., and DomainPeople Inc. All material intercompany balances and
transactions have been eliminated.
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States of America. Through December 31, 1998, the Company's
consolidated financial statements were presented in accordance with
generally accepted accounting principles in Canada. The application of
United States accounting principles to these consolidated financial
statements has been made on a retroactive basis. For the year ended
December 31, 1998 there were no material differences previously
reported to the Company's consolidated financial statements arising
from differences between generally accepted accounting principles in
Canada and the United States.
F-6
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Cash and cash equivalents:
Cash and cash equivalents include highly liquid investments, such as
term deposits, having terms to maturity of three months or less when
acquired that are readily convertible to contracted amounts of cash.
(c) Fixed assets:
Fixed assets are stated at cost less accumulated depreciation.
Depreciation is computed annually as follows:
======================================================
Assets Basis Rate
- ------------------------------------------------------
Computer hardware declining-balance 30%
Computer software declining-balance 30%
Furniture declining-balance 20%
Office equipment declining-balance 30%
Leasehold improvements straight-line lease term
======================================================
The Company performs reviews for the impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss is
recognized when estimates of undiscounted future cash flows expected
to result from the use of an asset and its eventual disposition are
less than its carrying amount. When such a difference arises, the
impairment loss is calculated as the excess of the carrying value over
the asset's fair value. No such impairment losses have been identified
by the Company for the years ended December 31, 2000, 1999 and 1998.
(d) Investments:
The Company has an investment in a non-publicly traded company in
which it has less than 20% of the voting rights and in which it does
not exercise significant influence. This investment is carried at
cost. The Company monitors this investment for impairment, and makes
appropriate reductions in carrying value when necessary.
(e) Advertising costs:
Advertising costs are expensed as incurred and totaled $1,750,415,
$1,271,350 and $348,069 during the years ended December 31, 2000, 1999
and 1998, respectively.
F-7
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) Revenue recognition:
Revenue is recognized as web-site hosting, domain name and related
services are provided. Revenue from web-site hosting set-up fees is
recognized over the estimated period the hosting services are provided
to customers, which is typically 12 months. Domain name registration
and maintenance revenue is recognized ratably over the contract term
which is between one and ten years.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 and
related material indicates that the fair value of initial set-up fees
should be recognized over the estimated period of service. The
Company's contracts generally include such fees. The Company has
determined the impact of SAB 101 and the resulting cumulative
adjustment of $597,950 has been recorded in the Company's financial
statements in the fourth quarter of 2000.
(g) Deferred expense:
The cost of acquiring domain names is deferred and amortized in
conjunction with the recognition of domain name registration and
maintenance revenue.
(h) Stock-based compensation:
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations, in accounting for awards of common stock granted to
employees. Deferred stock-based compensation is recorded at the
measurement date, which is generally the date of grant, when the
market value of the underlying common stock exceeds the exercise price
for stock options or the purchase price for the shares of common
stock. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
Non-employee options are accounted for under SFAS 123 and recognized
at the fair value of the options as determined by an option pricing
model as the related services are provided.
F-8
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(i) Use of estimates and assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at
the date of the financial statements and the reported amounts of
revenue and expenses during the period then ended. Actual results may
differ from these estimates.
(j) Fair value of financial instruments:
Carrying values of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable, capital
lease liability and accrued liabilities approximate fair value due to
their short terms to maturity.
(k) Translation of foreign currencies:
The Company's functional and reporting currency is the United States
dollar. Transactions undertaken in a currency other than the United
States dollar are remeasured into United States dollars using exchange
rates at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are remeasured at each balance sheet
date at the exchange rate prevailing at the balance sheet date. Gains
and losses arising on remeasurement or settlement of foreign currency
denominated transactions or balances are included in the determination
of income.
The foreign currency financial statements of integrated subsidiaries
are translated into United States dollars using the temporal method.
