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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required] for the transition period from
--------- to -----------
Commission File Number 000-26881
NETNATION COMMUNICATIONS INC.
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(Exact name of registrant as specified in charter)
DELAWARE 33-0803438
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(State or other jurisdiction (I.R.S. Employer I.D. No.)
of incorporation or organization)
Suite 1410 - 555 West Hastings Street, Vancouver, British Columbia, Canada,
V6B 4N6, Tel: (604) 688-8946
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(Address, including zip code, and telephone number of registrant's principal
executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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 10, 2000, the aggregate market value of the voting common equity
held by non-affiliates of the registrant was $77,776,875, based on the closing
trade reported on the NASD Over-the-Counter Bulletin Board quotation system.
Shares of Common Stock held by each officer and director and by each person who
owns 5% 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 10, 2000, the registrant's outstanding common stock consisted of
15,407,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K
Report, which Proxy Statement is to be filed within 120 days after the end of
the Registrant's fiscal year ended December 31, 1999.
Form 10-K
Table of Contents
Part Item(s) Page No.
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I 1 Business 1
2 Properties 25
3 Legal Proceedings 25
4 Submission of Matters to a Vote of Security Holders 25
II 5 Market for Registrant's Common Equity and Related
Stockholder Matters 25
6 Selected Financial Data 27
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
7A Quantitative and Qualitative Disclosure About
Market Risk 31
8 Financial Statements and Supplementary Data 31
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
III 10 Directors and Officers of the Registrant 31
11 Executive Compensation 31
12 Security Ownership of Certain Beneficial Owners 31
13 Certain Relationships and Related Transactions 32
IV 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 32
Signatures 33
Index to Consolidated Financial Statements
Page 1
PART I
ITEM 1: BUSINESS
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
(the "Commission") that attempt to advise interested parties of the risks and
factors that may affect the Registrant's business.
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
NetNation is an application service provider (ASP) and an application
infrastructure provider (AIP) focused on meeting the needs of small and
medium-sized businesses and individuals who are establishing a commercial or
informational presence on the Internet. NetNation competes in the shared and
dedicated web hosting, server co-location and domain name registration markets.
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 website 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 website 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 currently located at the Company's data
center in Vancouver and will be part of the product line at the Company's
planned data center expansions in San Diego and London. 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.
In order to access the Internet, a business must have a Web site that is hosted
on a server connected to the Internet through an ISP. NetNation hosts customer
Websites 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. Website design and development may include such features
as graphics, text, colour, typestyle, audio and video. The person or company
typically responsible for assisting in the design and maintenance of a website
is called a webmaster. This function is labour 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 current data center,
and planned new centers, also provide 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. According to the
Internet Corporation for Assigned Names and Numbers ("ICANN"), the regulatory
body charged with administering accreditation, fewer than 30 companies worldwide
were accredited and operational as at March 10, 2000.
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 two 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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Marketing and Sales
NetNation's marketing is comprised of print and online advertising which 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 San Diego, USA; London, England; and Vancouver,
Canada. NetNation's head offices are currently located in Vancouver, Canada.
The head offices are in the process of being relocated to San Diego, California
which is expected to complete by July of 2000.
BACKGROUND
During 1999, NetNation derived revenue primarily 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 website 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 website, 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 $20-$60. 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. Transmission of Internet data is
provided at a rate of 100 megabits per second, which is approximately 1,800
times faster than transmissions over residential telephone lines which occur at
56 kilobits per second. 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".
NetNation believes that the Internet today represents 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.
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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 labour costs.
NetNation has targeted the US and International small and medium sized business
markets for a number of reasons. The percentage of these markets that utilize
the internet is expected 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, 1999, NetNation's
marketing efforts have been directed primarily to North American and European
markets. During 2000, 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 build out the existing data center in Vancouver and invest in
new data centers in San Diego, London, and other strategic locations. NetNation
is moving its corporate headquarters to San Diego from Vancouver in the first
half of 2000 in order to increase exposure to strategic business opportunities
and customers.
During 2000, NetNation's monthly marketing budget will continue to increase
significantly, primarily to pay for partnering initiatives and brand awareness
campaigns in the United States and Europe, as well as new marketing initiatives
in Asia. As part of its geographic expansion plan, NetNation will establish
satellite offices in select countries to support direct sales efforts. On July
1, 1999, NetNation established a representative sales office in London, England
to spearhead the Company's initiative in Europe. The next phase of the
initiative, now underway, is the establishment of a data center in London to
service the European market.
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 2000 and beyond include:
a) enhanced electronic commerce services;
b) faxing and telephone services via the Internet;
c) ASP services (human resources, customer relationship management and
financial applications);
d) AIP services;
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e) new top-level domain name extensions (i.estore, .web, .firm, etc)
f) unified messaging and intranets for "virtual" and distributed offices;
g) managed data services;
h) automated marketing tools; and
i) expanded multi-national data centers with full computer support
redundancy.
Existing products and services will require integration with third-party
technology and products in order to upgrade NetNation's service solutions.
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, British Columbia. The common
shares of NetNation currently trade on the Over-the-Counter Bulletin Board
(OTCBB) 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, including the San Diego data center and corporate
headquarters.
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 that they utilize. NetNation can then provide
enhanced services to these customers as their needs evolve.
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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.
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 EZsite.
The EZsite package of services offers customers up to 2 gigabytes ("GB") of data
transfer per month and 50 megabytes ("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 Front Page 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.
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NetNation supports the following platforms, operating systems and applications:
Intel based servers (Pentium Pro, Pentium II, etc.)