Under this method, monetary assets and liabilities are translated
At the exchange rates in effect at the balance sheet date and
non-monetary items are translated at the exchange rates in effect on
transaction dates. Revenue and expense items, except amortization, are
translated at average exchange rates for the period, and amortization
is translated at the same exchange rate as the asset to which it
relates. Exchange gains and losses resulting from the translation of
foreign currency financial statements of integrated subsidiaries are
recognized in income.
(l) Income taxes:
The Company provides for income taxes under the asset and liability
method. Deferred tax liabilities and assets are recognized for the
estimated future tax consequences of differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date. To the extent that realization of deferred tax assets cannot be
considered to be more likely than not, a valuation allowance is
recognized for the excess.
F-9
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(m) Comprehensive income (loss):
The Company reports comprehensive income (loss), which includes net
earnings as well as changes in equity from other non-owner sources,
specifically the foreign currency translation adjustment.
(n) Loss per share:
Loss per share is calculated in accordance with SFAS No. 128,
"Earnings per Share". Under SFAS No. 128, basic net loss per share is
computed using the weighted-average number of outstanding shares of
common stock, excluding common stock subject to repurchase. Diluted
net loss per share is computed using the weighted-average number of
outstanding shares of common stock and, when dilutive, potential
common shares from options and warrants to purchase common stock and
common stock subject to repurchase using the treasury stock method,
and from convertible securities using the as-if converted basis. All
potential common shares have been excluded from the computation of
diluted net loss per share for all periods presented because the
effect would have been anti-dilutive.
(o) Recent accounting pronouncements:
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which established standards relating to the
recognition and disclosure of all aspects of derivative instruments
and hedging activities. To date, the Company has not engaged in
hedging activities. Accordingly, the Company has evaluated the impact
of adopting SFAS 133 and determined that it will not have a material
effect on its financial position, results of operations or cash flows.
The Company will implement SFAS No. 133 in its fiscal year ending
December 31, 2001.
(p) Comparative figures:
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
F-10
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
3. WRITE-OFF OF INTELLECTUAL PROPERTY:
In 2000, the Company made an unsuccessful attempt to acquire American
Digital Network ("ADN"), a company involved in the web-hosting, ISP, and
internet services industry. As part of the planned acquisition, NetNation
advanced to ADN a total of $500,000, and received as security the
intellectual property rights to the eStoreManager software. The acquisition
was terminated and NetNation has not been able to recover its advanced
funds, and has taken possession of the eStoreManager software. If ADN is
unable to repay the advances, NetNation will retain the full rights to the
eStoreManager software. ADN has the option to repurchase the software from
NetNation at $500,000 plus 10% annual interest if repurchased by February
10, 2001, $750,000 with no interest if repurchased by May 10, 2001, and
$1,500,000 with no interest if repurchased by August 10, 2001. If the
vendor decides to repurchase after February 10, 2001 and on or before
August 10, 2001, NetNation retains a non-exclusive rights to have
a worldwide, royalty-free, perpetual license to use, distribute, and
reproduce the software. To date, ADN has not exercised its option to
repurchase the software.
As the Company does not expect to recover the amount advanced to ADN, nor
does it expect to make commercial use of the intellectual property rights
acquired, the Company has decided to write-off the amount advanced to ADN.
4. FIXED ASSETS:
=============================================================
Accumulated Net book
2000 Cost depreciation value
- -------------------------------------------------------------
Computer hardware $1,579,217 $ 397,240 $1,181,977
Computer software 93,694 12,903 80,791
Furniture 70,439 26,096 44,343
Office equipment 168,257 34,152 134,105
Leasehold improvements 10,736 1,000 9,736
- -------------------------------------------------------------
$1,922,343 $ 471,391 $1,450,952
=============================================================
==================================================================
Accumulated Net book
1999 Cost depreciation value
- ------------------------------------------------------------------
Computer hardware and software $488,075 $ 114,725 $ 373,350
Furniture 42,544 6,170 36,374
Office equipment 60,185 13,990 46,195
- ------------------------------------------------------------------
$590,804 $ 134,885 $ 455,919
==================================================================
F-11
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
5. INVESTMENTS:
In 2000, the Company, through its wholly-owned subsidiary, DomainPeople,
Inc., made a 5% minority interest investment in Afilias, LLC ("Afilias"),
through the purchase of 100 Class A Units representing a 5% voting
interest. Afilias is a company formed for the purpose of bidding for,
developing, financing, marketing, owning and operating a registry to
register and maintain Internet top-level domain names and has obtained the
exclusive rights to register and maintain the new dot-info top-level domain
names. NetNation does not have significant influence over Afilias, and
therefore has accounted for the investment using the cost method. The
carrying value of the investment at December 31, 2000 is $100,000.
6. DEBENTURES PAYABLE:
As a condition of a capital transaction, the Company raised $1,100,000
through the sale of two $550,000 Series A Convertible Debentures, both of
which mature on September 30, 2000. Each debenture was convertible into
275,000 shares of common stock of the Company at a rate of $2.00 per share.
The debentures were non-interest bearing.
On February 18, 2000, the holders of the convertible debentures exercised
their option to convert the debentures into common shares of the Company.
7. SHARE CAPITAL:
(a) Private placement:
On February 24, 2000, the Company finalized an agreement to issue
250,000 common shares at $10 per share for gross cash proceeds of
$2,500,000. The Company also issued warrants entitling the investors
to purchase one additional share for every two shares owned. The
warrants are exercisable during a two-year period at $12 per
additional share purchased and may be called by the Company if certain
financial conditions are met.
(b) Stock to be issued:
On February 24, 2000, the Company agreed to issue 5,000 shares in
settlement of share issue costs of $50,000 in relation to the private
placement described above. At year-end, the shares had not been issued
however the Company expects to issue these shares in 2001.
F-12
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
7. SHARE CAPITAL (CONTINUED):
(c) Stock option compensation plan:
On January 3, 2000, the Company's Board of Directors approved the
adoption of a stock option compensation plan. The plan provides for
the issuance of both incentive and non-qualified stock options, at the
Board of Directors' discretion, to key employees, directors and
consultants. The Company's policy is to grant options with a purchase
price equivalent to market value at the time of the grant. 2,000,000
shares have been reserved for issuance under the plan. The options
vest over a three year period and expire 30 days after each vesting,
subject to change under management's discretion.
Effective January 3, 2000, the Company granted 564,000 options at
$4.63 per share under the stock option compensation plan. Effective
January 20, 2000, the Company granted 24,000 options at $7.69 per
share under the stock option compensation plan. Effective May 24,
2000, the Company granted 144,000 options at $4.13 per share under the
stock option compensation plan. Effective June 26, 2000, the Company
granted 24,000 options at $3.63 per share under the stock option
compensation plan. Effective November 16, 2000, the Company granted
270,000 options at $2.31 per share under the stock option compensation
plan. As at December 31, 2000, no options granted under the stock
option compensation plan were exercisable.
(i) A summary of the Company's stock option activity is as follows:
=======================================================================
Number of Weighted average
common shares exercise price
- -----------------------------------------------------------------------
Outstanding, December 31, 1999, 1998
and 1997 - $ -
Granted 1,026,000 4.00
Cancelled (306,000) 4.55
- -----------------------------------------------------------------------
Outstanding, December 31, 2000 720,000 $ 3.76
=======================================================================
The options outstanding at December 31, 2000 expire between
February 2, 2001 and December 16, 2003.