Slackware and Storm Linux
Windows NT 4.0
Apache web server
Microsoft IIS
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 currently located at the Company's
data center in Vancouver and will be part of the product offering at the
Company's planned data center expansions in San Diego and London. 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 don't 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 can 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. With the
accreditation, NetNation is one of less than 100 accredited registrars in the
world. As at March 10, 2000, there were less than 30 accredited registrars
worldwide that were also operational. NetNation became operational as a domain
name registrar in December of 1999. As at March 10, 2000, the Company had
registered approximately 87,000 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, and Intranet/Extranet hosting for specific
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products which are currently under development. These, and other new services,
will evolve and be developed both through internal development and from
third-party licensing agreements. 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. Most of the electronic
commerce solutions are licensed from a third-party software company, including
Miva Corp., Cybercash, PaymentNet and other Internet commerce services. The
Company believes it has the ability to integrate new or existing products, that
have been purchased or licensed from third parties, into its web hosting
packages in order to remain competitive in the Web hosting business.
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.
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.
NetNation also makes available, to its customers, the services of PaymentNet,
Cybercash, and E-xact, three leading providers of on-line credit card processing
services. 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. SmartAge.com is an
example of one of NetNation's existing OEM partners. 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
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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 traditional
television and 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.
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 800 value-added
resellers in 50 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 such as SmartAge.com.
NetNation has approximately 11,500 web hosting accounts in over 125 countries as
of March 10, 2000. For the year ended December 31, 1999, United States
customers comprised 56% of the total web hosting customer base, followed by
Canada at 24%, and all other countries combined at 20%.
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 10, 2000, NetNation has a network of over 800 VARs in 50 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 value-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.
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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 (such SmartAge.com, an
online small business community). 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 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 Website 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 recently added 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.
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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 1,000 simultaneous Web sites on a
single server, it generally limits the number of Web sites to approximately 500
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 enables 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.
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 10, 2000, the Company had one operating data center, located in
Vancouver, BC. In early March 2000, NetNation entered into a lease agreement
for a building in San Diego, California that will house a data center and
NetNation's corporate headquarters. The data center is expected to be
operational in the first half of 2000. The Company also plans to expand its
London, England operations to include a data center and to establish additional
data centers internationally to support the Company's international marketing
and business development initiatives.
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 100 accredited registrars of top-level domain names worldwide. Of
these, less than 30 were operational as at March 10, 2000.
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;
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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.
As at March 10, 2000, NetNation's largest identifiable web hosting competitor is
Verio Inc., a company that has over 300,000 hosting accounts and that has grown
significantly in the past two years through acquisition. In the domain name
registration market, there are two major public company competitors, Network
Solutions Inc. and Register.com Inc.
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.
The second major type of competitors are smaller companies. NetNation believes
that many of these companies have insufficient resources, no proper
infrastructure, insufficient Internet connectivity, and/or inadequate technical
support. These companies may have congested network servers and slow Internet
connectivity causing delays in website access and upload. This can result in
lost customers visiting and exploring a web site through abandoned connections.
These small competitors 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 smaller Web hosting companies may face these
competitive deficiencies, there are a number of smaller Web hosting companies
that have shown the ability to compete effectively. The ability of NetNation to
compete with these smaller companies over time is unproven.
Competitive Advantages
The following key advantages are provided to the customers of NetNation through
its various service solutions.
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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. The bulk of NetNation's 1999 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, labour,
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.
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.
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EMPLOYEES
As of March 10, 2000, 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.
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 significant additional losses and to generate
negative operating cash flow in the foreseeable future. The Company's
acquisition and integration initiatives and build up of data centers will
require significant amounts of cash in 2000. The extent to which negative cash
flow will occur depends upon a number of factors, including the following:
- the number and size of any acquisitions and investments;
- the expense and time required to integrate 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.
Page 15
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;
After consideration for the increase in variable marketing expenses, NetNation's
committed costs pertaining to premises, communication and wages account for
approximately 52% 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
Page 16
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
While NetNation continues to seek to deepen and broaden its market presence in
the U.S. and internationally through acquisitions, its success is also dependent
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
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.
Page 17
COMPETITION
The markets served by NetNation is 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 grow, rapidly. 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.
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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. NetNation's
foreign exchange risk is currently estimated at under $10,000. 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, 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 is planning to 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
Page 19
increased bandwidth usage. The Company has implemented an infrastructure
maintenance program to ensure that these issues are proactively addressed. This
program 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.
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 of March 10, 2000, ICANN
had accredited almost 100 competitive registrars, including NetNation, to
register domain names in the .com, .net and .org domains. As of March 10, 2000,
approximately 27 of these competitive registrars were registering domain names,
and the rest, while accredited, had not begun registering 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,
such as .web, .firm and .store. 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
Page 20
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 August 16, 2000. 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.
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., Sprint and MCI, 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
Page 21
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
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
Page 22
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
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.
Page 23
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
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, President; Ashley Sinclair, Chief Executive Officer;
Joseph Kibur, V.P. Strategic Development and Planning; and Glen Ibbott, Chief
Financial Officer. The loss of the services of one or more 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
Page 24
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 geographical
expansion, marketing and advertising, the development of new services, the
expansion and upgrading of its technical infrastructure, and the construction of
data centers. NetNation may not be successful in generating sufficient cash
from operations for those purposes and will need to raise additional capital.
Failure to generate 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 President, David Talmor, and Vice President Strategic Development
and Planning, Joseph Kibur, in the aggregate, beneficially own approximately
58.6% of NetNation's outstanding Common Stock as at March 10, 2000. 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 March 10, 2000, there were 11,033,000 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
Page 25
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 10,700 square feet, which
is leased 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. On March 14, 2000,
NetNation executed a lease agreement for a property in San Diego that will house
a data center and corporate offices. All property is insured to industry
standards.
ITEM 3: LEGAL PROCEEDINGS
To the knowledge of the officers and directors of NetNation, there is no pending
legal proceeding 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 1999.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY
NetNation's common shares are principally traded on the over the counter market,
with quotations posted on the Over-the-Counter Bulletin Board 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. On October 7, 1999, NetNation applied for
a listing on the Nasdaq Small Cap Market, which is currently under review by
Nasdaq staff.
Price Range of Common Stock
---------------------------
High/Ask Low/Bid
-------- -------
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
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.
As at August 28, 1999 there were approximately 868 registered shareholders of
record of NetNation's common stock.
Page 26
RECENT SALES OF UNREGISTERED SECURITIES
All amounts shown under this item are in U.S. dollars.
On February 1, 1999, NetNation completed a sale of 4,000,000 shares of its
Common Stock at a price of $0.01 per share for aggregate cash proceeds of
$40,000. The board of directors had set the share price based upon the fact
that NetNation was still a development stage company and had no operations.
Efforts to establish NetNation for the purpose of operating an online sports
card and other tradable memorabilia distribution business were not successful
and a reduced share price from the previous offering made on June 16, 1998 was
warranted to raise capital. This offering was made to 17 purchasers without
registration under the Act, in reliance upon the exemption from registration
afforded by Rule 504 of Regulation D. If the exemption under Rule 504 of
Regulation D is not available, NetNation believes that this sale was also exempt
under Regulation S and Sections 3(b) and 4(2) under the Act, due to the foreign
nationality of all purchasers, their prior contacts with NetNation and its
management and the limited number of investors.
On April 7, 1999, NetNation issued 10,000,000 shares of its Common Stock to all
33 shareholders of the Canadian Subsidiary in exchange for all of their shares
of the Canadian Subsidiary. The shares were issued pursuant to a Share Purchase
Agreement between the Canadian Subsidiary, its shareholders and Collectibles
(now NetNation). This share exchange created the parent/subsidiary
(wholly-owned) relationship between NetNation and the acquired Canadian company
(also named NetNation Communications Inc.). The issuance was made without
registration under the Act, in reliance upon the exemption from registration
afforded by Regulation S and Sections 3(b) and 4(2) under the Act, due to the
foreign nationality of the shareholders of the Canadian Subsidiary and their
relationship to NetNation. As such the shares are restricted in accordance with
Rule 144 under the Act. The issuance of the shares to 32 of the shareholders
may also be exempt from registration pursuant to Rule 701 promulgated under the
Act as these shareholders are also officers and/or employees of the Canadian
Subsidiary. The remaining shareholder is an immediate family member of a
director of NetNation.
On April 7, 1999, NetNation completed a sale of 450,000 shares of its Common
Stock at a price of $2.00 per share for a total of $900,000. The offering was
made to two investors, Polaris Investitionen Ltd. and Beste Investitionen Ltd.,
without registration under the Act, in reliance upon the exemption from
registration afforded by Rule 504 of Regulation D. If the exemption under Rule
504 of Regulation D is not available, NetNation believes that this sale was also
exempt under Regulation S and Sections 3(b) and 4(2) under the Act, due to the
foreign residency of both purchasers, 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 in connection with the acquisition of the
Canadian Subsidiary. At the time the transaction was under negotiation, the
share price was trading in the $2.00 to $3.00 range and the offering price
reflected the size, volatility and risk commensurate with the nature of the
transaction
On April 12, 1999, NetNation completed a sale of two Series A Convertible
Debentures in the amount of $550,000 each, to two investors, Polaris
Investitionen Ltd. and Beste Investitionen Ltd., for aggregate proceeds of
$1,100,000. The pricing of the Debentures was negotiated at the same time as
the pricing for the sale of Common Stock (see preceding paragraph). The trading
range from commencement of trading on February 3, 1999 to the date of issuance
of the Debentures was $2.00 to $5.50. The Convertible Debentures were due to
mature on September 30, 2000. The conditions of each Convertible Debenture
entitled the holder, at its option, at any time commencing thirty days after
issue to convert up to one hundred percent of the original principal face amount
into shares of Common Stock, at a deemed conversion price for each share of
Common Stock of $2.00. The debentures were converted to Common Stock of the
Company on February 18, 2000. The offering was made without registration under
the Act, in reliance upon the exemption from registration afforded by Regulation
S and Sections 3(b) and 4(2) under the Act, due to the foreign residency of both
purchasers, their level of sophistication and the limited number of investors.
The conversion price per share in the offering was determined by the board of
directors of NetNation based on the previous offering of Common Stock at $2.00
per share which was completed on April 7, 1999. The securities issued upon
conversion of the debentures are subject to restrictions on resale in accordance
with Rule 144 under the Act.
Page 27
On June 23, 1999 NetNation agreed to issue 300,000 shares of its Common Stock to
Veritas Communications Group Ltd. ("Veritas"), as consideration for the
provision of investor relations and business consulting services. The number of
shares was determined by NetNation's board of directors based on arm's length
negotiations. On June 2, 1999, when NetNation entered into an agreement with
Veritas, the Common Stock was trading in the $4.125 to $4.500 range. The
issuance was made without registration under the Act, in reliance upon the
exemption from registration afforded by Regulation S and Sections 3(b) and 4(2)
of the Act, as the holder is a non-domestic person. The shares are restricted
pursuant to Rule 144 of the Act. These shares are further subject to escrow
release requirements. On July 30, 1999, NetNation exercised its right to
terminate the agreement with the last day for the provision of services by
Veritas as August 31, 1999. Under the terms of the agreement, rather than
300,000 shares, NetNation issued 60,000 shares, in total, to Veritas.
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.
NetNation is an Application Service and Infrastructure Provider offering Web
site hosting and related enhanced Internet services to small and medium sized
businesses. NetNation's focus is on delivering dependable and flexible services
that are backed by reliable, 24 hour-a-day customer support.
For the year ended December 31, 1999, NetNation had revenue of $2,511,021,
representing an increase of 128% 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 been operated on the basis
whereby all excess cash flow was reinvested 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 and on April 12, 1999, NetNation raised a further $1.1 million of
convertible debt financing.