F-13
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
7. SHARE CAPITAL (CONTINUED):
(c) Stock option compensation plan (continued):
(ii) Additional information regarding options outstanding as at
December 31, 2000 is as follows:
==================================================================
Options outstanding Options exercisable
---------------------------------- -------------------
Weighted
average Weighted Weighted
remaining average average
Exercise Number contractual exercise Number exercise
prices of shares life (years) price of shares price
- ------------------------------------------------------------------
2.31 270,000 1.96 $ 2.31 - $ -
4.13 72,000 1.48 4.13 - -
4.63 366,000 1.09 4.63 - -
7.69 12,000 1.13 7.69 - -
- ------------------------------------------------------------------
720,000 1.45 $ 3.76 - $ -
==================================================================
(iii)Stock-based compensation:
With respect to the stock options granted and stock issued, the
Company recorded total stock-based compensation expense of
$558,443.
Pursuant to SFAS No. 123, the Company is required to disclose the
proforma effects the net loss and net loss per share data as if
the Company had elected to use the fair value approach to account
for its employee stock-based compensation plans. If this approach
had been applied, the Company's net loss per share would have
been as indicated below:
===================================================================
2000 1999 1998
- -------------------------------------------------------------------
Loss for the year:
As reported $3,971,597 $1,344,766 $109,550
Proforma 5,272,830 1,344,766 109,550
Basic and diluted loss per share:
As reported $ 0.26 $ 0.10 $ 0.01
Proforma 0.34 0.10 0.01
===================================================================
F-14
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
7. SHARE CAPITAL (CONTINUED):
(c) Stock option compensation plan (continued):
(iii)Stock-based compensation (continued):
The fair value for the options was estimated using the
Black-Scholes option pricing model assuming no expected dividends
and the following weighted average assumptions:
============================================================
Options
------------------------------
Interest
Rate Term Volatility
- ------------------------------------------------------------
Year ended December 31, 2000 5.66% 3 yrs 137%
============================================================
8. COMMITMENTS AND CAPITAL LEASE LIABILITY:
The Company leases its Vancouver, Canada premises under an operating lease
agreement which expires April 30, 2002 and may be renewed for one
additional year at the Company's option. The rent expense under this lease
for the years ended December 31, 1998, 1999, and 2000 , totaled $62,380,
$108,242, and $297,148, respectively. In 2000, $73,797 was incurred on the
San Diego lease, which was held for six months of the year. The Company
also leases certain fixed assets under capital leases, which expire at
various dates through 2004.
The Company is committed to operating lease payments for rent in 2001 and
2002 of approximately $279,000 and $93,000, respectively.
Future minimum commitments under non-cancelable capital leases at December
31, 2000 are as follows:
===================================================
2001 $20,439
2002 20,439
2003 21,637
2004 1,893
- ---------------------------------------------------
Total lease payments 64,408
Amount representing interest 12,843
- ---------------------------------------------------
Present value of capital lease obligations 51,565
Current portion 13,867
- ---------------------------------------------------
$37,698
===================================================
F-15
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
9. INCOME TAXES:
Significant components of the Company's deferred tax assets at December 31,
2000 and 1999 are as follows:
============================================================
2000 1999
- ------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,160,000 $ 559,000
Fixed assets 470,000 55,000
Deferred revenue 332,000 -
Contingent lease payments 174,000 -
Share issuance costs 55,000 -
- ------------------------------------------------------------
Gross deferred tax assets 2,191,000 614,000
Valuation allowance (2,148,000) (614,000)
- ------------------------------------------------------------
Total deferred tax assets 43,000 -
Deferred tax liability:
Deferred expenses (43,000) -
- ------------------------------------------------------------
Net deferred tax asset $ - $ -
============================================================
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. The amount of the deferred tax asset considered realizable
could change materially in the near term based on future taxable income
during the carry forward period.
The valuation allowance for deferred tax assets as of January 1, 2000 was
$614,000. The net change in the total valuation allowance for the year
ended December 31, 2000 was an increase of $1,534,000.
As of December 31, 2000, the Company has Canadian tax loss carryforwards of
approximately $1,857,000 available to reduce the future years' income for
tax purposes. These carryforward losses expire in 2004 to 2007.