Selected Financial Data
Period ended
Years ended December 31, December 31,
1999 1998 1997
-----------------------------------
Sales $ 2,511,021 $1,108,430 $ 339,632
Expenses
Depreciation 95,445 31,428 10,049
Marketing & selling 1,575,733 456,842 127,904
Office & administrative 844,582 161,297 52,911
Wages & benefits 1,340,027 568,413 168,191
- ----------------------------------------------------------------------------
Net loss 1,344,766 109,550 19,423
Page 28
Loss per share $ 0.10 $ 0.01 $ --
Weighted average number 13,164,836 9,692,030 10,000,000
of common shares
- --------------------------------------------------------------------------------
Total assets $ 1,518,165 $ 177,359 $ 92,064
Debentures payable $ 1,100,000 $ -- $ --
Cash generated by (used for)
Operating activities $ (604,773) $ 109,304 $ 80,295
Investing activities (435,922) (86,590) (52,486)
Financing activities 1,982,909 (4,734) 74
=============================================================================
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING RESULTS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Revenue
NetNation's 1999 revenue was generated, for the most part, from providing web
hosting services to SMEs. Also included in revenue were co-located server and
domain name registration services but, for 1999, 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 1999 revenues were derived from Web Hosting (88%), Domain Name
Registration services (9%), and Server Co-Location (3%). 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).
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. While these relationships, and further alliances
that have been forged since the end of 1999, will continue to enhance
NetNation's organic growth in the coming years, NetNation also intends to
acquire high-quality, strategically important web hosting operations.
Marketing and selling expense
Marketing and selling expense rose $1,118,891, or 241%, from 1998 expense, and
as a percentage of revenue, increased from 41% to 62%. The significant majority
of marketing and selling expense is comprised of advertising expenditures. In
fact, during 1999, 82% of marketing and selling expense was 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
Page 29
advertising is believed to best engage the attention of the target hosting
market, small and medium sized businesses. With new product offerings coming
online in 2000, NetNation is actively pursuing additional avenues to reach the
target market, including strategic acquisitions and partnerships.
Office & administrative expense
Office & administrative expense includes expenditures on rent and general office
costs, professional advisors and public relations. In 1999, office and
administrative expense increased $683,285, or 423%, over 1998, and as a
percentage of revenue, increased from 15% to 34%. The increase was due mainly
to the additional costs of professional advisors and public relations that are
normally associated with public companies. There were no comparable costs in
1998.
Expenditures on office and administrative items will continue to increase in
dollar amounts as new data centers and sales offices are added but is expected
to decrease as a percentage of total revenue as revenue growth outpace increases
in office costs.
Wages & benefits expense
Historically, NetNation has enjoyed the competitive advantage of having the
majority of its salaries denominated in Canadian dollars while, at the same
time, having access to an employee talent pool of variety and depth. As
NetNation expands globally, it will continue to benefit from the advantage of
relatively low employee costs compared to the cost structures of many of its
competitors.
In 1999, wages and benefits increased $771,614, or 136%, when compared with
1998. As a percentage of revenue, wage costs increased compared to the wage
costs in 1998, from 51% to 53%. The number of people employed rose from 23 at
the end of 1998 to 56 at the end of 1999. NetNation will continue to add staff
where the return on investment warrants it but the majority of revenue growth in
the future will not require an equivalent increase in staffing.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenue
NetNation's 1998 revenue was generated almost exclusively from web hosting
services and increased $768,798, or 226%, over 1997 revenue. During 1998, the
number of sites hosted grew 160%, from 1,775 to over 4,600 and the average
hosting package customers purchased increased in price. The growth in hosted
sites and revenue was completely internally-generated.
Marketing and selling expense
Marketing and selling expense rose $328,938, or 257%, from 1997 expense, and as
a percentage of revenue, increased from 38% to 41%. NetNation restricted 1998
and 1997 expenditures on advertising to a level supported by internal cash
generation.
Office & administrative expense
The 1998 office and administrative expense increased by $108,386, or 205%, when
compared to 1997, but as a percentage of revenue, decreased slightly from 16% to
15%. The decrease was due mainly to strict cost control pending growth in
revenues to the stage that could justify expansion of NetNation's premises.
Wages & benefits expense
In 1998 wages and benefits increased $400,222, or 238%, when compared to 1997.
As a percentage of revenue, wage costs increased slightly from 1997, from 50% to
51%. The number of people employed by NetNation rose from 12 at the end of 1997
to 23 at the end of 1998.
Page 30
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1999, NetNation's strategy required funding growth through
internally-generated cash flows. NetNation incurred a loss of $1,344,766 and
generated negative cash flows from operating activities of $604,773. NetNation
did not raise financing, equity or debt, of significant dollar amounts.
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 intends to use a combination of both private and
public equity investment in the future. NetNation anticipate substantial
capital requirements during 2000 which will be used for strategic acquisitions
and investments, to cover operating losses and for capital expenditures
associated with the development and expansion of the current and proposed data
centers. 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 mature 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. NetNation also raised $900,000 through a private placement of 450,000
shares of common stock at $2.00 per share.
During the summer of 1999, NetNation issued 60,000 shares to an unrelated
company in return for investor and public relations services.
Shortly after the end of the year, on February 18, 2000, NetNation received
notice that the holders of the convertible debentures had exercised their option
to convert the debentures to shares of common stock.
Also shortly after year-end, on February 24, 2000, NetNation finalized an
agreement to issue 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 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, there was $988,077 in cash and equivalents on hand. As the
business growth strategy calls for expanded investment in marketing and
infrastructure, NetNation has continued to assemble the required equity
financing when required.
In 1998 and 1997, 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 $109,304 in 1998 and
$80,295 in 1997.
OUTLOOK: ISSUES AND UNCERTAINTIES
Page 31
Refer to "Risk Factors" 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.
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.
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.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference from the
information captioned "Directors and Executive Officers" to be included in the
Company's proxy statement to be filed in connection with the annual meeting of
stockholders (the "Proxy Statement").
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from the
information captioned "Executive Compensation" to be included in the Proxy
Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference from the
information captioned "Security Ownership Of Certain Beneficial Owners And
Management" to be included in the Proxy Statement.
Page 32
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by the Item 13 is incorporated by reference from the
information captioned "Certain Relationships and Related Transactions" to be
included in the Proxy statement.
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:
The consolidated balance sheets of NetNation Communications Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, deficit and accumulated other comprehensive income,
and cash flows for the years ended December 31, 1999 and 1998 and the period
from incorporation on February 19, 1997 to December 31, 1997, together with the
notes thereto.
2) Reports on Form 8-K
None.
3) List of Exhibits
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
1** Agreement dated March 31, 1999 between the shareholders
of NetNation (The Canadian Subsidiary), NetNation (The Canadian
Subsidiary), and NetNation (formerly Collectibles Entertainment
Inc.)
2.1 ** Articles of Incorporation
2.2 ** By-laws
3.1 ** Convertible Debenture for $550,000 Maturing on September 30,
2000 issued to Polaris Investitionen Ltd.
3.2 ** Convertible Debenture for $550,000 Maturing on September 30,
2000 issued to Beste Investitionen Ltd.
21 List of Subsidiaries
27 Financial Data Schedule for the year ended December 31, 1999
** Incorporated by reference from the Registration Statement on
Form 10 of the Registrant filed with the Commission on July 29,
1999 as amended.
Page 33
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.
(Registrant)
By: /s/ Ashley J. Sinclair
- --------------------------------------------
Ashley J. Sinclair
Chief Executive Officer
Dated: March 17, 2000.
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
/s/ David Talmor___ President and Chairman of the Board March 17, 2000
---------------- and Director
David Talmor
/s/ Ashley J. Sinclair_ Chief Executive Officer and Director March 17, 2000
- ---------------------- (Principal Executive Officer)
Ashley J. Sinclair
/s/ Joseph Kibur Chief Operating Officer and Director March 17, 2000
- --------------------
Joseph Kibur
/s/ Ernest Cheung Director March 17, 2000
- ----------------------
Ernest Cheung
/s/ Glen Ibbott Chief Financial Officer March 17, 2000
- -------------------- (Principal Accounting Officer)
Glen Ibbott
INDEX TO FINANCIAL STATEMENTS
DESCRIPTION PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998 and the period from incorporation on February 19, 1997 to
December 31, 1997 F-4
Consolidated Statements of Deficit and Accumulated Other Comprehensive
Income for the years ended December 31, 1999 and 1998 and the period from
incorporation on February 19, 1997 to December 31, 1997 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998 and the period from incorporation on February 19, 1997 to
December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
Page F-1
Consolidated Financial Statements of
NETNATION COMMUNICATIONS INC.
(Expressed in United States Dollars)
Years ended December 31, 1999 and 1998 and
Period from incorporation on February 19, 1997 to December 31, 1997
Page F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NetNation Communications Inc.
We have audited the accompanying consolidated balance sheets of NetNation
Communications Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, deficit and accumulated other
comprehensive income and cash flows for the years ended December 31, 1999 and
1998 and the period from incorporation on February 19, 1997 to December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NetNation
Communications Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999 and 1998 and the period from incorporation on February 19, 1997 to
December 31, 1997 in conformity with United States generally accepted accounting
principles.
/s/KPMG LLP
Chartered Accountants
Vancouver, Canada
February 18, 2000, except for notes 8(b) and 8(c) which are as of February 24,
2000.
Page F-3
NETNATION COMMUNICATIONS INC.
Consolidated Balance Sheets
(Expressed in United States Dollars)
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 988,077 $ 45,863
Accounts receivable 10,961 12,635
Prepaid expenses and deposits 63,208 3,419
-----------------------------------------------------------------------------
1,062,246 61,917
Fixed assets, net of accumulated depreciation
of $134,885 (1998 - $39,440) (note 2) 455,919 115,442
- --------------------------------------------------------------------------------
$ 1,518,165 $ 177,359
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued liabilities $ 189,146 $ 97,800
Stock redemption premium payable,
current portion (notes 4(c) and 4(d)) - 36,818
Deferred revenue 400,007 180,748
Debentures payable (note 3) 1,100,000 -
- --------------------------------------------------------------------------------
1,689,153 315,366
Stock redemption premium payable (notes 4(c)
and 4(d)) - 12,484
Stockholders' deficit:
Share capital (note 4):
Authorized:
50,000,000 common shares with a par value
of $0.0001 each
Issued:
14,607,000 common shares 7,787 15,940
Additional paid in capital (notes 4(b) and 4(c)) 2,333,145 -
Cost of common stock redeemed but not cancelled
(note 4(d)) - (24,464)
Unearned compensation (1,015,466) -
Deficit (1,511,055) (156,568)
Accumulated other comprehensive income 14,601 14,601
- --------------------------------------------------------------------------------
(170,988) (150,491)
Commitment (note 5)
Subsequent events (note 8)
- --------------------------------------------------------------------------------
$ 1,518,165 $ 177,359
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/Ashley Sinclair Director
- ------------------------------------
/s/David Talmor Director
- ------------------------------------
Page F-4
NETNATION COMMUNICATIONS INC.