As of December 31, 2000, the Company has U.S. tax loss carryforwards of
approximately $605,000 available to reduce the future years' income for tax
purposes. These carryforward losses expire in 2019 to 2020. As of December
31, 2000, the Company has U.K. tax loss carryforwards of approximately
$347,000 available to reduce the future years' income for tax purposes. The
losses carry forward indefinitely.
F-16
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
10. SEGMENTED INFORMATION:
For the period from incorporation to December 31, 2000 the Company operated
as primarily two business segments from web-site hosting and domain name
registration.
The Company's revenues are generated from the following business segments:
============================================================
2000 1999 1998
- ------------------------------------------------------------
Web hosting $3,721,519 $2,210,478 $1,046,710
Domain name registration 1,290,340 300,543 61,720
- ------------------------------------------------------------
$5,011,859 $2,511,021 $1,108,430
============================================================
The Company's revenues are generated from the following geographic
segments:
=================================================
2000 1999 1998
- -------------------------------------------------
United States $2,538,673 $1,406,172 $ 631,805
Canada 1,427,849 602,645 277,108
Other 1,045,337 502,204 199,517
- -------------------------------------------------
$5,011,859 $2,511,021 $1,108,430
=================================================
During the year ended December 31, 2000, 1999 and 1998, approximately 95%
of the Company's assets and employees were located in Canada.
11. CONTINGENCIES:
(a) As at December 1, 2000, the Company has discontinued lease payments on
the San Diego premises due to a number of circumstances. To date, the
landlord has not commenced legal action against the Company. Should
the landlord commence legal action against the Company, the outcome of
the proceedings is unknown. The remaining lease payments of $381,254
have been accrued in the consolidated financial statements, and a gain
will be recognized in the event of a favorable outcome.
F-17
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2000, 1999 and 1998
================================================================================
11. CONTINGENCIES (CONTINUED):
(b) The Company contracted with Inovaware Corporation (formerly known as
ISP Power) on January 17, 2000 to develop customized billing software.
The contract called for three payments of $80,000 totalling $240,000
and the Company made the first payment in 2000. The Company claims
that Inovaware Corporation was unable to complete development of the
software in accordance with the terms of the contract, and has
terminated the contract with Inovaware on the basis that Inovaware
Corporation did not fulfill its contractual obligations. Inovaware
Corporation is claiming the Company owes it the remaining $160,000,
plus $40,000 for additional work under the terms of the contract. To
date, Inovaware Corporation has not commenced legal action against the
Company. Should Inovaware commence legal action against the Company,
the outcome of the proceedings and the amount of potential damages is
unknown. However, should Inovaware prevail in its claim, the Company
could be required to pay damages which could have a material effect on
the Company's operating results.
12. SUBSEQUENT EVENTS:
Effective January 8, 2001, the Company granted 234,000 options at $2.25 per
share under the stock option compensation plan. Effective February 13,
2001, the Company granted 36,000 options at $2.13 per share under the stock
option plan. These options granted subsequent to year-end vest over three
years, and expire 18 months after each vesting.
F-18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- ---------------------------------------------------------------------------------------
2 ** Agreement dated March 31, 1999 between the shareholders of NetNation (The Canadian
Subsidiary), NetNation (The Canadian Subsidiary), and NetNation (formerly Collectibles
Entertainment Inc.)
3.1 ** Articles of Incorporation
3.2 ** By-laws
4.1 ** Convertible Debenture for $550,000 Maturing on September 30, 2000 issued to Polaris
Investitionen Ltd.
4.2 ** Convertible Debenture for $550,000 Maturing on September 30, 2000 issued to Beste
Investitionen Ltd.
21 List of Subsidiaries
** Incorporated by reference from the Registration Statement on Form 10 of the Registrant
filed with the Securities and Exchange Commission on July 29, 1999, as amended.