Consolidated Statements of Operations
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
Period from
incorporation on
February 19,
Years ended December 31, 1997 to
--------------------------- December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Sales $ 2,511,021 $ 1,108,430 $ 339,632
Expenses:
Depreciation 95,445 31,428 10,049
Marketing and selling 1,575,733 456,842 127,904
Office and administrative 844,582 161,297 52,911
Wages, benefits and subcontract 1,340,027 568,413 168,191
-----------------------------------------------------------------------------
3,855,787 1,217,980 359,055
- --------------------------------------------------------------------------------
Net loss 1,344,766 109,550 19,423
Other comprehensive income:
Foreign currency translation
adjustments - (15,127) 526
Comprehensive loss $ 1,344,766 $ 124,677 $ 18,897
- --------------------------------------------------------------------------------
Loss per share, basic and diluted $ 0.10 $ 0.01 $ -
- --------------------------------------------------------------------------------
Weighted average number of
common shares 13,164,836 9,692,030 10,000,000
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Page F-5
NETNATION COMMUNICATIONS INC.
Consolidated Statements of Deficit and Accumulated Other Comprehensive Income
(Expressed in United States Dollars)
Years ended December 31, 1999 and 1998
Period from incorporation on February 19, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Deficit Income
- --------------------------------------------------------------------------------
Balance at incorporation, February 19, 1997 $ - $ -
Net loss (19,423) -
Foreign exchange translation loss - (526)
- --------------------------------------------------------------------------------
Balance at December 31, 1997 (19,423) (526)
Net loss (109,550) -
Excess of cost over carrying value of common
stock redeemed and canceled (note 4(c)) (27,595) -
Foreign exchange translation gain - 15,127
- --------------------------------------------------------------------------------
Balance at December 31, 1998 (156,568) 14,601
Net loss (1,344,766) -
Excess of cost over carrying value of
treasury stock canceled (note 4(d)) (9,721) -
- --------------------------------------------------------------------------------
Balance at December 31, 1999 $(1,511,055) $ 14,601
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Page F-6
NETNATION COMMUNICATIONS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
- --------------------------------------------------------------------------------
Period from
incorporation on
February 19,
Years ended December 31, 1997 to
--------------------------- December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Cash flows from operating
activities:
Net loss $(1,344,766) $ (109,550) $ (19,423)
Items not involving cash:
Depreciation 95,445 31,428 10,049
Change in cumulative
translation adjustment - 15,127 (526)
Services paid with common
shares 266,400 - -
Employee stock compensation 125,658 - -
Changes in non-cash operating
working capital:
Accounts receivable 1,674 (7,324) (5,311)
Prepaid expenses and
deposits (59,789) 437 (3,856)
Accounts payable and
accrued liabilities 91,346 53,514 44,286
Deferred revenue 219,259 125,672 55,076
-----------------------------------------------------------------------------
Net cash provided by operating
activities (604,773) 109,304 80,295
Cash flows from investing
activities:
Purchase of fixed assets (435,922) (91,327) (52,486)
Proceeds on disposal of fixed
assets - 4,737 -
-----------------------------------------------------------------------------
Net cash used for investing
activities (435,922) (86,590) (52,486)
Cash flows from financing
activities:
Redemption of capital (49,302) (5,860) -
Issue of debentures 1,100,000 - -
Issue of share capital 932,211 1,126 74
-----------------------------------------------------------------------------
Net cash provided by
financing activities 1,982,909 (4,734) 74
- --------------------------------------------------------------------------------
Increase in cash and cash
equivalents 942,214 17,980 27,883
Cash and cash equivalents,
beginning of period 45,863 27,883 -
- --------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 988,077 $ 45,863 $ 27,883
- --------------------------------------------------------------------------------
Supplementary information:
Cash paid for:
Interest $ - $ 6,934 $ 1,837
Income taxes 959 - -
Non-cash transactions:
Shares issued to third
parties for services 266,400 - -
Shares issued to employees
for services 1,141,124 - -
Shares issued in exchange
for contribution of
capital assets - - 17,843
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Page F-7
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 1999 and 1998
Period from incorporation on February 19, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
General:
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 has been accounted for as
a capitalization of NetNation Canada, effectively as if NetNation Canada issued
common shares to acquire the net assets of Collectibles. As such, the
statements of operations and deficit and cash flows reflect the results for
NetNation Canada from incorporation on February 19, 1997 to April 7, 1999.
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.
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.
1. 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 Domain People 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.
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 and period from incorporation on February 19, 1997 to December 31,
1997, 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.
(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.
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements, page 2
(Expressed in United States dollars)
Years ended December 31, 1999 and 1998
Period from incorporation on February 19, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(c) Fixed assets:
Fixed assets are stated at cost less accumulated depreciation.
Depreciation is computed using the declining balance method at the
following annual rates:
---------------------------------------------------------------------------
Assets Rate
---------------------------------------------------------------------------
Computer hardware 30%
Furniture 20%
Office equipment 30%
---------------------------------------------------------------------------
The Company makes 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. Under the Statement of
Financial Accounting Standard ("SFAS") No. 121, an impairment loss would
be recognized when estimates of future cash flows expected to result
from the use of an asset and its eventual disposition are less than its
carrying amount. No such impairment losses have been identified by the
Company for the years ended December 31, 1999 and 1998 or for the period
ended December 31, 1997.
(d) Revenue recognition:
Revenue is recognized as web-site hosting, domain name registration and
related services are provided. Amounts billed in advance of the
provision of services are deferred and recorded as revenue when services
have been rendered.
(e) 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. As such,
compensation expense would be recorded on the date of grant only if the
current market price of the common stock exceeded the amount required to
be paid by the employee for the stock. SFAS No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure require
-ments 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. As at December 31, 1999, the Company has not issued
any stock options to employees, the pro forma information required under
SFAS 123 has not been presented in these consolidated financial
statements.
Common stock issued to consultants in exchange for services provided to
the Company have been recorded at its fair value on the date the Company
committed to issue the shares.
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements, page 3
(Expressed in United States dollars)
Years ended December 31, 1999 and 1998
Period from incorporation on February 19, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(f) 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.
(g) Fair value of financial instruments:
Carrying values of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities and stock redemption premium payable approximate fair value
due to their short terms to maturity.
The debentures payable are non-interest bearing and mature September 30,
2000. If the debentures are not converted prior to maturity, the
Company will settle the obligation with $1,100,000 cash. As the term to
maturity is less than one year, the carrying value is considered to
approximate fair value.
(h) Translation of foreign currencies:
The Company's functional and reporting currency is the United States
dollar.
Monetary items denominated in foreign currency are translated to
United States dollars at exchange rates in effect at the balance sheet
date and non-monetary items are translated at rates of exchange in
effect when the assets were acquired or obligations incurred. Revenues
and expenses are translated at rates in effect at the time of the
transactions. Foreign exchange gains and losses are included in income.
(i) Income taxes:
The Company provides for income taxes by the asset and liability method.
This requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of differences between the
accounting and tax basis of assets and liabilities that have been
included in the financial statements or tax returns. Under this method,
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.
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements, page 4
(Expressed in United States dollars)
Years ended December 31, 1999 and 1998
Period from incorporation on February 19, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(j) Loss per share:
Loss per share is calculated by dividing net income or loss by the
weighted average common shares issued and outstanding during the period.
Diluted EPS reflects the potential dilutive effect that could occur
assuming any existing contracts to issue common stock were exercised or
converted into common stock. Potential conversion of the debentures
that were outstanding in 1999 would not result in a different reported
loss per share than the basic loss per share. The Company had no
potentially dilutive contracts to issue common stock in 1998 and 1997.
Accordingly, basic and diluted loss per share do not differ.
(k) Comparative figures:
Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.
2. Fixed assets:
- --------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------
Accumulated Net book
Cost depreciation value
- --------------------------------------------------------------------------------
Computer hardware $ 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Accumulated Net book
Cost depreciation value
- --------------------------------------------------------------------------------
Computer hardware $ 134,968 $ 33,846 $ 101,122
Furniture 6,242 1,574 4,668
Office equipment 13,672 4,020 9,652
- --------------------------------------------------------------------------------
$ 154,882 $ 39,440 $ 115,442
- --------------------------------------------------------------------------------
3. Debentures payable:
As a condition of the capital transaction described in the General note
above, 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 is convertible into 275,000 shares of common stock of the Company
at a rate of $2.00 per share. The debentures are non-interest bearing.
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements, page 5
(Expressed in United States dollars)
Years ended December 31, 1999 and 1998
Period from incorporation on February 19, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
4. Share capital:
(a) Authorized:
50,000,000 common shares, with a par value of $0.0001 each
(b) Common shares issued and outstanding:
----------------------------------------------------------------------------
Number Additional
of shares Amount paid in capital
- --------------------------------------------------------------------------------
NetNation Communications Inc.
-----------------------------
Balance at incorporation,
May 7, 1998 - - -
Issuance of common shares,
for cash 5,097,000 $ 510 $ 69,190
Shares canceled in conjunction
with the capitalization (1,000,000) - -
Adjustment in accordance with
capitalization accounting
principles (note 4(c)) - 6,226 (69,190)
- --------------------------------------------------------------------------------
4,097,000 6,736 -
Shares issued to effect the
capitalization (notes 2 and
4(c)) 10,000,000 1,000 25,672
Issuance of common shares
for cash 450,000 45 899,955
Issuance of common shares for
services provided to the
Company 60,000 6 266,394
- --------------------------------------------------------------------------------
Balance, December 31, 1999 14,607,000 $ 7,787 $ 1,192,021
- --------------------------------------------------------------------------------
The dollar amount ascribed to share capital after the capitalization of
$6,736 equals the aggregate share capital of NetNation Canada immediately
prior to the transaction.
The 10,000,000 common shares issued in the exchange are subject to a 12
month hold period from April 7, 1999. As a condition of the exchange, the
Company canceled 1,000,000 previously issued and outstanding common shares
immediately prior to the transaction.
(c) Share reconciliation:
- --------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock paid in
Number Amount Number Amount capital
- --------------------------------------------------------------------------------
NetNation Canada
----------------
Balances at incorporation,
February 19, 1997 - - - - -
Issuance of Class A
common stock for cash - - 10,000,000 74 17,843
- --------------------------------------------------------------------------------
Balances at December 31,
1997 - - 10,000,000 74 17,843
Common stock redeemed and
canceled - - (500,000) (3) (3,100)
Cost of common stock
redeemed but not canceled
(note 4(d)) - - - - -
Preferred stock issued
for cash 173,000 1,126 - - -
- --------------------------------------------------------------------------------
Balances at December
31, 1998 173,000 1,126 9,500,000 71 14,743
Cancellation of
previously redeemed
common stock (note 4(d)) - - (500,000) (2) (14,743)
Issuance of preferred
shares for cash 827,000 5,541 - - -
- --------------------------------------------------------------------------------
NetNation Canada balances
immediately prior to the
capitalization 1,000,000 6,667 9,000,000 69 -
- --------------------------------------------------------------------------------
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements, page 6
(Expressed in United States dollars)
Years ended December 31, 1999 and 1998
Period from incorporation on February 19, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
4. Share capital(continued):
(c) Share reconciliation (continued):
On August 26, 1998, 500,000 Class A common shares of NetNation Canada
were redeemed and canceled for $30,698 which was payable in installments
ending May 1, 2000. The entire amount was paid in 1999. The premium paid
on redemption was applied on a pro rata basis, to additional paid in
capital with the balance charged to the deficit.
(d) Cost of common stock redeemed but not cancelled:
On August 26, 1998, 500,000 Class A common shares were redeemed for
$24,466, which was payable in installments ending September 1, 1999.
$5,836 was paid in 1998 with the remaining $18,604 paid in 1999. The
shares were held in escrow until the final installment payment was made,
at which time the shares were released to the Company and canceled. When
the shares were canceled in 1999, the cost of $24,466 was applied
against share capital to the extent of $14,745 with the balance, being
the excess of the redemption price over the par value of the shares
redeemed, charged to deficit.
5. Commitment:
The Company leases its Vancouver, Canada premises. The lease agreement
expires April 30, 2002 and may be renewed for one additional year at the
Company's option. The Company has negotiated additional floorspace adjacent
to the existing space. The additional lease agreement is concurrent with the
existing lease agreement with respect to terms and expiry and is effective
January 1, 2000.
The Company is committed to operating lease payments for rent in 2000, 2001
and 2002 of approximately $210,000, $210,000 and $70,000, respectively.
6. Income taxes:
The income tax benefit for the years and period ended December 31 differs
from the amounts that would result from applying the federal statutory rate
of 34% as follows.
- --------------------------------------------------------------------------------
Period from
incorporation on
February 19,
Years ended December 31, 1997 to
--------------------------- December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Expected tax benefit $ (457,220) $ (37,247) $ (6,603)
Items not deductible
for tax purposes 32,451 10,685 3,417
Effect of different
tax rates in foreign
jurisdictions (129,231) (22,438) (7,814)
Change in valuation
allowance for net
deferred tax assets 554,000 49,000 11,000
- --------------------------------------------------------------------------------
Realized income tax
benefit $ - $ - $ -
- --------------------------------------------------------------------------------
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements, page 7
(Expressed in United States dollars)
Years ended December 31, 1999 and 1998
Period from incorporation on February 19, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
6. Income taxes (continued):
Significant components of the Company's deferred tax assets at December 31,
1999 and 1998 as follows.
----------------------------------------------------------------------------
Years ended December 31,
---------------------------
1999 1998
----------------------------------------------------------------------------
Net operating loss
carryforwards $ 559,000 $ 49,000
Valuation allowance 55,000 11,000
----------------------------------------------------------------------------
Gross deferred tax assets 614,000 60,000
Valuation allowance (614,000) (60,000)
----------------------------------------------------------------------------
Net deferred tax asset $ - $ -
----------------------------------------------------------------------------
Due to the uncertainty surrounding the realization of the deferred income
tax assets in future income tax returns, the Company has a 100% valuation
allowance against its deferred income tax assets.
As of December 31, 1999, the Company has Canadian tax loss carryforwards of
approximately $1,098,000 available to reduce the future years' income tax
purposes. These carryforward losses expire in 2004 to 2006.
7. Segmented information:
For the period from incorporation to December 31, 1999, the Company
operated as one business segment, web-site hosting and related services.
The Company's revenues are generated from the following geographic segments.
- --------------------------------------------------------------------------------
Period from
incorporation on
February 19,
Years ended December 31, 1997 to
--------------------------- December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
United States 56% 57% 50%
Canada 24% 25% 30%
Other 20% 18% 20%
- --------------------------------------------------------------------------------
Total 100% 100% 100%
- --------------------------------------------------------------------------------
During the years and period ended December 31, 1999, 1998 and 1997,
approximately 95% of the Company's assets and employees were located in
Canada.
NETNATION COMMUNICATIONS INC.
Notes to Consolidated Financial Statements, page 8
(Expressed in United States dollars)
Years ended December 31, 1999 and 1998
Period from incorporation on February 19, 1997 to December 31, 1997
- --------------------------------------------------------------------------------
8. Subsequent events:
(a) Effective January 3, 2000, the Company's Board of Directors approved the
adoption of a stock option 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. On January 3, 2000, 612,000
options were granted at a purchase price of $4.63. On January 20, 2000,
a further 60,000 options were granted at a purchase price of $7.69.
The options vest over a three year period and expire four years after
the date of grant.
(b) On February 18, 2000, the holders of the convertible debentures
exercised their option, as described in note 3, to convert the
debentures into common shares of the Company.
(c) On February 24, 2000, the Company finalized an agreement to issue
250,000 common shares at $10 per share for gross 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.
(d) The following pro forma condensed consolidated balance sheet gives
effect to the conversion of debentures and issuance of common shares
described in notes 8(b) and 8(c) respectively, as though they had
occurred on December 31, 1999:
----------------------------------------------------------------------------
December 31, Pro forma
1999 adjustments Pro forma
----------------------------------------------------------------------------
Assets
Cash and cash
equivalents $ 988,077 $ 2,500,000 8(c) $3,488,077
Other current
assets 74,169 - 74,169
Fixed assets (net) 455,919 - 455,919
- --------------------------------------------------------------------------------
$ 1,518,165 $ 2,500,000 $ 4,018,165
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Accounts payable
and accrued
liabilities $ 189,146 $ - $ 189,146
Deferred revenue 400,007 - 400,007
Debentures payable 1,100,000 (1,100,000) 8(b) -
Stockholders' equity (170,988) 1,100,000 8(b) 3,429,012
2,500,000 8(c)
----------------------------------------------------------------------------
$ 1,518,165 $ 2,500,000 $ 4,018,165
----------------------------------------------------------------------------
EXHIBITS
Exhibit 21 - List of Subsidiaries
NetNation Communications Inc., a company incorporated under the laws of the
Province of British Columbia, Canada, is wholly owned subsidiary of NetNation.
NetNation Communications UK Ltd., a company incorporated under the laws of
the United Kingdom, is a wholly owned subsidiary of NetNation.
NetNation Communications (USA) Inc., a company incorporated under the laws of
the
State of Delaware, is wholly owned subsidiary of NetNation.
DomainPeople Inc., a company incorporated under the laws of the
State of Delaware, is wholly owned subsidiary of NetNation.